What are the differences between VA and FHA home loans?

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Ask a Lender
July 21, 2017 | Updated September 10, 2018

Key Points

What are the differences at-a-glance?

  • The FHA and VA loan-guarantee programs provide government support for home mortgages.
  • The VA program is only open to eligible members of the U.S. armed forces, veterans and sometimes their spouses.
  • The FHA requires a minimum 3.5 percent down payment.
  • Borrowers using the VA program can finance the entire amount of the loan.

Federal Housing Administration (FHA) loans and U.S. Department of Veterans Affairs (VA) home loans are the two most widely-used government loan programs.

The programs are alike in some ways. A government agency is backing the loan, enabling lenders to make these loans widely available to qualifying borrowers, and at a reasonable cost.

The FHA and VA don’t lend out the money directly. You apply for a VA or FHA loan through an approved lender, which funds the loans and ensures that you meet the program’s guidelines.

VA and FHA mortgage loans differ in many ways, however.

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What are the differences between an FHA and a VA home loan?

While both FHA and VA home loans are government-backed loan programs, each have their own eligibility requirements and associated fees. While VA loans offer no down payment options and a federal guarantee, FHA mortgages require a minimum of 3.5% down and are insured through the U.S. Department of Housing and Urban Development (HUD).  For borrowers with low credit scores, FHA home loans offer the ability to buy a home with less down than a conventional mortgage.

What is a VA loan?

A VA home loan is a mortgage loan guaranteed by the United States Department of Veteran Affairs (VA) and is offered only to current or former members of the U.S. Military.  VA home loans are reserved for residential purchases only.  

A unique feature of VA home loans is that they allow for veterans to borrow 103.3% of a property’s value without private mortgage insurance (PMI)

What is an FHA loan?

Federal Housing Administration (FHA) loans are good options for many borrowers, but it is not a mortgage intended for people shopping for luxury homes. FHA literally puts a limit on how much house you can buy.

Like other federal loan programs, FHA guarantees the loan from an approved lender. The lender loans out the money and underwrites the loan according to guidelines the FHA establishes. The agency has guidelines relating to loan limits.

The terminology used to describe FHA loan limits can be confusing. FHA establishes a national “ceiling,” which is the maximum amount that can be borrowed in areas with the highest median home prices, assuming all other requirements are met. For 2018, this ceiling for a one-unit home is $679,650. This means that a buyer can only borrow $679,650 in areas where the cost of living is high, such as in large urban areas.

There are a few specially exempted areas in more remote places where the cost of living is high, such as Alaska, Hawaii, Guam and the Virgin Islands. In these places, the loan limit for one-unit homes can go up to $1,019,475.

FHA also establishes a national “floor,” which is the maximum amount that can be borrowed in a low-cost area. For 2018, the national floor – the most you could borrow in low-cost areas, such as parts of Birmingham, Ala., and Memphis, Tenn. – is $294,515.  

What are the eligibility requirements for a VA loan?

The first major difference involves eligibility. Whereas FHA loans are open to all borrowers, VA loans only are only open to members of the U.S. armed forces, qualifying veterans and, in some cases, the spouses of deceased veterans. VA loans are a special perk that was created as part of the GI Bill during World War II.

Before you can be approved for a VA loan, you’ll need a certificate of eligibility from the agency.

VA eligibility typically depends on your length of service, which can vary significantly depending on the era of your service. In most cases, the spouses of deceased veterans must have remained unmarried to qualify for a VA loan.

A VA loan offers has some special advantages. It is one of only two government guarantee programs that offer 100 percent financing. This means you won’t have to pony up a down payment, which is what often proves to be the greatest hurdle for new homebuyers.

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What are the eligibility requirements for an FHA loan?

By contrast, FHA requires borrowers to put a minimum of 3.5 percent down on the home.  Another important factor in determining eligibility is your credit score. In theory, FHA will allow borrowers with credit scores as low as 500. However, if you have a credit score within the range of 500-579, you must put at least 10 percent down on the home.

Another major requirement is that borrowers must demonstrate that they can afford the loan. FHA has established a maximum bar for debt-to-income (DTI) ratios. In other words, your debt payments each month can’t exceed a certain percentage of your gross income.

There are two separate numbers that are considered. One calculates your monthly house payment against your gross income. As of 2017, the house payment can’t exceed 31 percent of your gross monthly income.

The other number evaluates all your debt payments against your gross income. To qualify for FHA, your combined debt payments typically can’t exceed 43 percent. There are a few exceptions that can increase that percentage, such as making a larger down payment, showing a history of conservative spending and having substantial savings.

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What are the fees associated with FHA home loans?

FHA and VA also carry different insurance costs. FHA charges borrowers an upfront mortgage insurance fee when the loan closes, and an annual insurance premium that you typically must pay for the entire duration of the loan. The upfront insurance fee can be added to the loan or paid in its entirely in cash when the loan closes. The annual insurance fee is divided into 12 monthly installments. FHA charges these fees to protect lenders in the event your loan defaults, and also to cover the administrative costs of running the loan program.

What are the fees associated with VA home loans?

By contrast, VA does not require borrowers to carry annual mortgage insurance, but does charge what is known as an upfront funding fee. This funding fee goes to the VA directly to cover the losses on any loans that default in the program.

The VA funding fee amount can vary. The amount you pay depends on a number of factors, such as whether you are in the regular military or in the reserves, the size of your down payment and whether you have used the VA benefit before. The VA funding fee tends to be more than the FHA upfront mortgage insurance fee.

Since you will not have to pay annual mortgage insurance premium, the overall insurance costs of a VA loan will be significantly lower than with an FHA loan. The VA funding fee can be added into the loan. Also, the home seller has the option of paying the funding fee. The fee also can be waived for certain qualifying veterans with disabilities.

One disadvantage to the VA program is that it tends to be a harder loan to obtain than an FHA loan. FHA loans tend to have more flexible guidelines, enabling borrowers with lower credit scores and with a higher debt load to qualify for a loan.

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