FHA vs. VA Loan: Which One Is Right For You?

What Is a VA Loan?

VA loans are issued through banks, credit unions and other private lenders with the backing of the U.S. Department of Veterans Affairs. VA loans are one way the federal government supports and shows gratitude to service members and their families.

Under the VA loan program, eligible candidates can finance their homes with little or even no down payment. These loans have narrower eligibility requirements than many other government-backed mortgages, including FHA loans, but can be a good option if you can qualify for them.

As a prerequisite for a VA loan, you must be an active service member, military veteran, or qualifying spouse or survivor of a veteran, and you must meet specific requirements needed to obtain a certificate of eligibility (COE) based on the time period in which you (or your family member) served in the military. A lender must have your valid COE before approving your VA loan. VA loans also have minimum standards for income and creditworthiness.

What Is an FHA Loan?

FHA loans, designed to promote homeownership for all Americans, are geared toward homebuyers with limited funds for a down payment and/or less-than-ideal credit scores. Backed by the Federal Housing Administration, these mortgages are issued by private lenders under FHA guidelines.

Anyone can apply for an FHA loan, as long as they have a FICO^® Score^☉ of at least 580 (or as low as 500 under certain circumstances, as discussed below). They were created to help first-time homebuyers but are not limited to them.

Comparing FHA and VA Loans

Here's a comparison of key borrowing requirements and options for VA loans and FHA loans:

• Maximum loan amount: Both VA loans and FHA loans use the federal conforming loan limit (CLL) to determine the maximum amount you'll be able to borrow. The CLL is reset annually, based on median housing costs across the country, and it includes allowances for higher loan amounts in counties where housing costs significantly exceed the national average. For 2022, the CLL for single-family homes in most of the country is $420,680 and $970,800 in those counties where housing costs are greatest. You can check the CLL for your county at the Federal Housing Finance Agency website.
• Loan term: Both VA loans and FHA loans are available as fixed-rate mortgages and adjustable-rate mortgages. As with conventional mortgages, the adjustable-rate versions of VA and FHA loans typically offer attractive interest rates that apply for the first year, but which can change annually thereafter, making the amount of your monthly payments hard to predict over the course of the loan.
• Credit score: Just as lenders offering conventional loans have leeway on credit scoring requirements, those issuing VA loans can set their own score limits, but most prefer FICO^® Scores of 670 or higher—scores considered good or better. A FICO^® Score of 580 or better is required for most FHA loans, but you can get one with a credit score as low as 500 with a larger down payment.
• Debt-to-income (DTI) ratio: DTI is the percentage of your monthly pretax income used to make debt payments. Lenders issuing VA loans require DTI ratios no higher than 41%. FHA guidelines call for DTI ratios of 43% or less on most loans but allow DTI ratios as high as 50% for borrowers with significant cash reserves or other assets.
• Interest rates: VA loans typically offer better borrowing terms than conventional mortgages, with interest rates as much as a point lower than prevailing market rates. FHA loan rates may also fall slightly below conventional mortgage rates for borrowers with comparable credit scores because federal backing makes lenders more willing to take on borrowers they see as relatively risky.
• Down payment: If you're eligible for a VA loan, the federal government grants you a "basic entitlement" of $36,000, a sum you can consider part of your down payment. Most lenders will issue loans up to four times the basic entitlement ($144,000) without requiring a down payment. If you'd like to borrow more than $144,000, most lenders require that some combination of your entitlement and down payment cover at least 25% of your loan amount.

You can get an FHA loan with a minimum down payment of 3.5% of your home's purchase price, as long as that price falls within the federal conforming loan limit for your county.

• Mortgage Insurance: Mortgage insurance is typically required to protect borrowers against potential financial loss on loans with down payments of less than 20%. Mortgage insurance premiums typically are added to mortgage payments and may be removed once the borrower has made enough payments to have 20% equity in the home. Both VA loans and FHA loans offer alternatives to this. VA loans do not require any mortgage insurance at all. FHA loans require mortgage insurance on loans issued with down payments of 10% or less and, in contrast to conventional mortgages, those payments can never be removed over the life of the loan. If you make a down payment between 10% and 20% on an FHA loan, mortgage insurance can be removed after 11 years.
• Length of time for closing: In theory, both a VA loan and an FHA loan can close in 30 days or less after a sales agreement is signed, if all necessary paperwork and documentation is prepared and ready to go. In practice they can take longer: According to mortgage processor Ellie Mae, the average VA loan took 56 days to close as of November 2021, and the average FHA loan took 50 days, while conventional mortgages closed in an average of 49 days. The VA and FHA both demand more rigorous and detailed appraisals than most commercial lenders require and completing that process may affect the scheduling of your closing.

FHA vs. VA Loans: Which Should You Choose?

If you have the option of choosing between a VA loan and an FHA loan, in most cases you'll be better off with a VA loan, thanks to its low down-payment requirement, generous interest rates and lack of mortgage insurance requirement.

An FHA loan could be a better bet, however, if your credit score is low, or your debt-to-income ratio falls into the narrow eligibility gap between the VA loan maximum of 41% and the FHA loan limit of 43%. (If a DTI ratio is the only consideration, however, you might want to consider taking steps to reduce it, so you can take advantage of the benefits of a VA loan.)

The Bottom Line

Whether you choose to seek a VA loan, an FHA loan or a conventional mortgage, your credit history will play an important role in whether you're able to get approved for the loan. Before you submit any mortgage application, it's a good idea to review your credit reports for accuracy and check your credit score to anticipate how lenders will view your creditworthiness. If you're not thrilled with what you find, consider taking steps to spruce up your credit standing before you seek a mortgage.