FHA vs. VA Loans: Key Differences and How to Choose

Learn the Differences Between FHA Loans and VA Loans

FHA and VA loans can both be great choices for homebuyers because of their competitive interest rates, low down payments, and low minimum credit scores. However, there are important differences to consider before deciding which mortgage option is best for you. In this article, we’ll discuss the similarities and differences between FHA and VA loans, including who qualifies, how much you can borrow, what you might pay upfront (and over time), and which loan best fits your homebuying strategy.

FHA Loans vs. VA Loans: Key Differences

An FHA loan is a home loan backed by the U.S. Federal Housing Administration (a government agency within the Department of Housing and Urban Development), while a VA loan is backed by the U.S. Department of Veterans Affairs (VA). While both loans are part of federal programs and are designed to make homebuying more accessible, they operate very differently. The following chart provides a side-by-side comparison and breaks down the eligibility requirements for each:

FHA and VA Home Loan Requirements

Both FHA and VA loans offer more flexible financial requirements than many other major loan options, such as conventional mortgages. With minimal or no down payment requirements, generous debt-to-income limits, and lower credit score thresholds, these government-supported programs help make American homeownership more accessible. However, when compared side-by-side, these two mortgage options look quite different.

One of the main differences between FHA and VA loans is who qualifies for each. Financial situation permitting, any U.S. citizen or permanent resident could potentially qualify for an FHA loan. On the other hand, one of the eligibility requirements for VA loans is that the borrower must be a qualified veteran, active-duty military personnel, or surviving spouse.

Another difference is the down payment requirements. The minimum for FHA loan down payments starts at 3.5% of the home’s purchase price, while VA loans allow qualified borrowers to purchase a home with no down payment. This means that eligible buyers may need to bring significantly less cash upfront (or roll less money into their loan) when choosing a VA loan over an FHA loan.

FHA vs. VA Loans Mortgage Insurance

FHA and VA loans also differ in mortgage insurance requirements. Often confused with Private Mortgage Insurance (PMI), Mortgage Insurance Premiums (MIP) are fees borrowers pay on FHA loans to help fund the FHA program. It comes in two forms: upfront MIP and annual MIP. Upfront MIP is a single fee—1.75% of the loan amount—that you pay at closing. Annual MIP is a recurring fee built into your monthly mortgage payments. It generally ranges from 0.15% to 0.75% per year (depending on credit score and size of down payment) and is divided into 12 monthly payments.

For example, if your loan amount is $500,000 and your annual MIP rate is 0.15%, you’d pay about $750 per year—or roughly $62.50 per month. In most cases, MIP lasts for the life of the loan, but if you put a down payment of 10% or more, it ends after 11 years.

VA loan borrowers are not required to pay any MIPs. However, VA loan borrowers, except for disabled veterans and a few other exceptions, must pay a VA funding fee. This mandatory, one-time fee is paid directly to the Department of Veterans Affairs at closing and helps cover the program’s operating costs. It is typically rolled into the total loan amount but can be paid in cash at closing if the customer chooses.

FHA vs. VA Mortgage Rates and Limits

Interest rates for both FHA and VA loans can be fixed or adjustable, and are influenced by factors such as credit score, loan term, and market conditions. Generally, VA loans tend to offer slightly lower interest rates than FHA loans, and FHA loans are slightly lower than conventional loans, making them an attractive option for eligible borrowers.

While interest rates influence the monthly cost of a loan, another key factor is the loan limit, or the maximum amount that can be financed. FHA loan limits are set by county and are typically lower in rural areas and higher in expensive housing markets. FHA loan limits also differ between single family and multi-family properties, with higher limits for up to four-unit homes.

VA loans, however, do not have a hard-set maximum loan limit. This means that VA borrowers can usually finance higher-priced homes, regardless of area or size. However, the VA has capped its loan guaranty amount, limiting the loan amount that qualifies for a 0% down payment. Furthermore, while there is no set cap, lenders may still limit VA loan borrowing amounts based on income, finances, credit score, and other factors.

