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FHA Loans vs. VA Loans: Which Should You Get?
By Cassidy Horton MONEY RESEARCH COLLECTIVE
There are many types of mortgages, but two of the less expensive ones are the FHA loan and the VA loan. Both generally have attractive terms and conditions compared to conventional mortgages, but they’re designed for different types of people. FHA loans are ideal if you have a lower credit score than average, while VA loans are ideal if you’ve served in the military. With that in mind, here’s a quick outline of FHA vs. VA loans, including all the ways they’re similar, and all the ways they’re different.
Table of Contents
- What is an FHA loan?
- What is a VA loan?
- Differences between FHA loans and VA loans
- Similarities between FHA loans and VA loans
- Which one should you get?
- FHA loans vs. VA loans FAQs
- Summary of our guide to FHA loans vs. VA loans
What is an FHA loan?
An FHA loan is a type of mortgage that’s insured by the Federal Housing Administration (FHA), which is a branch of the U.S. Department of Housing and Urban Development (HUD). The FHA doesn’t actually create mortgages—it insures them so if the borrower defaults, the lender gets money back from the FHA.
This type of mortgage loan is popular with first-time homebuyers and people who’ve had a bankruptcy or foreclosure because it offers more flexible credit and down payment requirements than conventional mortgages.
For example, let’s say you have a credit score of 590. If you went with a conventional mortgage lender, you’d most likely get denied because their minimum requirements might state that you need a score of 620 or higher to get approved. However, if you went with an FHA loan provider, you might have much better luck because their minimum credit requirements are generally 580 or even 500 in some cases. Suddenly, your odds of becoming a homeowner are much higher.
What is a VA loan?
A VA loan is a type of mortgage that’s backed by the U.S. Department of Veterans Affairs (VA) and is only available to military personnel.
Because they’re backed by the federal government, VA loan lenders don’t require a down payment or private mortgage insurance (PMI). In fact, 90% of VA loans are made with no down payment at all.
Differences between FHA loans and VA loans
If you’re not familiar with VA loans vs. FHA loans, comparing the two can be confusing. To help you quickly sort through your options, we broke down the requirements for each in this table.
| Requirements | VA loans | FHA loans |
| Eligibility | Open to military members and veterans | Open to the general public |
| Loan limit | Sometimes | Always |
| Minimum FICO credit score | None (but some lenders require a score of 620 or higher) | 580 (or as low as 500 with a larger down payment) |
| Debt-to-income ratio (DTI) | None (but some lenders require further review if DTI is over 41%) | 57% or less |
| Minimum down payment | 0% | 3.5% |
| Mortgage insurance | No | Yes |
| Fees | VA funding fee, loan origination fee, VA appraisal fee, title insurance, recording fee | Mortgage insurance premium (MIP), loan origination fee, appraisal fee, title insurance, recording fee |
| Interest rates | May be slightly lower than FHA loans | May be higher than VA loans, but still lower than conventional loans |
Requirements
One of the biggest advantages of FHA loans is that they’re available to a wider range of borrowers, while VA loans are specifically for individuals with military service experience.
FHA mortgages have no service requirements. You’ll generally qualify if you meet the debt-to-income (DTI) ratio and minimum credit score requirements. Because these qualifications are more flexible than VA loans and conventional loans, FHA mortgages are an ideal choice for first-time homebuyers, people who have been foreclosed upon, or anyone with a low credit score or a high debt level.
Mortgage insurance
VA loans don’t require mortgage insurance, but FHA loans do. In fact, one of the most surprising things about FHA loans is that everyone pays a mortgage insurance premium (MIP), no matter how big or small your down payment is. This MIP is similar to a conventional loan’s PMI.
There are two types of MIP: upfront and annual. You must pay an upfront MIP, which is 1.75% of your loan value, within 10 calendar days of closing on your mortgage. On a $300,000 mortgage, you’d pay $5,250 in upfront mortgage insurance premiums.
Then there’s an annual MIP. This fee becomes part of your monthly mortgage payment. Annual MIPs range from 0.45% to 1.05%, depending on your loan-to-value ratio and mortgage term. On a $300,000 mortgage, you’ll pay anywhere from $1,350 to $3,150, spread out over 12 months.
Eligibility requirements
FHA loan requirements tend to be looser than VA loan requirements. For instance, most FHA lenders expect you to have a minimum FICO credit score of 580. However, those with lower credit scores may still be eligible if they make a larger down payment. You must also have a DTI ratio below 57%, which is a fairly high maximum compared to other loans.
To qualify for a VA loan, you must have some type of military service experience. VA loans are available to:
- Veterans
- Active-duty service members
- National Guard members
- Reservists
- Surviving spouses of any of the above
While there are technically no credit score requirements or DTI ratios set by the VA, most private lenders will require you to meet certain credit benchmarks, such as maintaining a base credit score of 620 and a DTI ratio that doesn’t surpass 43%.
Funding fees
VA loans require funding fees and FHA loans don’t. A funding fee is a one-time payment that’s calculated based on the purchase price of the loan. It can be as low as 1.4% or as high as 3.6%. The exact percentage depends on your loan type and size and whether you’re a first-time borrower or not.
For example, let’s say you’re a first-time VA loan borrower. If your down payment is less than 5% of your new home’s purchase price, your funding fee will be 2.3%. But if your down payment was at least 10%, your funding fee would drop to 1.4%. You can pay this fee upfront or roll it into your VA mortgage.
The VA waives its funding fee for some surviving spouses and disabled veterans. To see if you qualify for a waiver, visit the VA’s website.
