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VA loan series: VA vs FHA vs USDA mortgages [VIDEO]

Peter Miller
The Mortgage Reports contributor

Ridiculously good benefits for eligible VA buyers

VA-qualified borrowers can obtain mortgage financing with very advantageous terms.

How advantageous? How about no money down — and no monthly mortgage insurance costs?

Purchasing a home with 100% financing means that if the property costs $300,000 you can get a $300,000 mortgage.

You don’t have to save for a down payment.

So how do the advantages of a VA loan stack up against USDA and FHA loans?

Verify your VA loan eligibility (Jan 26th, 2020)

In this article:


VA mortgages versus USDA rural development loans program

Both VA and USDA borrowers can purchase with nothing down. However, the VA and USDA programs are not apples and apples.

The USDA program is for rural areas. However, USDA financing can be used in an estimated 97 percent of the country, at least as far as geographic land mass.

Population-wise, you may have a tough time qualifying for USDA if you want to buy within commuting distance of a major city.

A second restriction of USDA concerns income.

Under the USDA program, borrowers with incomes that exceed 115% of the median income for the county or area where the property is located.

Following are maximum household income limits for certain areas:

  • Boston, Massachusettes $116,600
  • Seattle, Washington: $125,950/yr
  • Amarillo County, Texas: $82,700
  • Chicago, Illinois: $97,300

If you have a high-paying job or a two-income family, you may not qualify for USDA.

The VA loan program has no income limitation. You can make $1 million per year and still qualify for VA.

USDA loans have an up-front guarantee fee equal to 1% of the loan amount and 0.35% annually. The up-front fee is cheaper in most cases that up-front fees for the VA and FHA programs. The annual fee is less than the FHA charge but more than borrowers pay with the VA program, a program which does not have an annual fee.

Lastly, and strangely, USDA financing depends on the federal budget. The program must be re-approved by Congress regularly, or lenders can’t do the program. In some cases – USDA loans are literally unavailable because of budgetary issues.

VA vs. FHA financing

The biggest advante of VA over FHA is that FHA requires 3.5% down.

In addition, FHA borrowers pay an upfront mortgage insurance premium equal to 1.75% of the mortgage amount. That’s more than $5,000 in the case of a $300,000 home.

The upfront MIP does not have to be paid in cash, FHA borrowers can add it to the mortgage amount. The amount owed goes up but the additional expense is paid out over a 30-year schedule. At 4.25%, adding $5,000 to a 30-year mortgage will increase the monthly cost by $25.

»RELATED: FHA Payment Calculator

The is also an annual FHA mortgage insurance premium (the annual MIP). In the case of a $300,000 property, the premium will be $209 a month.

In the case of the $300,000 property, a VA borrower will save the up-front MIP ($5,000), and the annual MIP ($209). If the property is held for nine years the total cost for the annual MIP is $22,572 ($209 x 108 months). So far, our VA borrower is ahead by about $28,000

But, while VA borrowers do not need cash for a down payment or mortgage insurance, they do have a cost which is unique to the VA program. They must pay an upfront funding fee.



VA loan funding fees & service requirements

Generally, there’s little difference between an FHA up-front insurance premium and a VA funding fee. They’re both costs.

However, there is one important difference between the two charges.

With FHA mortgage insurance, one size fits all. Your up-front MIP is 1.75% regardless of loan size or down payment.

With the VA program, the funding fee can vary.

The FHA program is an insurance plan. You pay premiums and if something goes wrong the FHA will pay off the lender. The VA program is essentially recognition for military service. It looks at the borrower and their service to the country. It’s a way of saying thank you, in part a moral obligation to those who have served. It’s not just a business deal.

The result is that some borrowers will not pay a funding fee.

