Background: Dry eye disease (DED) is a common chronic condition with increasing prevalence. Standard discriminative visual acuity is not reflective of real-world visual function, as patients can achieve normal acuities by blinking. Methods: Participants recruited from a tertiary referral eye centre were divided into two groups—Severe DED (with significant, central staining) and Mild DED (absence of such staining). Functional Visual Acuity (FVA) in both groups was assessed using the DryeyeKT mobile application and Impact of Vision Impairment (IVI) questionnaire to assess quality of life (QOL). Results: Among the 78 participants (74.4% women), 30 (38.5%) had Severe DED and 48 (61.5%) Mild DED. In women, Severe DED produced a significantly worse FVA of 0.53 ± 0.20 vs. 0.73 ± 0.30 in the Mild DED group (p = 0.006). FVA decreased with increasing age, showing a significant inverse correlation (r = −0.55). A poorer FVA ≤ 0.6 was seen in older patients (68.2 years ± 7.68) vs. an FVA > 0.6 in younger patients (58.9 years ± 10.7), p < 0.001. When adjusting for age, FVA was still 0.107 lower in the Severe DED group, p = 0.003. There was significant difficulty in performing specific daily activities in the Severe DED group, after adjusting for age, gender and FVA. Conclusions: FVA is reduced in severe DED and older people. Severe DED significantly impacts certain aspects of QOL. However, no significant relationship was found between FVA and QOL. FVA is not the only reason for the compromise of health-related QOL in severe dry eye.