Last Updated on March 9, 2023 by Luke Feldbrugge
If you’re looking at an FHA vs VA loan and it is something you’re investigating, one of these two things must be true. Either you are, or were, in the military and may be eligible for the VA loan. Otherwise, the VA loan isn’t an option for you. So let’s proceed assuming you are eligible for a VA loan based on your military service, and you are wondering if you should also be looking at the FHA loan.
All things being equal, the VA loan guarantee is a better option for you, the home buyer, than the FHA loan guarantee. Of course, in the complex world of real estate there are little differences between everything, so let’s dig a little further in comparing the FHA vs VA loan.
First off, you’re going to hear a lot about VA and FHA mortgage programs, and it’s important to remember that these organizations – the U.S. Department of Veterans Affairs and the Federal Housing Administration – do not give loans. They only give loan guarantees, which means they insure and guarantee the mortgage loan that you will get from a private lender or mortgage broker.
This is a good point to mention that Homes for Heroes can help with private lenders. When you sign up for our Hero Rewards savings, we connect you with mortgage lenders who specialize in helping military heroes, including veterans and active duty service members. We also connect you with real estate specialists who can help you find a great home. We have a whole team of professionals who are committed to helping community heroes like you with getting a mortgage, buying a home, and saving you money in the process.
Executive Summary: FHA Loan vs VA Loan
There’s going to be a breakdown of the benefits of each program further down, but let’s cut to the chase. The three main differences that stand out for FHA vs VA loans.
- The FHA loan guarantee has a small down payment (3.5%) and the VA loan guarantee has none.
- The FHA requires mortgage insurance and the VA does not.
- The FHA and the VA both typically have lower interest rates on the mortgage that the private lender gives you. The VA’s interest rate tends to be lower, but it’s variable.
FHA vs VA Loan Benefits Comparison
Because we are dealing with finances, loans, contracts and mortgages, details are important. Let’s go over the details of the benefits of each type of loan guarantee.
We mentioned that the FHA has a small down payment requirement and the VA has none at all. That savings of tens of thousands of dollars, right up front, is what makes the VA system a great option. It’s typically the first thing anyone mentions. It is, however, not absolute. If you are buying a house for $400,000 and the VA appraiser determines it’s only worth $350,000, you will need to make a down payment for the extra amount. Also if you don’t have a full entitlement (covered below), you may have to contribute a down payment.
On the FHA side, the 3.5% down payment on the total amount for your mortgage is pretty straightforward. If your credit score is below 580, your down payment increases to 10%.
Private Mortgage Insurance (PMI)
On the VA side, you don’t ever have to pay private mortgage insurance (PMI) if you get the VA loan guarantee. Most mortgages require that you pay this for the first few years of payments, but the VA already has you covered. The average PMI payments are between $100 and $300 per month, so over the years this can really add up.
FHA loan guarantees require two mortgage insurance programs. The first is an upfront mortgage insurance premium of 1.75% of the entire loan, called the Mortgage Insurance Premium (MIP). That upfront fee can be folded into your mortgage if you want to. Then, in addition, you will also be paying a monthly premium, just as you might with conventional loans. These rates on these monthly mortgage insurance premiums range from 0.45% to 1.05% depending on the size of the loan and how long you pay it.
Both FHA and VA loans tend to have a lower rate than conventional mortgages, but there are any real rules about this from the federal government. Truth is, private lenders and banks and mortgage brokers will decide what your interest rate is. However, because you have the backing of either of these federal programs, lenders typically will give you a better rate because your loan is less risky. In the eyes of lenders, VA loans present slightly less risk and you may get a slightly better interest rate than with a FHA guarantee.
Choosing the right lender is going to be the most important variable in getting a good interest rate on your mortgage. Again, Homes for Heroes can help with that.
The VA home loan process doesn’t have any credit score requirements. You might see numbers like 580 or 620 related to VA loans, but those are not from the federal agency. They are from private lenders, who want you to have good credit.
The FHA on the other has a minimum credit score requirement of 580 or above. If you have a lower score than that, you can qualify for the FHA loan guarantee if you make a bigger down payment (10%).
FHA and VA Loan Limits
Regardless of what you may have read, or heard, there is no upper limit on a loan you get through the VA process. There is a limit to how much of a loan the VA will insure and guarantee, but if you need a loan higher than a full entitlement ($647,000) you can request it. However, keep in mind you may need to start making down payments when you go over that full entitlement. Again the amount of the loan will be between you and a private lender, but the VA rules won’t stand in your way.
The FHA loan program limits adjust each year, and for 2023 the range is $472,030 to $1,089,300. This range of FHA loan limits depends on the area of the country that you are looking for a home. If you want to buy a home, for example, in Washington D.C., where the prices for homes are high, the upper end of the range will probably be your limit. On the other hand, if you are looking at a home in a small town in the Midwest, the lower end of the range will come into play.
Differences for a Refinance
If you’ve been in your house for awhile, or if you bought it during a period when interest rates were higher than they are today, you may want to look into refinancing your mortgage. Both the FHA and VA make that possible. Better than that, they actually make it easy.
On the VA side, there is the VA IRRRL (Interest Rate Reduction Refinance Loan). The FHA has its Streamline Refinance. Both are considered streamlined because they require less documentation than a traditional refinance. They can also be accomplished quickly. Both say that they can turn around streamlined government-backed mortgage refinancing in 30 days.
Upfront Cost of the VA Funding Fee
In the PMI section above, the comparison makes it look like VA home loan borrowers get a free ride while FHA borrowers get hit with two kinds of mortgage insurance. VA borrowers also have an upfront payment called the VA Funding Fee, and while it’s technically not for insurance, it is something to consider as you are weighing the benefits.
All VA mortgages include this one-time fee and this fee can range between 2.6% and 3.5% of the loan amount (lower for first-time home buyers). This is due at closing but you can fold it into the mortgage and pay it that way if you don’t have the cash. If you were injured or disabled as a result of your service in the military, you probably don’t need to pay this fee. Likewise, if you received a Purple heart, this fee is waived.
This fee is unique to the VA and the money it collects is used to keep the VA home loan program running.
Homes for Heroes Savings Accompanies These Loan Programs
Homes for Heroes has been working for over 20 years to help active and retired military heroes choose the right house and the right mortgage. We have, from the beginning, worked with both FHA guarantees and the VA loan program.
“I spent 32 years in the Army, and I was thrilled to learn about it from our real estate agent. Getting some money back helped with the cost of our cross country move.” – Diane – Army – found a new home in Texas.
Our model for helping consists working with you at three phases of your house hunt.
- We connect you with our local real estate professional to help you buy a home.
- We connect you with our local mortgage lender to help you finance your loan.
- After working with our specialists, and you close on your home and/or mortgage, you receive an average of $3,000 in Hero Rewards® savings after closing to help purchase anything you may need for your new home.
Our local specialists joined Homes for Heroes to help military personnel in all the branches of the United States armed forces–Navy, Army, Marines, Air Force, Coast Guard, National Guard and more buy, sell and refinance a home. They understand your unique challenges.
On your part, the process is exactly the same as a typical real estate transaction. You just receive excellent care from our real estate specialists and receive a Hero Rewards® check at the end. On average, our heroes save $3,000 when using both our real estate and lending specialists for their home purchase. Our team can work with you to find a perfect home for you and your family. For more information, sign up today to speak with our local specialists with no obligation.