Is an FHA or a VA Loan Better

By Ciaran John

The Federal Housing Administration and the United States Department of Veterans Affairs both provide mortgage insurance for loans written for people who make small down payments. Due to this federally backed mortgage insurance, lenders allow people who could not qualify for conventional loans to take out FHA- and VA-backed mortgages. There are pros and cons with both types of loan, and you need to consider the merits of both programs to determine which one would work best for you.

The FHA insures a variety of different types of loans, including loans for first-time home buyers, loans used to rehabilitate properties that are in a state of disrepair, and refinance loans for homeowners with existing FHA loans. FHA loans are available to U.S. citizens and residents. The Department of Veterans affairs insures purchase and refinance loans but only for current and retired members of the armed services, some family members of veterans and some members of the Coast Guard and reserves. Therefore, FHA loans are available to many more people than VA loans.

When you take out an FHA-insured purchase loan, you must make a down payment equal to at least 3.5 percent of the mortgage amount. This down payment goes toward the purchase, and does not include closing costs. On an FHA cash-out refinance loan, you can normally borrow up to 85 percent of your property's value. When you borrow a VA-insured loan, you do not have to make a down payment, and you can also borrow up to 100 percent of your home's value with a cash-out refinance. Consequently, VA loans are best if you want the maximum loan amount.

The FHA and VA both fund mortgage insurance by charging premiums that you must pay. With a VA loan, you pay this fee upfront, although the VA calls it a "funding fee" rather than an insurance premium. With an FHA loan, you pay for mortgage insurance as part of your monthly mortgage payment. You also pay one year's premium upfront when you close on your mortgage. Therefore, with a VA loan, unlike an FHA loan, all of your monthly payment goes to principal and interest.

The FHA imposes limits on the maximum that you can borrow; these limits vary from county to county. The VA does not impose dollar limits on loan amounts, but instead imposes insurance limits, which means it will insure your loan for a certain dollar amount, but your lender can write the loan for an amount in excess of that amount.

Generally, VA loans are better for people who have limited funds to cover closing costs and down payments. Interest rates and lender fees vary from mortgage company to mortgage company. If you qualify for both a VA loan and an FHA loan, ask your lender to provide you with a good-faith estimate for each type of loan. Compare the total costs of the two options and the choose the one that works best overall.

http://www.lenderva.com