VA vs FHA: Which Government Program is Best?

VA vs FHA: Which government program is best?

There are plenty of different home loan products that home buyers can choose from, with popular products including FHA and VA loans. The Federal Housing Administration (FHA) and the Department of Veterans Affairs (VA) are both government-backed programs, but they have their own set of benefits and drawbacks.

When looking to buy a house, which is best: VA or FHA? The answer depends entirely on what the buyer is looking for.

Here’s a breakdown of some of the big differences between the two mortgage products:

Down payment

For home buyers looking to avoid a down payment, it’s tough to beat VA loans. VA loans don’t require any type of down payment – part of the program’s guarantee.

FHA loans will require a down payment of at least 3.5%, but that’s still well below the traditional 20 percent that many home buyers assume they need.

In terms of getting the lowest down payment possible, VA loans have FHA loans beat.

Insurance

If you make a down payment of less than 20 percent on an FHA loan, you can expect to be paying a mortgage insurance premium, or MIP. This will be paid either upfront at the closing of the FHA loan or monthly, with the annual fee being spread over all 12 months.

Unlike other types of mortgage insurance, MIP will also last the life of the FHA loan. That means an FHA buyer with less than 20 percent down will be required to refinance their loan after they’ve established enough equity in their home.

VA loans, on the other hand, require no type of insurance regardless of how much the buyer puts down. This is another part of the VA’s guarantee – the VA insures the loan, so any type of insurance is moved away from the home buyer.

Mortgage Rates

It’s difficult to peg mortgage rates since they’re always changing, but one thing is clear: VA loans typically come with a lower mortgage rate than FHA loans. Mortgage software giant ICE demonstrates this. Each month, they compile a report of all the loans that go through their software. That report is then released, giving home buyers valuable information to work with. Throughout 2023, the average mortgage rate for a VA loan was 47 basis points (0.47%) lower than the average rate for an FHA loan. October wasn’t a fluke, either; VA loans routinely have lower mortgage rates than FHA loans.

VA Loan Qualifications

While VA loans have an edge with the down payment, mortgage rates, and insurance, home buyers will still need to qualify for the loans. Here’s how different qualification requirements compare for both products:

Credit Scores

Technically, VA loans have no minimum credit score, and FHA loans can be approved with scores as low as 520. But in the real world, lenders will want to see a credit score of at least 580 for FHA loans, and usually around 620 for VA loans.

According to Ellie Mae’s most recent report, the average credit score for closed VA first-time homebuyer purchase loans in January 2024 was 709, compared to 673 for FHA loans. Granted, this does not show what the minimum requirement is for either product. However, generally speaking, FHA loans are usually more flexible with credit scores than VA loans.

DTI

With the debt-to-income ratio (DTI), both VA and FHA home buyers will want to keep their total debt-to-income below 45 percent. This means that the total monthly amount spent on debt (including the mortgage you’re trying to get) needs to be below 45 percent of your monthly income.

Neither product has an edge here, but it’s still an important part of qualifying to pay attention to.

Eligibility

Anyone can be eligible for an FHA loan, but only specific veterans and military members can get a VA loan. Usually, most veterans are eligible, so long as they’ve served for 2 years or more. Requirements for eligibility do change, though, depending on when the individual served, how they served, and why they retired from the military.

Ease of using the product

VA loans have a reputation for going slower than other loan products, but that’s not entirely the case. According to Ellie Mae, the average VA loan closed in 37 days – just 1 day slower than the average FHA loan.

The longest part of the VA home buying process can be the VA appraisal. With some preparation, this process can go smoothly, as with all the other steps of buying a home with a VA loan.

Which loan product is the best?

On paper, VA loans have more benefits than FHA loans. Each situation is different, though, so it’s impossible to say whether one product is definitively better than the other. With everything said, VA-eligible home buyers will likely want to take advantage of the VA’s mortgage program.