Explore your mortgage options
Plunging into homeownership is a big deal. You want to make sure you’re getting the best deal possible, and that starts with researching your loan options.
Federal Housing Administration (FHA) and Veterans Affairs (VA) loans are two of the most common government-backed mortgage programs – but they offer very different benefits for borrowers. So which one is right for you?
For many of us, the choice comes down to two things: money and time.
How much money will you save in the long run? And how quickly can you get a loan? Whatever your priorities, both FHA and VA loans offer some clear advantages over traditional mortgage loans.
Let’s take a close look at the key differences, benefits and drawbacks of FHA versus VA loans.
FHA Loans vs. VA Loans: An Overview
FHA loans are government-backed mortgages insured by the Federal Housing Administration. They’re issued by federally qualified lenders to help lower-and middle-income borrowers access homeownership.
On the other hand, the VA loan program assists active duty military and veterans with buying a home. It also offers surviving spouses of service members a way to qualify for these loan benefits.
While both loans have some differences, one similarity is that FHA and VA loans can only be used to purchase a primary residence – meaning you have to live in the home for most of the year. Borrowers can’t use either loan to finance an investment property or vacation home.
As government-backed loans, FHA and VA loans also offer homeowners easier refinancing options through FHA Streamline Refinancing and the VA Interest Rate Reduction Refinance Loan (IRRRL). Borrowers looking to refinance or secure a lower interest rate often consider this a huge plus.
Before applying for either loan, it’s important to understand the requirements and eligibility criteria. The basic requirements for an FHA loan include the following:
- A minimum credit score of 580, or 500 with a down payment of 10% or more
- A down payment as low as 3.5% of the purchase price
- A debt-to-income ratio of no more than 43%
VA loans have slightly different requirements compared to FHA loans – specifically, no minimum credit score and additional help with a down payment. However, you should still expect the lender to look at your credit score, as they can set their own credit score requirements.
VA loans don’t require down payments, but borrowers will need to pay the VA funding fee and havet a debt-to-income (DTI) ratio 41% or less. You’ll also need to provide a VA Certificate of Eligibility (COE), which confirms you’re qualified for the loan benefits.
FHA vs. VA loans: Side-by-side comparison
Despite the similarities between FHAand VA loans, there are major differences to compare before you decide which is right for you.
|FHA Loan||VA Loan|
|Down Payment Requirement and Loan Limits||3.5% down payment and $472,030 – $1,089,300 loan limit||No down payment* and loan limit|
|Mortgage Insurance||Yes (mortgage insurance premiums)||No|
|Credit Score Requirement||580||No, but it can vary by lender|
|Debt-To-Income (DTI) Ratio||Less than 43%||Less than 41%|
|Fees and Closing Costs||Yes||Yes including the VA funding fee|
|Interest Rates||Often lower than conventional loans||Often lower than conventional loans|
|Property Type||Primary residence||Primary residence|
*Down payment requirements will depend on whether you’ve used your VA entitlements.
Down Payment and Loan Limits
When taking out a loan, some of the most important considerations are the amount of money you need for the down payment and how much you can borrow overall.
For 2023, loan limits for FHA loans were set at $472,030 – $1,089,300. Meanwhile, VA loan limits were eliminated in 2019 following the enactment of the Blue Water Navy Vietnam Veterans Act.
The VA loan is an excellent financing option for those who qualify and don’t want to worry about saving up for a down payment. In the same vein, an FHA loan may be a better option for borrowers with low credit scores, low income and those who can’t take advantage of a VA loan.
Mortgage insurance is another area in which FHA loans and VA loans differ.
Those borrowing an FHA loan are required to pay mortgage insurance premiums (MIPs). These are fees the borrower pays both upfront and for the life of the loan. MIPs are meant to protect the FHA from borrowers who might default on the loan. How much you put as a down payment can also impact how long you pay this fee.
The upfront MIP fee is typically 1.75% of the loan amount. It’s either a one-time fee charged at closing, or you can roll it into the loan. The annual MIP you’ll pay is usually .8% – 1.05% of the loan.
Unlike FHA loans, VA loans don’t require mortgage insurance. However, you’ll have to pay a one-time funding fee – a percentage of the loan amount – which is paid upfront to the VA at closing or rolled into the loan. So it’s kind of like an FHA loan’s upfront MIP.
