FHA and VA loans can help prospective homebuyers achieve their homeownership dreams. These loans are geared towards people with low to middle incomes and help them get a mortgage and buy their homes. They come with favorable terms, although they differ in terms of who is eligible and other details.
If you are unsure about the difference between FHA and VA loans and which type fits your needs, call Society Mortgage. Our expert loan officers will be happy to explain the FHA vs VA loan similarities and differences, guide you into the best mortgage choice for your situation, and help you with the whole mortgage process, whether you choose an FHA loan or a VA one.
FHA and VA loans are popular government-backed loan programs aimed at helping people buy the homes they want.
Eligibility
FHA loans eligibility
FHA loans are available to all borrowers who meet the basic requirements, regardless of military service. However, these loans are only designed for primary residences, meaning the homes can’t be used for investment or rent.
Borrowers must have a valid Social Security number and be of legal age to sign a mortgage in their state.
VA loans eligibility
VA loans are exclusively available to eligible veterans, active-duty service members, and surviving spouses.
Applicants must obtain a Certificate of Eligibility (COE) to prove their entitlement. The property must be the borrower’s primary residence (at least for the first 12 months), so they can’t rent it.
As for eligibility, it’s earned after 90 days of active-duty service during wartime, 181 days during peacetime, or 6 years in the National Guard or Reserves.
Down Payment
FHA loans down payment
FHA loans require a minimum down payment of 3.5% for borrowers with a credit score of 580 or higher.
For those with credit scores between 500 and 579, a larger down payment of 10% is necessary. This relatively low down payment requirement makes FHA loans a better fit for first-time homebuyers or those with limited savings.
VA loans down payment
VA loans usually do not require a down payment. Eligible borrowers can finance 100% of the home’s value, subject to the VA loan limits. This makes homeownership more accessible to veterans and active-duty service members who may not have substantial savings for a down payment.
Credit Score
FHA loans credit score requirements
FHA loans have more lenient credit score requirements compared to conventional loans.
The minimum credit score for an FHA loan is 500, but a score of 580 or higher is needed to qualify for the lowest down payment of 3.5%.
Borrowers with credit scores between 500 and 579 can still qualify but will need to make a larger down payment of 10%.
VA loans credit score requirements
The VA does not set a minimum credit score requirement for VA loans.
However, individual lenders often have their own credit score thresholds. Most VA lenders look for a credit score of at least 620, although some may approve loans with lower scores.
The lack of a VA-mandated minimum credit score can make these loans accessible to borrowers with less-than-perfect credit but it does depend on your lender.
Interest Rates
FHA loans interest rates
FHA loans offer competitive interest rates, which can be slightly lower than those for conventional loans. The exact rate depends on various factors, including the borrower’s credit score, down payment amount, and current market conditions. While rates may be favorable, the addition of mortgage insurance premiums can increase the overall cost of the loan.
VA loans interest rates
VA loans have lower interest rates compared to both conventional and FHA loans. This is partly due to the government guarantee, which reduces lender’s risk.
VA loan rates can remain competitive even for borrowers with lower credit scores. However, rates can vary between lenders, so borrowers should shop around for the best terms.
Debt-to-Income Ratio (DTI)
FHA loans DTI
FHA loans are more forgiving, with higher debt-to-income ratios compared to conventional loans.
The FHA usually permits a DTI of up to 43%, but in some cases, they may approve ratios as high as 50% for borrowers with compensating factors such as a higher credit score or substantial cash reserves. An FHA loan could thus be a good fit if you have high debts.
VA loans DTI
VA loans are known for their lenient DTI requirements. While the VA doesn’t set a specific DTI limit, most lenders prefer a DTI of 41% or lower. Borrowers with a higher DTI may still qualify if they demonstrate sufficient residual income.
Loan Limits
FHA loans loan limits
FHA loan limits vary by county and are based on local median home prices. In 2024, the FHA loan limits for single-family homes range from $498,257 in low-cost areas to $1,149,825 in high-cost areas. These limits are subject to annual adjustments.
VA loans loan limits
As of 2020, the VA eliminated loan limits for veterans with full entitlement. This means eligible borrowers can obtain a VA loan for any amount their income and credit qualify them for, without needing a down payment. However, veterans with reduced entitlement (due to, for example, an existing VA loan or previous foreclosure) may still be subject to loan limits. In these cases, the limits are the same as those for conventional loans.
Income Limits
FHA loans income limits
FHA loans do not have specific income limits. Borrowers from all income levels can qualify for an FHA loan as long as they meet other eligibility criteria. Borrowers must demonstrate sufficient income to repay the loan, which is usually assessed through the debt-to-income ratio.
VA loans income limits
Similar to FHA loans, VA loans do not have income limits. Eligibility is based on military service requirements rather than income thresholds. However, borrowers must still demonstrate sufficient income to cover their mortgage payments and other living expenses. The VA uses a residual income test, which verifies the borrower has enough income left over after paying major expenses. This acts as an extra layer of financial security.
Mortgage Insurance
FHA loans mortgage insurance
FHA loans require two types of mortgage insurance: an upfront mortgage insurance premium (UFMIP) and an annual mortgage insurance premium (MIP).
The UFMIP is 1.75% of the loan amount and can be rolled into the loan, so you don’t have to pay it upfront. The annual MIP varies based on the loan amount, term, and loan-to-value ratio, typically ranging from 0.5% to 1.5% of the loan amount per year. Unlike conventional loans, FHA mortgage insurance is required for the life of the loan in most cases.
VA loans mortgage insurance
VA loans do not require ongoing mortgage insurance, which is a significant advantage.
However, most VA loans include a funding fee, which is a one-time charge that helps offset the cost of the program to taxpayers. This fee depends on factors such as the type of service, down payment amount, and whether it’s the borrower’s first VA loan. It can range from 0.5% to 3.3% of the loan amount and can usually be financed into the loan. However, some veterans, including those receiving VA disability compensation, are exempt from the funding fee.
Property Requirements
FHA loans property requirements
FHA loans have specific property requirements to verify the home is safe and sound.
The property must pass an FHA appraisal, which assesses both the home’s value and its condition. FHA appraisers look for potential safety hazards, structural issues, and other concerns that could affect the home’s livability or value.
VA loans property requirements
VA loans also have property requirements, known as the Minimum Property Requirements (MPRs). These standards check that the property is safe, sanitary, and structurally sound.
The VA appraisal process evaluates both the home’s value and its compliance with MPRs. Key areas of focus include adequate living space, safe mechanical systems, and a sound roof.
FHA vs. VA loans: which one is best
FHA loans are generally better for first-time homebuyers, those with lower credit scores, or individuals with limited savings for a down payment. They come with flexible qualification criteria and are available to a broader range of borrowers.
VA loans are typically an excellent choice for eligible veterans, active-duty service members, and their surviving spouses. They require no down payment or ongoing mortgage insurance and often come with lower interest rates.
The best loan for you depends on your financial situation, credit score, military status, and long-term homeownership goals. If you are undecided about which loan type best fits your needs, our Society Mortgage loan officers are always here to help, advise, and guide you. Call us today and get started on your home-owning journey!