Loan limits
While we’re on the topic of FHA vs. VA loans, let’s talk about loan limits. FHA loans always have limits. There’s no way around them. Whether a VA loan has limits depends on the borrower. Some people are subject to VA loan limits, while others are not.
The maximum amount you can borrow on an FHA loan in 2022 is $647,200 in most cases—although it may be higher or lower depending on which county you live in.
VA loans don’t have any limits if you qualify for full entitlement. According to the VA, you qualify for full entitlement if:
- You’re a first-time VA loan borrower, or
- You’ve sold and paid off a previous VA loan in full, or
- You were foreclosed upon or short-sold a previous VA loan but have since repaid it in full
If you don’t meet one of these three requirements, then you have what’s called “remaining entitlement.” This means you’re subject to the same loan limits that are imposed by an FHA loan.
Closing costs
Both FHA and VA loans generally require borrowers to pay appraisal fees and origination fees. Depending on your lender, both types of loans may also require you to pay for title insurance. However, FHA borrowers may pay higher closing costs overall because they have to pay upfront MIP at the time of closing. VA borrowers can bundle their funding fee into their mortgage loan if they can’t afford to pay it in advance.
Similarities between FHA loans and VA loans
Both VA loans and FHA loans are government-backed, meaning the government will step in and cover the loan if you default—up to a certain limit. Government-backed loans tend to be more affordable than conventional loans because if the borrower defaults, lenders are guaranteed by the US government to recover at least some of the money they loaned. Here are a few more ways in which FHA loans and VA loans are alike.
Application process
The application process is one area where FHA loans and VA loans are quite similar. When you apply for an FHA loan, you’ll fill out a standard mortgage application just like you would with any other mortgage. The only difference is that you’ll need to work with an FHA-approved or VA-approved lender, depending on which loan you choose.
For a VA loan, you’ll also need to obtain a Certificate of Eligibility (COE) before you fill out a mortgage application. You can do this through your lender or through the VA’s eBenefits website. A COE verifies that you’re eligible for a VA-backed loan and states whether you qualify for full entitlement or remaining entitlement.
Down payment
Not everyone can afford a large down payment—and that’s where FHA and VA loans offer real benefits to homebuyers. These loans allow you to finance a larger portion of your home so you can still enjoy the benefits of homeownership even if you don’t have a lot of money to put down or have less-than-perfect credit. Lower down payment requirements set FHA and VA loans apart from conventional loans and give more people the opportunity to become homeowners.
Refinancing
In general, FHA and VA loan refinancing can help you lower your mortgage interest rate and monthly payment. You refinance existing FHA loans through a Streamline Refinance. You can refinance a VA loan using an Interest Rate Reduction Refinance Loan (IRRRL) or a cash-out refinance loan, depending on your situation.
Which one should you get?
If you’re still stuck deciding between FHA loans vs. VA loans, here are some scenarios in which it may be better to go with one option over the other.
When is it better to get a VA loan?
If you’re a veteran or active duty military member, a VA loan is probably your best option. This is because VA loans offer a number of benefits that other types of loans don’t—including better interest rates, no down payment, and no mortgage insurance. Explore our VA home loan guide for more information.
When is it better to get an FHA loan?
If you don’t qualify for a VA loan, then an FHA loan is an obvious choice. But beyond that, you may find that an FHA loan is a better deal if any of the following situations apply to you:
- Your DTI is above 43%
- Your credit score is below 620
- You’re having a difficult time getting approved by VA lenders
FHA loans vs. VA loans FAQs
Are FHA loans and VA loans conforming loans?
FHA loans are always conforming. This means that they meet the standards set by Freddie Mac and Fannie Mae. Specifically, they have a national loan limit of $647,200—although limits can be as low as $420,680 in low-cost counties or as high as $970,800 in high-cost counties.
Whether a VA loan is conforming or not depends on the type of entitlement you have. If the VA has given you full entitlement, then you're not subject to any loan limits. If you have remaining entitlement, then you're subject to the same loan limit that FHA loans impose, which is typically $647,200.
Which is better for a veteran to get, a VA loan or an FHA loan?
If a veteran has the choice between a VA and FHA loan, a VA loan will make the most sense most of the time because VA loans typically have more favorable terms.
However, there could be some situations where an FHA loan makes more sense, such as if you have a DTI over 43%, a credit score less than 620, or are having a difficult time getting approved by a private lender.
What are the pros and cons of FHA loans vs. VA loans when buying a home?
There are several pros and cons to the FHA loan and VA loan programs. This chart breaks them all down for you:
| Pros | Cons | |
| FHA Loans |
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| VA Loans |
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Summary of our guide to FHA loans vs. VA loans
FHA loans are available to a wide range of borrowers, and they come with looser credit and debt requirements than VA loans. However, they also require mortgage insurance premiums, which can be expensive.
With VA loans, you don’t have to worry about saving up a huge chunk of money for a down payment or paying mortgage insurance. However, VA loans are only available to eligible veterans and military members. And while the Department of Veteran Affairs doesn’t set minimums for credit scores or DTIs, most private lenders will.
Ultimately, the best loan for you will depend on your individual circumstances. Be sure to compare your options and talk to a loan officer before you make a decision.
Cassidy Horton is a finance writer based in Seattle, Washington. With an MBA and a bachelor's in public relations, her work has been published over a thousand times by The Balance, Finder.com, Money Under 30, Clever Girl Finance, and many more. Cassidy is a self-confessed money nerd who’s passionate about helping people find financial freedom. Oh, and she really loves cats.