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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 FHA and VA 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, both FHA and VA 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. 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

FHA loan VA loan
Eligibility Anyone who meets loan requirements Active-duty military service members, veterans and spouses
Property type Primary residence Primary residence
Down payment At least 3.5% No down payment required
Credit score As low as 500 No requirement, but lenders prefer scores of 620 or higher
DTI ratio Up to 50% Up to 41%
Mortgage insurance Upfront and ongoing mortgage insurance premiums (MIP) Upfront funding fee
Current interest rates (30-year fixed rate purchase) 6.000% 6.150%
Cash-out refinance? Yes (up to 85%-95% LTV) Yes (up to 100% LTV)

Eligibility for FHA vs. VA loan

With the FHA loan, anyone who meets the requirements can apply and refinance. For VA loans, 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.

Down payment for FHA vs. VA loan

The down payment for an 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 loan-to-value, or 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.

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.

You don’t pay mortgage insurance with VA loan refinancing. Instead, you pay an upfront funding fee 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.)

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.

FHA vs. 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

Benefits of VA loan 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 goals, including consolidating debt, funding home improvements or taking other steps to improve your financial situation. 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.

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
Mortgage editor
Reviewed by
Senior mortgage loan originator, American Fidelity Mortgage