FHA Vs. VA Loans: Know The Difference

Whether you’re a first-time home buyer or a seasoned pro, there are several mortgage options that you may qualify for to finance your home. Often, home buyers will find that one option suits their situation better than another. If you’re debating between using an FHA loan or a VA loan to finance your new home, it may be helpful to directly compare the two.

Let’s take a closer look at FHA vs. VA loans and how these mortgage options differ.

FHA Vs. VA Loans

FHA loans and VA loans are two types of mortgages that home buyers can use to finance their home purchases. These two loan options are both backed by the federal government and can help make homeownership more attainable for first-time and low- to moderate-income home buyers.

What Is An FHA Loan?

FHA loans are backed by the Federal Housing Administration (FHA), part of the Department of Housing and Urban Development (HUD). These loans are aimed at low-income borrowers and have more lenient qualification requirements than other home loans.

What Is A VA Loan?

VA loans are backed by the Department of Veterans Affairs. To take out a VA loan, you must be a qualified veteran, active-duty military member or surviving spouse. These loans require no down payment and have lower interest rates, making them a great benefit to those who are eligible. VA.gov provides great information for those looking to learn more about VA loan eligibility.

What’s The Difference Between FHA And VA Loans?

While borrowers may qualify for both FHA and VA loans, one option may be more beneficial for your particular situation. Before you decide between an FHA and VA loan, make sure you consider all relevant factors.

Property Type

FHA loans and VA loans can usually only be used to buy or refinance a primary residence, so those looking to buy an investment property won’t be able to use either of these options, at least initially. Homes bought with FHA and VA loans must also meet the minimum requirements set by the HUD and the Department of Veteran Affairs, respectively.

Down Payment

Both FHA and VA loans have lower down payment requirements than some other types of mortgages. FHA loans usually have a required minimum down payment of 3.5%.

VA loans don’t require a down payment whatsoever, which is a huge perk of taking out this type of loan. Saving for a down payment is often a barrier to homeownership for many, so those eligible for a VA loan may be able to purchase a home more quickly.

Credit Score Requirements

To take out an FHA loan, borrowers must typically have a minimum credit score of 580 to qualify. You may be able to qualify with less than 580 with some lenders, but you will need to make a down payment of at least 10% in that case. Rocket Mortgage^® requires borrowers to have a credit score of 580 for FHA loans, as well as a 3.5% down payment.

VA loans don’t require a minimum credit score, but many lenders want to see a score of at least 580. Generally, having a good credit score will help you get a better rate on your loan.

Debt-To-Income Ratio

To qualify for an FHA loan, borrowers will generally want to have a debt-to-income (DTI) ratio under 50%, though the exact number required will vary based on their credit score and other factors.

There’s no maximum DTI for VA loans, but the VA requires borrowers with a DTI of over 41% to undergo more thorough screening. It’s recommended that borrowers pay off debt as much as possible in order to get the best rate for their loan.

Interest Rates

Lenders determine your interest rate by considering several financial factors but generally speaking, VA loans tend to have slightly lower interest rates compared to FHA loans.

Mortgage Insurance

FHA loans require borrowers to pay mortgage insurance on their loan in the form of both an upfront payment and an annual premium, which is broken up into monthly payments. The upfront fee is equal to 1.75% of the loan and the annual mortgage insurance could range from 0.15% – 0.75% of the loan depending on things like the loan term and other factors. You’ll have to pay this over the life of the loan. If you put 10% down when you buy, however, you may be able to have your mortgage insurance removed after 11 years, depending on the start date of your loan.

On the other hand, VA loans don’t require borrowers to pay mortgage insurance. There are other fees VA loan borrowers will be responsible for, however.

Fees

One of the closing costs that VA loans come with is a funding fee that all borrowers are required pay. The funding fee for a first-time home buyer is usually 2.15% of the loan amount. The funding fee can range from 0.5% to 3.3%, however, depending on your loan type, if you've used a VA loan before and the size of your down payment. Borrowers can make a down payment to lower their funding fee.

Refinancing With An FHA Loan Vs. VA Loan

FHA and VA loans are both eligible for refinance, which is where the existing loan is replaced either by a different loan or another of the same type. Both FHA and VA loans are also eligible for special refinances designed to cut down on requirements and close faster. These processes are typically easier than other types of refinancing thanks to less paperwork and no required home appraisal. With FHA loans, the refinance is called an FHA Streamline Refinance, while it’s referred to as an Interest Rate Reduction Refinance Loan (IRRRL) with VA loans.

The Bottom Line On VA Loans Vs. FHA Loans

FHA loans and VA loans are both popular loan options, and they can make it easier for first-time and low-income borrowers to achieve their dream of homeownership. If you qualify for both of these loan options, carefully consider which is more beneficial to you given your unique situation. If you have any doubts, consult with your financial advisor before you take out any loans.

If you’ve already weighed the pros and cons of your home loan options and are ready to begin the home buying process, get approved with Rocket Mortgage today.