According to the VA, the following borrowers DO NOT have to pay a funding fee:

  • A veteran receiving VA compensation for a service-connected disability
  • A veteran entitled to receive VA compensation for a service-connected disability, but receives retirement pay or active service pay
  • A surviving spouse of a Veteran who died in active service or from a service-connected disability
  • A service member on Active Duty who provides, on or before date of loan closing, evidence of having been awarded the Purple Heart

For all other VA borrowers, the following fees apply:

VA mortgage funding fees

The amount you’ll pay in VA loan funding fees depends on your down payment, and whether or not it’s your first time using a VA home loan.

The following fee schedule is newly enacted as of January 1, 2020.

Type of Military Service Down Payment* Fee for First-Time Use* Fee for Subsequent Use*
Active Duty, Reserves, and National Guard None 2.3% 3.6%
5% or more 1.65% 1.65%
10% or more 1.4% 1.4%

*VA funding fees applicable as of January 1, 2020

VA loans with lower funding fees

The VA also has reduced fees for certain types of refinancing, including an IRRRL. An “IRRRL” or Interest Rate Reduction Refinancing Loan, is essentially a rate-and-term refinance, a new loan for the same amount but with a lower rate.

Type of Loan Funding Fee for All Applicants*
IRRRLs 0.5%
Manufactured home loans (NOT permanently affixed) 1.0%
Loan assumption 0.5%

*VA funding fees applicable as of January 1, 2020


Cash-out refinancing

As home prices have appreciated in many markets VA-qualified borrowers – like other borrowers – have elected to get cash-out refinances. For example: the value of a $300,000 home goes up to $400,000 over a period of years. The VA borrower gets a replacement loan, one that pays off the balance of the original mortgage and pulls $50,000 in cash from the property.

Unfortunately, some cash-out refinancing transactions resulted in situations where VA borrowers paid excessive fees and were sold the idea of multiple refinancings which resulted in significantly higher loan origination costs. The VA – which takes the protection of VA borrowers very seriously – issued new rules to prevent cash-out abuses.

Rules for VA cash-out refinance loans

Seasoning

A cash-out refinance will not qualify for a VA loan guarantee unless it is originated at least 210 days after the first monthly payment has been made on the current financing and six monthly payments have been made on the loan. This rule prevents serial refinancing.

Recoupment

This is a fancy term which means loan savings must be enough to get back the expenses paid for a cash-out refinance within 36 months. Costs can include such expenses as fees, closing costs, expenses, and incurred costs. This rule is designed to prevent excess charges and fees.

Net benefit test

The VA will not approve a cash-out refinance unless the borrower can benefit from the new financing. At least one of the eight allowable benefits must be shown.

VA cash-out refinance eligibility

You may be eligible for a VA cash-out refinance in any of the following applies to your home loan:

  • The new loan eliminates monthly mortgage insurance, whether public or private, or monthly guaranty insurance
  • The term of the new loan is shorter than the term of the loan being refinanced
  • The interest rate on the new loan is lower than the interest rate on the loan being refinanced
  • The payment on the new loan is lower than the payment on the loan being refinanced
  • The new loan results in an increase in the borrower’s monthly residual income
  • The new loan refinances an interim loan to construct, alter, or repair the home
  • The new loan amount is equal to or less than 90% of the reasonable value of the home, or;
  • The new loan refinances an adjustable-rate loan to a fixed-rate loan.

VA borrowers might also be able to do a cash-out refinance if the new loan is equal to or less than 90% of the home’s value.

And it’s possible to get a VA cash-out refinance when switching from an adjustable-rate loan to a fixed-rate loan.

This could help you get cash out and lock in a lower rate for the rest of your loan term.

Verify your VA loan rates today (Jan 26th, 2020)

VA cash-out refinance fees for 2020

Type of Military Service Fee for First-Time Use* Fee for Subsequent Uses*
Active Duty, Reserves, and National Guard 2.3% 3.6%

*VA funding fees applicable as of January 1, 2020


Check your eligibility for a VA loan

If you’ve served in the U.S. military, it’s worth checking your eligibility for a VA loan.

For details and specifics, speak with VA lenders. Shop around for the best rates, whether getting a VA loan to purchase or refinance a property.

Verify your new rate (Jan 26th, 2020)

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