FHA or VA: Which mortgage is best for you?

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When 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

Before looking at the difference between FHA and VA loans, it’s important to consider some of the similarities.

First, 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 lender’s risk. You borrow from the lender, not the government.

Next, it’s 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.

It’s also 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 refinancing programs.

Finally, 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

With the 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 move forward.

Loan-to-value for FHA vs. VA loan

When it 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 zero percent down payment VA loan.

With VA loan refinancing, you might be limited to the conforming loan limits in most areas (although with a cash-out refinance, you can do up to 100-percent LTV). 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

Credit 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.

On the 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

With an 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.

On the 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.

With both 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

Don’t 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 gross monthly 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.

Compare 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 you qualify.

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

  • You don’t have to be involved with military service
  • Might be easier for those with lower credit scores
  • Potentially higher allowance for DTI

Advantages of refinancing

Both of 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 flow.

Additionally, 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.

Mortgage 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.

Loan requirement FHA loan VA loan
Eligibility Available to anyone Only available to active duty military, veterans and spouses
Property type Primary home Primary home
Cash out available Yes Yes
LTV ratio 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
DTI requirement 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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Written by
Miranda Marquit
Contributing writer
Miranda Marquit is a contributing writer for Bankrate. Miranda writes about topics related to investing, saving and homebuying.
Edited by
Senior mortgage editor
Reviewed by
Senior mortgage loan originator, American Fidelity Mortgage
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