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If you're looking to buy a home and don't have a lot of money for a down payment, there are types of mortgages you can explore. Here, we'll compare the FHA vs. VA loan to help you figure out which mortgage loan is right for you.
What is the difference between FHA and VA loans?
An FHA loan is a mortgage that's backed by the Federal Housing Administration and is designed for borrowers with lower down payments and poor credit. A VA loan is a loan backed by the Department of Veterans Affairs that allows U.S. service members as well as veterans or their surviving spouses to purchase a home with no money down.
The primary difference between these two loans is that to get a VA home loan, you must be on active duty in the U.S. military, be a veteran, or be the surviving spouse of a veteran. If you or your spouse have never served in the military, you won't be eligible for a VA loan. But there are no service requirements associated with an FHA loan. FHA lenders determine eligibility based on credit score and other factors.
How to compare FHA and VA loans
Let's take a closer look at how a VA loan compares to an FHA loan.
| FACTOR | FHA LOAN | VA LOAN |
|---|---|---|
| Credit score requirements | 580 with a 3.5% down payment, 500 with a 10% down payment | Must have satisfactory credit but technically no minimum |
| Down payments | 3.5% down | 0% down |
| Interest rates | Competitive for all borrowers | Tend to be lower than FHA loan rates |
| Uses | 1-4 unit properties, but only for owner-occupied homes | 1-4 units for a solo borrower, or 1-7 units with a joint borrower, but one unit must be owner-occupied |
| Standard loan limit (2021) | $356,362 | $548,250 |
| Costs | Upfront mortgage insurance and ongoing premiums for the duration of the loan | Upfront funding fee |
Comparing Federal Housing Administration vs. Veterans Affairs loan factors
Credit score requirements
If you want an FHA loan, a lender will require a credit score of 580 or higher. But if you can put down 10% or more on your home, you can qualify with a score of 500. On the other hand, the VA loan program doesn't have specific credit score requirements. This means VA lenders can impose their own standards on an individual basis.
Down payments
You'll need to make at least a 5% down payment to get an FHA mortgage. With a VA lender, you can qualify for a home loan with no money down. However, your VA funding fee will be lower if you're able to put some money down.
Interest rates
FHA mortgage rates can be very competitive, especially if you have good credit. If your credit score isn't great, your interest rate for the loan term may be higher than what you'll pay for a VA loan or a conventional mortgage. In fact, it pays to compare the FHA vs. conventional loan to see which is the best option for you. Meanwhile, VA loan rates can be even lower than what you'll pay for an FHA loan or conventional loan.
Uses
An FHA loan can be used to buy a property with up to four units, but at least one unit must be owner-occupied. This means you, the borrower, must use at least one unit of the home as your primary residence. A VA mortgage can be used to buy a home with up to four units if you're buying on your own or up to seven units with a joint borrower. Like the FHA loan, at least one unit must be owner-occupied.
Standard loan limit (2021)
In most parts of the county, the standard loan limit for an FHA borrower is $356,362. But in higher-cost parts of the country, the loan limit is $822,375. VA loans work similarly. In most of the country, the standard limit is $548,250, but in higher-cost parts of the country, it's $822,375.
Costs
FHA loans require you to purchase mortgage insurance. The amount of mortgage insurance you'll pay will depend on your loan amount and the amount of money you put down. You'll automatically pay an upfront premium of 1.75%, plus a monthly premium on top of your home loan's monthly payment. Those monthly premiums range from 0.45% to 1.05% of your loan amount.
With a VA home loan, you'll pay an upfront funding fee. This amount will depend on whether this is your first VA loan and how much of a down payment you're making on your home. First-time VA loan applicants with no down payment will pay a funding fee equal to 2.3% of your loan. If it's your first application with a 10% down payment, your fee will be 1.4%.
If it's your second VA loan application, you'll pay a funding fee of 3.6% if you're not making a down payment. But if you're putting money down, the same fees apply as if it were your first application -- 1.65% for putting 5% down, and 1.4% for putting 10% down.
FHA vs. VA loan: Which is better?
FHA loans are available to a wider range of borrowers than VA loans, but VA loans offer certain advantages, like the option to put no money down and potentially lower rates. If you qualify for both loan types, you might favor a VA loan, especially if you have limited funds to put down at closing.
Ultimately, your best bet is to look carefully at both loan types before making your decision. If you need more help, you can check out this first-time home buyers guide to FHA loans for more information on what to expect with the FHA loan program. Then, look at this complete guide to VA mortgage loans. You can also read up on VA refinancing to get a better picture of how VA loans work.
Still have questions?
Here are some other questions we've answered:
FAQs
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FHA loans are designed for borrowers with not-so-great credit who can't make a large down payment on a home. VA loans are specifically designed for U.S. military service members, U.S. military veterans, and the surviving spouses of veterans.
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Both FHA and VA loans allow you to buy a home with little money down, but VA loans offer the benefit of getting to put no money down. Both loans come with certain upfront costs you'll need to cover. So if you qualify for both, you'll need to run some numbers to see which option makes the most sense for you.
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Both FHA and VA loans come with competitive rates, but you'll generally pay a lower rate with a VA loan. However, your specific rate will depend on your credit score and the lender you use.
Our Mortgages Expert
Maurie Backman is a personal finance writer who covers topics ranging from Social Security to credit cards to mortgages to REITs. She also has an editing background and appears on live podcasts to talk about financial matters.
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