FHA vs. VA loan: Pros and cons for first-time home buyers

Craig Berry
Craig Berry
The Mortgage Reports Contributor
December 21, 2021 - 5 min read

FHA or VA loan: What’s better?

As you begin your home buying adventure, you’ll find a number of home loan options. Each loan program comes with its own set of advantages and disadvantages.

For first-time home buyers, FHA loans and VA loans are among the most popular.

One key difference between FHA and VA is that only veterans, service members, and their surviving spouses can use a VA loan. So that will narrow the playing field for many borrowers.

But, which one is better? That depends.

Understanding how both of these programs work is the key to deciding which loan is best for you.

Fortunately, choosing the best program isn’t as daunting as you may think.


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What's the difference between a VA and FHA loan?

The Federal Housing Administration (FHA) and the U.S. Department of Veterans Affairs (VA), are two U.S. government organizations that insure home loans.

Both programs work in a similar way: the government agencies (VA and FHA) provide backing for home loans while the loans themselves are issued by private lenders. That means both FHA and VA loans are widely available for home buyers and current homeowners alike. But they’re geared toward different groups of borrowers:

  • FHA mortgages are government-insured home loans intended to help borrowers get financing with lower credit scores and relatively little money down. Anyone can apply for an FHA loan
  • VA mortgages are government-insured mortgages for active military service members, veterans, and their spouses. Only those with an eligible service history can apply for a VA loan

FHA and VA loans can offer significant benefits to first-time home buyers.

Both programs have looser requirements for mortgage borrowers as compared to conventional loans. For instance, FHA and VA allow lower credit scores and higher debt-to-income ratios than many non-government mortgage programs.

But there are notable differences between these two federally-backed programs, too.

One difference between a VA loan and an FHA loan is the size of the down payment. Unlike conventional and FHA loans, VA loans require no down payment. They also require no mortgage insurance.

With no down payment or mortgage insurance requirements, it’s no surprise that VA loans are extremely sought after. And if you have a service history, a VA loan will likely be your best bet.

If you’re not VA-eligible, FHA is a great alternative. But it’s not your only option. We’ll discuss some alternative loan programs below.

FHA vs. VA loan comparison chart 

FHA LoanVA Loan
Minimum Credit Scores580 with 3.5% down, 500 with 10% down620*
Minimum Down Payment3.5%None
Maximum Debt-to-Income Ratio45%*41%*
Typical Closing Costs2-4% of loan amount2-5% of loan amount
Maximum Loan Amount$No maximum*
Upfront Mortgage Insurance/Funding Fee1.75% of loan amount2.3% of loan amount**
Annual Mortgage Insurance0.85% of loan amountNone
Eligible Properties1-4 unit owner-occupied1-4 unit owner-occupied
Ideal For...Homeowners with less-than-perfect credit or smaller down paymentsService members, veterans and their spouses

*Can vary from one mortgage lender to the next. Values shown in the table are commonly used for loan approval  

**For first-time home buyer with 0% down. VA funding fees vary depending on the borrower and loan purpose

Should you choose a VA loan or an FHA loan?

If you are either an active service member, veteran, or spouse of a veteran, choosing a VA loan over an FHA loan is generally an easy decision.

As a veteran, most of the time you’ll find that VA loans are the better option for a variety of reasons.

The fact that you can buy a home with zero down, and have no mortgage insurance, makes VA loans tough to beat.

If your credit isn’t perfect, the good news is that VA loans have no minimum score requirements. Although it’s important to note that while the VA doesn’t have a minimum credit score requirement, most lenders set their own credit score benchmarks.

Many lenders want to see a 620 or greater score.

VA loans don’t have a maximum debt ratio. And, while you may be able to get approved with a 60% ratio, 41% or lower is usually preferred.

What about conventional loans? 

Conventional conforming loans are the most common type of mortgage for U.S. homeowners. “Conventional conforming” simply means the mortgage is not backed by the federal government, and it has a loan amount within conforming loan limits.

For those who qualify, conventional mortgages are popular because they generally pose fewer hurdles than FHA or VA mortgages.

In addition, conventional mortgage rates are often very low for borrowers with good credit. And if you can put 20% down, you’ll never pay for private mortgage insurance (PMI). FHA, by contrast, requires mortgage insurance no matter how much money you put down.

But, while conventional loans are great, not every would-be homeowner qualifies for a conventional mortgage.

Conventional loans are usually better suited for mortgage borrowers with higher credit scores. FHA and VA loans can be better suited for those with lower scores, as well as lower down payments.

If you’re not sure whether you’d qualify for a conforming loan, talk to a lender. They can help you understand your eligibility as well as alternative options, like FHA or VA loans.

A final option: USDA loans

Another type of mortgage with the benefit of no down payment is the U.S. Department of Agriculture (USDA) mortgage loan.

Designed to help low- and moderate-income families residing in eligible rural areas, these loans are issued by private lenders and backed in part by the USDA.

This government backing allows lenders to offer terms that are more favorable than the homeowner might otherwise qualify for.

Funds from USDA loans can be used for a variety of purposes, including:

  • The purchase of a new or existing home
  • Closing costs associated with the purchase
  • Connection fees for utilities
  • Repairs and rehabbing of the dwelling
  • Site preparation
  • The purchase of essential household equipment
  • The purchase and installation of energy-efficient improvements

In addition to no down payment being necessary, credit requirements for USDA loans are more relaxed.

Closing costs can be rolled into USDA loans or paid out of pocket by the buyer or seller. USDA loans are also assumable.

Some possible drawbacks of USDA loans, however, include:

  • Geographical restrictions — Only properties in areas deemed “rural” by the USDA can be purchased
  • Income limitations — Maximum incomes are set to 115 percent of the median income for the county or area
  • Mortgage insurance Mortgage borrowers using a USDA loan will pay an upfront fee and a monthly fee for mortgage insurance

FHA vs. VA loans: The bottom line

Several great mortgage programs exist to help folks get into a new home, even if their credit isn’t perfect or they don’t have a large down payment.

If you plan to buy a home soon, but aren’t confident about qualifying for a conventional mortgage, you may want to look into a VA loan or an FHA loan.

Both VA and FHA loan programs offer outstanding financing options for veterans and non-veterans alike.

For qualified veterans and their spouses, VA loans are almost always going to come out on top.

FHA loans are an excellent option, too, and aren’t restricted to a certain type of person or group. If you are a veteran with no available VA entitlement, FHA loans can make a lot of sense.

Before deciding which loan is best, carefully consider your financial situation. Review your circumstances and needs with a lender, and do your research so you know whether an FHA loan or a VA loan is better suited for you and your goals.