FHA and VA loans are both good options for homebuyers because of their competitive interest rates, flexible credit qualifications, and low down payment requirements. Both loans are backed by the federal government. FHA loans are backed by the Federal Housing Administration and VA loans are backed by the Department of Veterans Affairs.
There are important differences between FHA loans versus VA loans. FHA loans are available to all U.S. citizens who qualify while VA loans are only available to veterans, active duty military personnel, and surviving spouses who meet the eligibility requirements.
FHA loans have low down payment requirements while VA loans allow many borrowers to buy a house without a down payment. Finally FHA loans have upfront and monthly mortgage insurance premiums while VA loans just have a one-time VA funding fee.
Keep reading to find out more about the advantages and disadvantages of FHA loans versus VA loans, and decide which one might work better for you!
About FHA loans
FHA loans are offered by private lenders like Freedom Mortgage and are insured by the Federal Housing Administration ("FHA"). FHA loans make it easier for you to buy a home when you have fair credit, a moderate income, or less money for a down payment. Because the FHA backs these mortgages, private lenders are able to offer home loans to more borrowers.
What are the advantages of an FHA Loan?
- Competitive rates. The interest rate you receive for your FHA loan may be similar to the rate you might receive if you were purchasing or refinancing a home with a conventional loan.
- Low down payment. You may be able to buy a house with just a 3.5% down payment. You are typically required to have a credit score of at least 600 to make this payment however.
- Low credit score requirement. Lenders may approve your loan application with a lower credit score compared to conventional loans.
- Fixed rates. You can get a fixed-rate FHA loan, which makes your monthly payment more predictable because your interest rate will not change.
- Easier DTI ratio requirement. Your debt-to-income ratio (DTI) can be as high as 43% with an FHA loan.
FHA loans are good for first-time homebuyers but you can use them to purchase your next home too. If you currently have an FHA loan, you can also take advantage of the FHA streamline refinance program to lower your interest rate. Streamline refinances feature easier credit and income requirements and no loan-to-value ratio limits, so you can refinance even if you have little equity in your home. You won’t need a new home appraisal either, and you can close quickly on your new loan.
What are the disadvantages of FHA loans?
- Mortgage insurance. You’ll need to pay for two types of mortgage insurance premiums with an FHA loan. The upfront mortgage insurance premium (UFMIP) is equal to 1.75% of the loan amount and is collected at closing. There are also monthly mortgage insurance premiums (MIP) you will need to pay.
- Less buying power. FHA loans have limits on the amount of money you can borrow. In 2022, the maximum loan amount ranges between $420,680 and $970,800 depending on the county in which the house is located.
- Primary residences only. You can only use an FHA loan to purchase a home that will be your primary residence. Vacation homes, rental properties, or investment properties are not eligible for FHA loans. The home usually needs to meet the FHA’s appraisal guidelines too.
About VA loans
VA loans are also government-backed and make it easier for military personnel to buy and refinance homes. Unlike FHA loans, VA loans are only available to veterans, active-duty military personnel, and surviving spouses who qualify.
What are the advantages of a VA Loan?
- Competitive rates. VA loans offer interest rates that are competitive with conventional loan rates and in some cases may even be lower.
- No down payment. It’s possible to buy a home without a down payment using a VA loan. Making a down payment can lower your funding fee and help you save money on interest.
- Low credit score requirement. Most lenders require a score around 600 to approve a VA loan to buy a house. Freedom Mortgage can help veterans refinance homes with an easy credit score qualification.
- No loan limits. Unlike FHA loans, the Department of Veterans Affairs does not set a limit on the amount of money you can borrow with a VA loan. Lenders typically have limits on the amount of money they are willing to lend you based on your credit, income, and finances.
- No mortgage insurance. You won’t need to pay for mortgage insurance with a VA loan. You will need to pay a one-time fee which helps insure the VA loan program.
VA loans also have a streamline refinance program which is also called VA IRRRL refinancing. This program lets you get a lower rate on a new VA loan with easy credit qualifications, less paperwork, and faster closing.
What are the disadvantages of VA loans?
- Eligible service members only. VA loans are only available to eligible service members and in many cases, the spouses of veterans who have died while in service or from a service-related disability. FHA and conventional loans are available to any buyer.
- Funding fee. Funding fees protect the VA home loan program from borrowers who default on their mortgage. The VA funding fee is paid at closing and is based on your loan type, loan amount, and other factors. Some veterans and surviving spouses are exempt from paying this fee.
- Primary residence only. Much like an FHA loan, you can only buy or refinance your primary residence with a VA loan.
- Appraisal process. VA loans are subject to VA appraisal guidelines which include an inspection of the property to determine if it meets the VA’s Minimum Property Requirements before your loan can be approved.
Learn more about FHA and VA loans
Freedom Mortgage was the #1 FHA lender and #1 VA lender in the United States in 2021.1 You can use an FHA or VA loan to purchase or refinance a home. By refinancing, the total finance charges may be higher over the life of the loan. Our friendly Loan Advisors are happy to talk to you about your loan options! Complete our Get Started form or call us at 877-220-5533.
1 Inside Mortgage Finance, 2021