Buying a home is more than a financial step; it’s a life-changing journey and one of the most meaningful investments you'll ever make. And, as with any big adventure, having the right support and tools can make all the difference in smoothly reaching your goals.
For many prospective homeowners, especially those with specific financial needs or eligibility, FHA and VA loans are highly attractive options. Both loan types, backed by the government, offer pathways to homeownership that are often more accessible and flexible than traditional loan options.
However, while they may seem similar, FHA and VA loans have distinct features, eligibility requirements, and benefits that make each uniquely suited to different financial situations and goals.
VA vs. FHA Loan Key Differences
Both loan types are tailored to make homeownership more accessible but were created with different borrower needs in mind.
Here’s a quick overview of FHA and VA loan origins and fundamental differences:
| Feature | FHA Loan | VA Loan |
|---|---|---|
| Created For | FTHB, and borrowers struggling to provide a higher down payment | Military members, Veterans, and their families |
| Down Payment | Federal Housing Administration | Department of Veterans Affairs |
| Mortgage Insurance | Yes (MIP) | No, but VA funding fee applies |
| Credit Score Requirement | Flexible, generally 580+ | Flexible, generally 620+ |
| Eligible Property Types | Primary residences only | Primary residences only |
Mortgage Rates
VA loans often have lower interest rates than FHA loans because they are considered lower risk for lenders. This is mainly due to the VA guarantee, which reduces the lender’s potential losses if a borrower defaults. Since VA loans are exclusively for military members, lenders view them as more secure.
On the other hand, FHA loans are open to a wider range of borrowers, including those with lower credit scores and smaller down payments. Because this group presents more risk, FHA loan rates tend to be slightly higher than VA loan rates, even though they remain competitive.
Get started with a loan expert to discuss Neighbors Bank’s current VA & FHA rates.
Loan Eligibility
VA loans are exclusively available for eligible Veterans, active-duty military personnel, National Guard and Reserves members, and surviving spouses.
To qualify, borrowers must meet time in service requirements and obtain a Certificate of Eligibility (COE) from the VA. You can see the full VA loan eligibility requirements here.
FHA loans have a much broader eligibility scope and are available to nearly any borrower with a steady income and reasonable credit history. Unlike VA loans, there is no service requirement, making FHA loans accessible to all first-time and repeat homebuyers.
Mortgage Insurance vs. VA Funding Fee
Interestingly, one key difference in the cost of FHA vs. VA loans comes down to insurance fees.
FHA loans require a mortgage insurance premium, which protects the lender if the borrower defaults. This includes an upfront premium (typically around 1.75% of the loan amount), and an annual MIP rolled into the monthly payment. Your annual MIP rate depends on the size of your loan and your loan-to-value ratio; however, the average is 0.55% to 0.90% of your loan amount divided between monthly payments.
VA loans don’t require mortgage insurance but instead come with a one-time VA funding fee, which can vary based on factors like down payment and whether it’s the borrower’s first VA loan. For example, a first-time VA borrower with no down payment would pay a funding fee of 2.15%, which may be rolled into the loan.
The VA also offers funding fee exemptions for service members who have received a Purple Heart, are receiving compensation for a service-connected injury, and surviving spouses receiving Dependency and Indemnity Compensation (DIC).
Example Cost Comparison: Let’s say our buyer wants to make a $200,000 home purchase:
- FHA Loan: With a 3.5% down payment, the borrower would pay $3,500 upfront for MIP (1.75%), which can be rolled into the loan amount, and then $91.67 per month or $1,100 annually (MIP annual rate of 0.55%).
- VA Loan: A first-time VA borrower with a 2.15% funding fee would pay $4,300, which can be rolled into the loan amount to reduce upfront costs.
Down Payment Requirements
VA loans have a distinct advantage here, with a 0% down payment requirement for eligible borrowers. This benefit, made possible by the VA’s partial guarantee of the loan, helps Veterans and military families secure homes with little to no upfront cost.
FHA loans typically require a down payment of 3.5% of the home’s purchase price if the borrower has a credit score of at least 580. For lower scores (as low as 500), the down payment requirement increases to 10%.
Notably, If a borrower wishes to use their VA loan benefit a second time, a zero down payment is not always guaranteed. Entitlement limits may apply, which could require a down payment if the borrower has a remaining balance on a previous VA loan or meets other conditions.
Credit Score Requirements
While the VA does not set a strict credit score minimum, most lenders require a score of 620 or higher. Some lenders may accept lower scores, but these typically come with higher interest rates or other limitations.
