What Is the Difference Between an FHA and a VA Mortgage?

Government-backed programs like Federal Housing Administration (FHA) and Department of Veterans Affairs (VA) loans offer distinct financing options for homebuyers. Both programs facilitate home purchases with favorable terms, but they cater to different populations. Understanding their characteristics is important for prospective homebuyers.

Eligibility Requirements

FHA loans serve a broad public, particularly those with lower credit scores or limited down payment funds. To qualify, borrowers typically need a minimum credit score of 580 for a 3.5% down payment. Those with credit scores between 500 and 579 may qualify with a 10% down payment. Lenders evaluate a borrower’s debt-to-income (DTI) ratio, preferring it at or below 43%. A stable employment history, typically at least two years in the same field, is also a common requirement.

VA loans are exclusively for eligible service members, veterans, National Guard and Reserve members, and certain surviving spouses. The primary qualification is a Certificate of Eligibility (COE), confirming military service requirements. Specific service requirements apply: active-duty members need at least 90 continuous days; veterans need a minimum of 90 days during wartime or 181 days during peacetime with an honorable discharge; National Guard and Reserve members qualify after six years of honorable service or 90 days of active duty. The COE is required before loan closing.

Financial Considerations

FHA loans require a minimum down payment of 3.5% for credit scores of 580 or higher, and 10% for lower scores. FHA loans also mandate mortgage insurance premiums (MIP), consisting of an upfront MIP (UFMIP) and an annual MIP. The UFMIP is 1.75% of the loan amount, typically paid at closing or financed. The annual MIP varies based on loan amount, loan-to-value (LTV) ratio, and loan term, typically ranging from 0.15% to 0.75% annually, paid monthly. This annual MIP generally remains for the life of the loan unless the borrower makes a down payment of 10% or more, in which case it may be canceled after 11 years.

VA loans often require no down payment. Instead of mortgage insurance, VA loans include a VA Funding Fee, a one-time charge that helps offset program costs. This fee varies based on loan purpose, down payment, and whether it is the borrower’s first or subsequent use of the VA loan benefit. For first-time users with no down payment, the fee is typically 2.3% of the loan amount; repeat users without a down payment might pay up to 3.6%. Veterans receiving VA compensation for a service-connected disability or surviving spouses are generally exempt from the funding fee.

Interest rates for both FHA and VA loans are set by private lenders, not government agencies. These rates are influenced by market conditions, Federal Reserve policies, and the borrower’s financial profile, including credit score and debt-to-income ratio. While government backing can lead to competitive rates, the specific rate offered depends on the lender’s risk assessment and borrower creditworthiness. Both loan types have maximum loan limits, which vary by location and are generally aligned with conforming loan limits. For VA loans, if a borrower has full entitlement, there may not be a specific loan limit, allowing them to borrow as much as a lender approves.

Property and Occupancy Guidelines

Both FHA and VA loans have specific property and occupancy requirements. Both loan types are primarily for owner-occupied properties, meaning the borrower must live in the home as their primary residence. For FHA loans, the borrower must occupy the property within 60 days of closing and typically for at least one year. FHA loans can be used for multi-unit properties (up to four units) if the borrower occupies one unit.

Properties financed with an FHA loan must meet Minimum Property Standards (MPS), ensuring the home is safe, secure, and structurally sound. An FHA-approved appraiser evaluates the property to confirm it meets these standards, checking for issues like proper functioning of major systems, a sound roof, and absence of health or safety hazards. If a property does not meet these standards, repairs may be required before the loan can close.

VA loans require the property to meet Minimum Property Requirements (MPRs) to ensure it is safe, sanitary, and structurally sound. The VA appraisal process involves an independent VA appraiser who assesses the home’s market value and verifies compliance with MPRs. The appraiser issues a Notice of Value (NOV), detailing the appraised value and any necessary repairs or conditions that must be addressed before loan closing. Eligible property types for both FHA and VA loans include single-family homes, approved condominiums, and some manufactured homes, provided they meet program requirements.