Both FHA and VA borrowers may be able to purchase multi-family homes, but in both cases, the borrower must occupy one of the units as their primary residence. Neither loan type can be used to buy a property purely as an investment or second home.

Streamline Refinancing for FHA and VA Home Loans

Interest rates, loan limits, and other terms can differ between traditional FHA and VA home loans and their refinance counterparts.

FHA Streamline Refinance allows borrowers to reduce interest rates or switch from an adjustable-rate to a fixed-rate mortgage with minimal documentation and cost—often without an appraisal. So, if you purchased your home with a traditional FHA loan when rates were higher, you may be able to refinance your loan today and lock in a lower rate. Similarly, VA IRRRL Streamline Refinance allows eligible borrowers to lower interest rates or change loan terms. This makes it easier to reduce monthly payments and overall interest costs.

It’s important to keep in mind, however, that while your interest rate may change during refinancing, the amount you are allowed to borrow will also change. For owner-occupied primary residences, the maximum base loan amount for a Streamline Refinance is whichever is lower: the current outstanding balance of your existing mortgage as of the month before closing, or the original amount of your mortgage when it was first issued.

For example, suppose you have an FHA loan on your primary residence with an original principal balance of $300,000, and after several years of payments, your outstanding principal balance is $280,000. If you choose to do a Streamline Refinance, the maximum base loan amount you could refinance is the least of the two: $280,000 (your current balance) or $300,000 (the original loan amount). In this case, the refinance would be limited to $280,000.

The same is typically true for VA IRRRL (Interest Rate Reduction Refinance Loan) Streamline Refinances. So, while there is no set limit for VA loan purchases, the maximum amount you can refinance through an IRRRL is generally capped at the lesser of your current loan balance or your original loan amount, ensuring the refinance stays within the scope of your existing VA entitlement.

FHA and VA Mortgage Costs

When deciding whether to choose an FHA or VA loan, it’s important to remember the additional fees associated with both. Generally speaking, FHA closing fees include standard closing costs, such as appraisal fees, origination fees, attorney fees, and more, which can add roughly 2–5% of the home’s purchase price. FHA borrowers must also pay a down payment of at least 3.5%, along with an upfront Mortgage Insurance Premium (MIP) of 1.75%.

For example, if an FHA borrower purchases a $300,000 home, their estimated upfront costs on the lower end could look like this:

Closing costs (2%): $6,000

Down payment (3.5%): $10,500

Upfront MIP (1.75%): $5,250

Total: $21,750

By comparison, if the same buyer were to purchase their home using a VA loan, their estimated upfront costs could look like this:

Closing costs (2%): $6,000

Downpayment (0%): $0

VA funding fee (1.25%): $3,750

Total: $9,750

With higher upfront fees and the added cost of ongoing mortgage insurance, FHA loans generally end up being more expensive than VA loans over time. VA loans, with no down payment and no monthly mortgage insurance, can offer significant monthly savings for eligible borrowers, making homeownership more accessible and affordable in the long run.

VA Loan vs. FHA Loan Benefits

The table below highlights key benefits of VA loans and FHA loans, helping you compare features and determine which mortgage option may be the better fit for your financial goals.

Final Thoughts: Is an FHA or VA Loan Better for You?

Choosing between an FHA and a VA loan can be difficult, but understanding the key differences can help you make the right choice for your situation. The best option depends on your financial situation, eligibility, and homeownership goals. FHA loans offer more flexibility for borrowers with lower credit scores or smaller down payments, while VA loans provide significant cost savings for eligible veterans, service members, and surviving spouses through no down payment and no monthly mortgage insurance. Understanding the differences in fees, interest rates, loan limits, and refinance options can help you make an informed decision.

Ready to take the next step toward homeownership and let us help you figure out if a VA or FHA loan is best for you? Get prequalified with Freedom Mortgage today.