FHA loans generally require a minimum credit score of 580 to qualify for the 3.5% down payment. Scores between 500 and 579 may still qualify with a higher down payment, though many lenders may set their own, often higher requirements.
Closing Costs & Fees
When it comes to closing costs, both FHA and VA loans involve fees that buyers need to consider, but there are a few unique points.
FHA loan closing costs include a mix of lender fees, third-party fees and fees to the FHA like mortgage insurance. The upfront MIP can be rolled into the loan amount, lowering the initial out-of-pocket cost but increasing the loan balance.
VA loans have a similar mix of closing cost fees but typically have lower closing costs than FHA loans overall because the VA has certain protections on what fees VA borrowers can and cannot pay. For example, VA borrowers are not allowed to pay broker fees. Additionally, the VA funding fee is due at closing, however, most buyers roll it into their loan amount.
VA Loan vs. FHA Loan Options
Conveniently, both FHA and VA loans offer a variety of loan options for borrowers to consider.
FHA Loan Options
| FHA Loan Types | How it Works |
|---|---|
| Traditional FHA Loan | Standard mortgage for purchasing a primary residence with a low down payment and flexible credit requirements. |
| FHA 203(k) Loan | Designed for buying and renovating a home, combining the purchase price and renovation costs into one loan. |
| FHA Streamline Refinance | Simplifies refinancing for current FHA borrowers, often with reduced paperwork and no appraisal requirement. |
| FHA Cash-Out Refinance | Allows homeowners to refinance and borrow against their home equity for cash. |
| FHA Energy Efficient Mortgage (EEM) | Helps borrowers finance energy-efficient upgrades alongside their FHA loan. |
VA Loan Options
| VA Loan Types | How it Works |
|---|---|
| VA Purchase Loan | Helps eligible veterans and service members buy a home with no down payment and competitive terms. |
| VA Cash-Out Refinance Loan | Allows homeowners to refinance and access their home equity for cash to use as needed. |
| VA Streamline - Interest Rate Reduction Refinance Loan (IRRRL) | Offers a streamlined way to refinance an existing VA loan to a lower interest rate. |
| VA Construction Loan | Helps finance the construction of a new home, converting to a traditional VA loan after completion. |
| VA Energy Efficient Mortgage (EEM) | Allows borrowers to finance energy-efficient improvements with a VA loan. |
If you’re interested in a specific type of FHA or VA loan, you can reach out to a loan expert to learn more.
FHA Loan vs. VA Loan FAQs
Here are our answers to your top questions and a closer look at the VA loan vs. FHA differences, benefits, and specific requirements to help you determine which loan might be right for your path to homeownership.
Is VA stricter than FHA?
VA loans are stricter in the sense that they are only available to eligible service members and surviving spouses, but they are actually more flexible than FHA loans in some aspects. For instance, VA loans don’t require a down payment, and their credit score requirements are often more flexible, though these can vary by lender.
FHA loans, while accessible and popular, have set down payment requirements and require mortgage insurance. VA loans typically offer favorable terms to military members, with flexible debt-to-income ratios and additional protections in case of financial hardship. So, while VA loans have unique guidelines, they are not necessarily stricter.
Are FHA loans better than VA loans?
FHA loans are typically only a better choice if a VA-eligible borrower cannot meet the VA lender’s credit requirements. This is because they require an ongoing mortgage insurance premium in comparison to the VA funding fee - which is a one-time upfront cost.
While the VA does not set strict requirements, lenders often have credit minimums between 620 and 640, while FHA loan credit score minimums go as low as 500.
Is it hard to buy a house with a VA loan?
There is a misconception that VA loans are less desirable because they have more stringent property requirements than conventional loans. However, the VA has improved processes over the years to ensure that the appraisal is as hiccup-free as possible. Similarly, FHA loans also require an appraisal with stricter standards than conventional loans.
Why would a seller not accept a VA loan?
Some sellers may have misconceptions about VA loans or worry about the additional property requirements set by the VA that ensure homes are safe and habitable. There’s also a misconception that VA loans involve a longer closing process, though this isn’t necessarily true.
Sellers may also be concerned about covering certain closing costs, as VA guidelines limit the fees military borrowers can be charged. Educating sellers on the realities of VA loans can often address these concerns, and a skilled real estate agent can help navigate any hesitations on the seller’s part.
VA Loan vs. FHA—which is better?
If you qualify for a VA loan, it is likely the better choice due to the lack of mortgage insurance and its $0 down benefit. However, it’s still worth it to get pre-qualified for both and compare rates.
By carefully weighing the pros and cons of both options, you can make an informed decision and choose the loan that aligns with your goals of achieving affordable, sustainable homeownership.
