March 21st, 2020 11:25 AM by Jackie A. Graves
deciding between an FHA vs. VA loan, it’s important to consider your situation.
Here’s what you need to know about the difference between FHA and VA loans when
refinancing or taking out a new mortgage.
Similarities between VA and FHA loans
looking at the difference between FHA and VA loans,
it’s important to consider some of the similarities.
both are government programs designed to encourage financial institutions to
lend money to borrowers. It’s possible to refinance either a conventional, FHA or VA loan using
either of these programs. Basically, the government offers insurance to lenders
willing to work with the program to lower the loan provider’s risk. You borrow
from the lender, not the government.
important to understand that both types of refinancing come with credit
requirements. However, the FHA vs. VA loan criteria are a little different from
each other. In either case, though, you do need to find out what the lender
expects from you before moving forward.
worth noting that cash-out options are available with both of these programs.
You can also get an interest rate reduction by using either the FHA or VA loan
both FHA and VA loan refinancing can only be used with a
primary residence that is structurally safe and sound.
FHA vs. VA loan: What you need to know
Eligibility for FHA vs. VA loan
FHA loan, anyone who meets the requirements can apply and refinance. For VA loans, though, you must be active duty military, a
veteran or a spouse. With VA loan refinancing, a Certificate of Eligibility is
required, so you need to complete the necessary steps to receive one before you
Loan-to-value for FHA vs. VA loan
comes to a home loan, the down payment for the FHA loan is at least 3.5
percent. However, it’s possible to get a 0 percent down payment VA loan.
a similar pattern for refinancing with regard to the loan-to-value (LTV) ratio.
With VA loan refinancing, you might be limited to the conforming loan limited
in most areas. With an FHA loan, on the other hand, the limit is either 85
percent or 95 percent LTV, depending on the type of loan, and how long you’ve
had your original mortgage.
Credit score requirements for FHA vs. VA loan
score requirements are different for each. In fact, the VA doesn’t have minimum
credit score criteria. Many lenders, though, like to see a credit score of at least
620, so if your score is lower, you might have limited loan options.
other hand, the FHA has allowances for those who have credit scores that are a
little lower. You can refinance with an FHA loan even if you have a credit
score of 500, subject to the lender’s requirements.
Mortgage insurance for FHA vs. VA loan
FHA loan, even on a refinance, you pay an upfront fee, plus an ongoing mortgage
insurance premium. The idea is that if you default on the loan, the lender is
reimbursed from the mortgage insurance fund.
other hand, you don’t pay mortgage insurance with VA loan refinancing. Instead,
you pay an upfront funding fee. It’s important to find out the amount of that
funding fee, which is based on your loan amount and your military service, as
well as other factors.
types of loans, you can choose to pay the fee separately or roll the fee into
the total cost of the loan.
Other factors to consider
forget that there are other factors that might be considered. For example, you
might be under increased scrutiny for a debt-to-income (DTI) ratio of 41
percent or higher when you apply for VA loan refinancing. (DTI is the
percentage of your monthly gross income that is used to pay monthly debt. So,
if you earn $1,000 a month, and your bills are $410, your DTI would be 41
percent) On the other hand, with an FHA loan, you might be able to get a loan
even with a DTI as high as 50 percent.
mortgage rates as well. VA loan rates are sometimes lower than
what you’d see with FHA loans, so you might benefit from getting a VA loan if
Benefits of FHA vs. VA loans
When comparing the difference between FHA and VA loans,
it’s important to weigh the benefits of each and decide what is likely to work
best for you.
Benefits of VA loan refinancing
Benefits of FHA loan refinancing
Advantages of refinancing
these programs can help you refinance your home to a lower interest rate and
potentially save you money on your overall budget and improve your monthly cash
with a cash-out refinance, you can use the money to address other financial
issues, including consolidating debt, funding home improvements or taking other
steps to improve your financial situation.
refinancing rates remain near historic lows, and the potential to save money
and lower your monthly payment might help your budget. Carefully consider your
options to determine whether an FHA or a VA loan is right for you, and then
contact a lender to see if they participate in these programs.
Available to anyone
Only available to active duty military, veterans and spouses
Cash out available
Limited by conforming loan limits
85% or 95%, depending on the type of refinance
Mortgage insurance and fees
Upfront fee, plus monthly mortgage insurance
One-time VA funding fee: no mortgage insurance
Minimum credit score
Minimum of 500
No VA-set minimum, but many lenders require 620
50% or less, based on various factors
41% or higher results in increased scrutiny, although there
isn’t a set requirement
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