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FHA OVER VA?

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Posted On: 08/25/2010

QUESTION:

Is there any reason that military personnel should prefer FHA financing instead of a VA mortgage?

ANSWER:

There are some cases where qualified military personnel might want to finance the purchase of a home with an FHA loan to preserve their VA eligibility for a mortgage at some point in the future. However, in the usual case those in the military are better off with VA financing. Here's why:

Both the FHA and VA loan programs are insurance plans. Instead of financing with 20 percent down, those who use the FHA and VA programs can purchase with much less -- as little as 3.5 percent down with the FHA and nothing down with the VA. In all cases closing costs are extra.

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At first it might seem as though being able to purchase with nothing down is automatically "better" then needing 3.5 percent up front. However, buying with nothing down also means borrowing more and having bigger monthly payments, something which may not be a better alternative for selected borrowers.

As the FHA is currently set up, you can borrow with 3.5 percent down plus an up-front mortgage insurance premium equal to 2.25 percent of the mortgage. With the VA, a first-time military borrower could buy with nothing down and a "funding fee" equal to 2.15 percent of the mortgage amount. (The funding fee can be waived in certain cases, such as those involving disabled military personnel.)

The FHA program has not only an up-front mortgage insurance premium (MIP), it also has an annual MIP which is typically equal to .55 percent of the outstanding loan amount.

For $200,000 in outstanding debt that .55 percent MIP is equal to roughly $1,100 for a year. However, while there's an annual MIP under the FHA program there is no annual funding fee with the VA plan, and that's a big saving for VA-qualified borrowers.

The bottom line: If you qualify for VA financing it's likely to be the best mortgage out there. For specifics, speak with a VA lender.

Peter G. Miller is the author of The Common-Sense Mortgage and a veteran real estate columnist. Have a question? Please write to peter@ctwfeatures.com.

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