Blanda retired after the 1958 NFL season because of Halas' insistence on only using him as a kicker, but returned in 1960 upon the formation of the American Football League. He signed with the Houston Oilers as both a quarterback and kicker. He was derided by the sports media as an "NFL Reject", but he went on to lead the Oilers to the first two league titles in AFL history, and he was the All-AFL quarterback and won AFL Player of the Year honors in 1961. During that season, he led the AFL in passing yards (3,330) and touchdown passes (36). His 36 touchdown passes in 1961 were the most ever thrown by any NFL/AFL quarterback in a single season, until matched by Y.A. Tittle of the NFL New York Giants just two years later in 1963. Blanda's and Tittle's mark would remain the record until surpassed by Dan Marino's 48 touchdown passes in 1984. His 42 interceptions in 1962 is a record that still stands.
During 1962, he had two 400-yard passing days for the Oilers: a 464-yard effort against the Buffalo Bills on October 29, with four touchdown passes (winning 28-16); and 418 yards three weeks later against the Titans of New York, this time with seven touchdown passes in a 49-13 victory. Blanda passed for 36 touchdowns that season. On 13 occasions, he connected on four or more touchdown passes during a game, and on November 1, 1964, unleashed 68 passes for Houston against the New York Titans.
From 1963 to 1965, Blanda led the AFL in passing attempts and completions, and ranked in the top ten for attempts, completions, yards and touchdowns during seven consecutive seasons. A four-time member of the American Football League All-Star team, Blanda's already-long career seemed over when he was released by the Oilers on March 18, 1967. However, the Oakland Raiders signed him that July, seeing his potential as a contributing backup passer and a dependable kicker.
In later years, Blanda would remain a strong supporter of AFL heritage, saying: "That first year, the Houston Oilers or Los Angeles Chargers (24-16 losers to the Oilers in the title game) could have beaten the NFL champion (Philadelphia) in a Super Bowl." Blanda said further: "I think the AFL was capable of beating the NFL in a Super Bowl game as far back as 1960 or '61. I just regret we didn't get the chance to prove it."