FHA vs. VA loans: What's the difference, and which one is best for you?

When you’re applying for a mortgage, there are many different loan programs you can use. VA loans, which are offered to veterans, servicemembers, and their surviving spouses, are one option. FHA loans, which are insured by the U.S. Department of Housing and Urban Development (HUD), are more widely available and aimed at those with lower credit scores or smaller savings.

Both can be an option for people who want to buy a home, but choosing between the two can be tricky. We’ll break down what you need to know to choose the right loan program for you.

Key differences between FHA and VA loans

Both FHA and VA loans are types of government-backed mortgages that can serve as an alternative to conventional loans.

FHA loans are available to most people, while VA loans are only available to veterans, servicemembers, and their surviving spouses. While they’re insured by government agencies, they come from regular mortgage lenders.

In general, FHA loans can be costlier because they require mortgage insurance and a down payment. VA loans have no down payment requirement but usually have a funding fee. VA loans also typically have slightly lower rates.

FHA and VA loan definitions

FHA loans are mortgages insured by the Federal Housing Administration, which is part of the Department of Housing and Urban Development. They’re designed to help borrowers with low credit scores and down payments qualify for a mortgage.

VA loans are mortgages backed by the Department of Veterans Affairs. They are exclusively available to eligible servicemembers and veterans and have benefits such as low rates and no down payment requirements.

VA loan applicant eligibility

VA loans are only available to servicemembers and, in some cases, surviving spouses. There are several different types of VA loans for qualified applicants to choose from. To be able to apply for these loans, you must meet specific requirements.

You may be eligible if you meet one of these requirements:

• You’re an active service member with at least 90 continuous days of service
• You’re a national guard member with 90 days on non-training duty or who has served at least 6 creditable years
• You’re a reserve member with 90 days of non-training duty or have served 7 creditable years
• Precise eligibility requirements are available on VA.gov.

Even if you meet these eligibility requirements, you’ll still have to meet your lender’s credit and financial requirements. You will also need to provide documentation about your service and income, which may include a statement of service from your commanding officer.

Mortgage insurance

If you’re applying for an FHA loan, you’ll need to pay a mortgage insurance premium (MIP). The MIP is 1.75% upfront and between 0.15% to 0.75% of the loan amount annually. MIP payments are usually included in your normal monthly payment.

VA loans, by comparison, do not require mortgage insurance payments. However, you will pay an upfront funding fee, which we’ll cover in the next section.

Cancelling MIP on an FHA loan can be complicated and often involves refinancing. How long it takes to cancel MIP will depend on when you get your loan and the equity you have in your home. Another option is to refinance your FHA loan to a conventional loan, which will generally not require private mortgage insurance (PMI) if you have at least 20% equity in your home.

Fees and closing costs

Mortgages often come with upfront fees and closing costs, and VA and FHA loans are no different.

If you apply for a VA loan, you’ll likely need to pay a VA loan funding fee. The amount varies based on whether you’ve had a VA loan before and your down payment. You can pay the fee upfront or roll it into your mortgage payment.

You can have the fee waived if you meet certain requirements, such as getting VA compensation for a service-connected disability or if you have received a Purple Heart.

Loans come with closing costs, which cover things like underwriting and origination costs. These can be paid at the time of closing on the loan, or they can sometimes be rolled into the loan. In other situations, lenders may offer a no-closing-cost loan that has a higher interest rate.

Down payment requirements

A major perk of VA loans is that you do not need to provide any down payment, though a larger down payment can help you secure a lower funding fee.

FHA loans, on the other hand, have a minimum down payment of 3.5% of the home’s value. However, those with credit scores under 580 may need to put down 10% to qualify for a loan.

Credit score requirements

You might wonder what credit score you need to buy a house. FHA loans are designed for people who have lower credit scores. In general, the minimum is 580, though some lenders will allow people to get a mortgage with a score as low as 500. Rocket Mortgage® only extends FHA loans to those with a credit score of at least 580.

VA loans have no minimum credit score, but your lender may set its own requirements.

If your credit score is not as strong as you’d like, there are ways to improve it through effort and planning.

Interest rates

VA loans may offer better interest rates for those who qualify, and FHA loans tend to offer more lenient credit requirements than conventional loans. This is because the government agencies insuring the loans reduce the risk that the lender is facing.

Remember that lenders will adjust the rates they offer based on factors like your credit score, down payment, and financial situation.

FHA vs. VA refinancing

Refinancing your mortgage allows you to replace an existing loan with a new one that has a different rate, payment, and terms. Government-backed loans offer streamlined refinancing, which can make the process a bit quicker and easier.

With an FHA streamline refinance, you can refinance an existing FHA loan with minimal credit documentation and underwriting, so long as you’re current on the loan, aren’t taking out more than $500 in equity, and can show a net tangible benefit, such as reducing the loan’s rate or payment. In some cases you may not need a home appraisal.

VA Interest Rate Reduction Refinance Loans (IRRRL) are the equivalent for VA loans. You can use one if you have a VA loan and currently live in or used to live in the property.

Overview of differences

FHA and VA loans are both government-backed mortgages, but they are designed for very different groups of people. Make sure you understand these key differences.

FHA or VA loan: Deciding which loan is better for you

FHA loans and VA loans are both government-backed mortgages with low (or no) down payment requirements. While VA loans have heavily limited eligibility, FHA loans are much more widely available.

If you can qualify for a VA loan, it may be the better choice for you, but FHA loans can be an alternative for those who have not served in the military.

If you’re ready to start your homebuying journey, you can reach out to Rocket Mortgage^® to see what you qualify for.