Should Veterans Choose an FHA Mortgage or a VA Loan?

Some veterans consider FHA loans instead of VA mortgages. This may happen when a borrower wants to preserve VA loan entitlement for later use or has already used their entitlement on another property.

Whatever the reason, it’s important to understand how the two programs compare before choosing one. While both are government-backed mortgages, they differ in key areas, including down payments, loan limits, and mortgage insurance.

FHA and VA Home Loans: Major Differences

VA home loans offer several advantages over FHA and conventional mortgages. One major change took effect on January 1, 2020, when the VA eliminated loan guaranty limits for borrowers with full entitlement.

This means the VA no longer sets a maximum loan amount. Before 2020, VA loans had county-based limits tied to Fannie Mae and Freddie Mac conforming loan limits.

FHA loans still use county loan limits based on those same conforming limits, meaning FHA borrowers may face stricter borrowing caps than VA borrowers.

However, lenders still evaluate risk. If a loan amount exceeds the VA’s guarantee limit, borrowers may need to cover part of the difference in cash.

Another key difference is the down payment requirement. VA loans typically require no down payment, while FHA loans require a minimum down payment of 3.5%.

FHA and VA Home Loan Similarities

In many ways, VA and FHA mortgage loans share similar features.

Property Requirements

Both VA and FHA loans have property requirements. Most importantly, both programs are designed for primary residences located in the United States or its territories.

In general, the property must:

• Comply with local laws and zoning. VA and FHA rules do not override state or local building codes or zoning regulations.
• Qualify as real estate. Manufactured homes must be permanently attached to a foundation. RVs and houseboats do not qualify.
• Be primarily residential. Non-residential use typically cannot exceed 50% of the home’s floor space.

FICO Scores

Both FHA and VA loans typically have more flexible credit requirements than many conventional mortgages.

• FHA loans: A 580 FICO score is generally required for maximum financing, though lenders may require higher scores for better rates or lower down payments.
• VA loans: The VA does not set a minimum credit score, leaving requirements up to individual lenders.

Because both programs are government-backed, lenders may be more flexible with credit standards. However, some loan types or lenders may require higher credit scores.

Higher Scores May Be Required For Some Loans

If you plan to have a home built for you using an FHA One-Time Close Construction loan, for example, your FICO scores will be given more scrutiny due to the more complex nature of the loan, the dollar amounts involved, etc. Lender standards will also play an important role in determining and enforcing these requirements.

Occupancy Rules

Both VA and FHA loans generally require the home to be the borrower’s primary residence.

• FHA loans: At least one borrower must occupy the home as their primary residence.
• VA loans: Also require the home to be the borrower’s primary residence.
• Cash-out refinances: Both FHA and VA require occupancy.

One key difference applies to VA Interest Rate Reduction Refinance Loans (IRRRLs). For these streamlined refinances, borrowers only need to certify that the home was previously their primary residence.

Interest Rates

Neither the VA nor the FHA sets or regulates interest rates for government-backed mortgages. Instead, borrowers negotiate rates directly with their lender, and factors such as credit score, payment history, employment, and overall financial profile influence the rate they receive.

The main guideline in both programs is that rates, fees, and other charges must be reasonable and customary compared to similar mortgage products.

VA and FHA Mortgage Loan Programs That Are Similar

Both FHA and VA mortgages may allow the purchase of a mobile home, a farm home (under the right circumstances), a condo unit, a suburban house, a mixed-use property that has at least 50% of the floor space dedicated to residential purposes (a percentage that is subject to change based on current legislation, government policy, or other variables), and/or multi-unit properties up to four units.

Down Payment

FHA mortgages require a minimum 3.5% down payment, calculated based on the property’s adjusted value. The down payment requirement states that other mortgage loan expenses, such as lender’s fees, appraisal fees, and closing costs, cannot be included in the down payment.

FHA loan down payments are completely separate from any other closing costs associated with a real estate loan.

VA mortgage loans, as a rule, do not require a down payment, but there are circumstances in which one may be required due to lender standards for certain FICO score ranges, credit history issues, etc.

When A VA Home Loan Down Payment May Be Required

You may also be required to pay up front in cases where there is a difference between the appraised value of the real estate and the asking price-the borrower cannot be forced to close the deal in such cases.

There is a VA Escape Clause that forbids the lender and seller from compelling the buyer to complete the transaction when the loan amount is less than the asking price. The borrower is free to choose the property regardless, but is required to pay the difference between the asking price and the loan amount in cash. This cannot be financed.

Mortgage Insurance

VA loans do not require mortgage insurance. FHA loans, however, require two types of mortgage insurance:

• Upfront Mortgage Insurance Premium (UFMIP)
• Annual Mortgage Insurance Premium (MIP)

Borrowers can either pay the UFMIP at closing or roll the full amount into the loan, but it cannot be partially financed.

Funding Fees

VA loans include a funding fee, which helps support the program. However, some borrowers are exempt, including:

• Veterans receiving VA compensation for service-connected disabilities
• Veterans are eligible for disability compensation, but receive retirement or active-duty pay instead
• Surviving spouses of service members who died in service or from service-connected causes
• Active-duty service members awarded the Purple Heart before loan closing

If a borrower is awaiting a VA disability determination at closing, they may need to pay the funding fee initially and request a refund later if approved.

VA Loan Funding Fees Rates

First-time use

• 0% down: 2.15%
• 5% down: 1.5%
• 10% down: 1.25%

Subsequent use

• 0% down: 3.3%
• 5% down: 1.5%
• 10% down: 1.25%

VA Loan Limits: A Thing Of The Past

Since January 1, 2020, VA loans have not had loan limits for borrowers with full entitlement. However, the VA still guarantees only a portion of the loan, and lenders may impose their own limits depending on the borrower’s financial profile.

Loan Entitlement and Property Use

Unlike VA loans, FHA loans do not use an entitlement system. However, both programs are intended for primary residences, not investment properties or short-term rental businesses.

Both FHA and VA loans can be used to purchase multi-unit properties (up to four units) as long as the borrower lives in one of the units.

VA borrowers can use up to 100% of their entitlement and may restore it after selling, refinancing, or paying off the loan.

Other Similarities Between FHA and VA Loans

Both programs share several borrower protections and features:

• Cash back at closing is generally limited to $500, except for legitimate refunds
• No prepayment penalties
• Streamline refinance options (VA IRRRL and FHA Streamline)
• No government-required appraisal or credit check for many streamline refinances

Why Many Veterans Prefer VA Loans

For many borrowers, the VA funding fee exemption available to disabled veterans and some Purple Heart recipients makes the VA loan especially attractive. Because FHA loans always require mortgage insurance, VA loans can often result in lower overall borrowing costs.