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FHA vs. VA loan: What are the differences?

Yahoo Personal Finance· Getty Images
Updated 6 min read

If you’re a service member, veteran, or family member who qualifies for a VA home loan, you may wonder whether you should automatically buy a home using a VA loan or opt for another type of mortgage, like an FHA loan.

The answer depends on where you can get the best interest rate, how much you have for a down payment, and the fees you’re willing to pay.

In this article:

Learn more: First-time home buyers — what you need to know

Veterans and service members have a variety of loan options. A home buyer who is a service member can choose from VA, FHA, USDA, or conventional mortgages to purchase a primary residence. You can use a VA loan to buy a second home, but not an FHA loan.

Here’s what you need to know to see if you’re eligible for a VA loan, FHA loan, or both.

Whether or not you qualify for a VA loan often depends on the time you spent serving in the military — and the minimum amount of time varies based on when you served.

Many people qualify after 90 days of active-duty service. This includes current service members — regardless of branch of service — and veterans who served on or after Aug. 2, 1990 (unless you were discharged for a hardship or a reduction in force).

The requirement is 181 days if you served between May 8, 1975, and Aug. 1, 1990.

In most cases, you don’t have to meet the requirements for a number of days of active duty service if you have a service-connected disability.

For an even more detailed breakdown of service time requirements, check out the U.S. Department of Veterans Affairs eligibility page.

Surviving spouses can get a VA loan if their spouse meets the requirements. If you or your spouse never served in the military, you won’t qualify for a VA home loan. The value of your home or home loan doesn’t determine whether you qualify.

FHA loans have fewer eligibility requirements. The main limit is that your home has to be a primary residence. FHA also limits maximum loan amounts based on national and local area home values.

Learn more: What are the requirements for an FHA loan?

FHA loans require a 3.5% minimum down payment if your credit score is 580 or higher and a 10% down payment if it is 500 to 579. VA loans don’t require down payments as long as the loan isn’t for more than the home's value.

VA and FHA loans are insured by the federal government, and you must pay a fee to protect the private lender in case you default on payments later. The Department of Veterans Affairs implements a VA funding fee, which you’ll only pay once at closing (unless you choose to roll the fee into your mortgage principal). You’ll pay an up-front FHA mortgage insurance cost at closing, then an annual mortgage insurance premium (MIP), which varies yearly based on your loan value.

Learn more: What is mortgage insurance?

VA loans generally require a higher credit score to buy a house than FHA loans. FHA loans may be issued with a credit score of 500 with a 10% down payment or 580 with a 3.5% down payment. VA loan credit scores typically start at 580, though many mortgage lenders require 620 or higher.

Your debt-to-income ratio (DTI) is the amount of your monthly debt payments compared to your monthly pre-tax income. For instance, you may have a car loan, credit card, and insurance payments.

The overall debt-to-income ratio you’ll need to know for FHA loans varies quite a bit, depending on the FHA lender, credit score, and factors such as energy-efficient home features. FHA debt-to-income ratio requirements range from 43% to 50%. VA debt-to-income ratios can also vary by VA loan lender and start at 41%.

Read more: Pros and cons of FHA loans

Both loan types offer a version of a streamline refinance, which involves refinancing your loan to reduce interest rates or change loan terms. However, unlike with a regular rate-and-term refinance, you don’t need a home appraisal, credit report check, or DTI ratio check to qualify for a streamline refinance. This makes it easier to qualify and faster to close.

The VA loan streamline refinance is often called a VA Interest Rate Reduction Refinance Loan (IRRRL). It still charges a VA funding fee, but only a 0.50% fee rather than a new VA loan’s 1.25% to 2.15%.

Fees may vary on FHA Streamline Refinances, but they still have lower closing costs than the initial FHA loan.

You can also complete a cash-out refinance with FHA and VA loans. The primary difference between the two is that the VA has a much lower loan-to-value ratio (LTV) requirement for refinancing. With an FHA loan, your LTV ratio needs to be 80% or less, while the VA allows 100% financing.

Another way of looking at this is that you need 20% equity in your home for an FHA cash-out refinance and 0% for a VA cash-out refinance.

Either loan can be refinanced into a conventional loan. The main reason to do this is if you qualify for better interest rates on a conventional loan now than what you’re paying on your current mortgage loan. You can also remove FHA mortgage insurance if you refinance into a conventional loan and have at least 20% home equity, which will save you money on your monthly payment.

However, you should carefully consider this option. You could lose certain benefits, such as access to a streamline refinance later.

Read more: Mortgage refinance — how to get started

VA loans are more strict than VA loans regarding credit scores and which buyers are eligible. But the down payment requirements are more lax.

VA loans are specifically for military service members, veterans, and some family members.

Some sellers may prefer an all-cash offer to avoid dealing with the mortgage process. The general fear of VA loans is a misconception about extra red tape because it’s a government program. For FHA loans, the seller may be hesitant because FHA loans have more lenient requirements and take longer to close due to the more complicated home appraisal process.

This article was edited by Laura Grace Tarpley