Credit Score Requirements
As you begin the search for a loan, you’ll want to pay attention to your credit score. It’s one of the most significant factors lenders look at when evaluating your loan application.
The general FHA loan credit score requirement for maximum financing is 580. However, some lenders will work with you if your credit score is lower than that.
The VA has no minimum credit score requirement. Although, most lenders may require a minimum credit score of 580 to qualify for a VA loan.
Debt-to-Income (DTI) Ratio
One of the key metrics lenders use to measure how much debt you can handle is your DTI ratio.
You can calculate this ratio by dividing your total monthly debt payments – including housing, credit cards, car loans and other debt – by your gross monthly income.
To get an FHA loan, your DTI ratio can’t be above 43%. The VA typically limits the DTI ratio to no more than 41%, which is slightly lower than for the FHA loan.
If your DTI ratio exceeds the required percentage, you could still qualify for a VA loan. Lenders will look at your overall financial situation to determine if you’re eligible.
Fees and Closing Costs
Like any other mortgage, FHA and VA loans have various fees that make up closing costs.
In most cases, these fees will include the lender’s origination fee, title search and insurance, discount points, the appraisal fee and other costs associated with closing. Usually, these costs come out to 3% – 6% of the total loan amount but can vary based on the type of loan.
On the other hand, VA loans have a funding fee that is part of closing costs. This fee is a percentage of the loan amount and is paid upfront at closing or rolled into the loan. It’s capped at 3.6% for repeat borrowers and 2.3% for first-time buyers.
If you roll your funding fee into the loan, it means you’ll be paying interest on it over the life of the loan, which may cost you more money in the long term.
Mortgage loans come with interest rates, but you can expect the interest rates of FHA and VA loans to be slightly lower. This is because the U.S. government backs these home loans, so lenders can offer more competitive rates with less risk.
It’s important to remember that the interest rate isn’t set in stone and can vary depending on several factors, such as your credit score and loan amount.
FHA vs. VA Loans: Which Is Right for You?
So which loan is right for you? The answer depends on your individual financial situation.
FHA loans are an excellent choice for those with lower credit scores or higher DTI ratios, since they tend to have more relaxed requirements. However, VA loans are a great option for those who meet the eligibility criteria and can qualify for lower interest rates.
Ultimately, it’s important to do your research and crunch the numbers before making a decision. You should also consider taking steps to build your credit score if it’s not up to par. This can help you qualify for the best loan terms possible and save you money in the long run.
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The Short Version
- FHA and VA loans can only be used to purchase a primary residence
- An FHA loan may be a better option for borrowers with low credit scores, low income and those who can’t take advantage of a VA loan
- The VA loan is an excellent financing option for those who qualify and haven’t been able to save up for a down payment
U.S. Department of Housing and Urban Development. “FHA Single Family Origination Trends.” Retrieved December 2022 from https://www.hud.gov/sites/dfiles/Housing/images/FHAOT_Aug2020.pdf
U.S. Department of Housing and Urban Development. “Section B. Acceptable Sources of Borrower Funds.” Retrieved December 2022 from https://www.hud.gov/sites/documents/4155-1_5_SECB.PDF
U.S. Department of Housing and Urban Development. “Borrower Qualifying Ratios.” Retrieved December 2022 from https://www.hud.gov/sites/documents/4155-1_4_SECF.PDF
U.S. Department of Housing and Urban Development. “Maximum Mortgage Limits 2023.” Retrieved December 2022 from https://www.hud.gov/program_offices/housing/sfh/lender/origination/mortgage_limits
U.S. Department of Housing and Urban Development. “Appendix 1.0–Mortgage Insurance Premiums.” Retrieved December 2022 from https://www.hud.gov/sites/documents/15-01MLATCH.PDF
Fed Home Loan Centers. “Closing Costs & Federal Home Loans.” Retrieved December 2022 from https://www.fedhomeloan.org/closing-costs-federal-home-loans/
U.S Department of Veterans Affairs. “VA Funding Fee and Loan Closing Costs.” Retrieved December 2022 from https://www.va.gov/housing-assistance/home-loans/funding-fee-and-closing-costs/