Many times Veterans will use an FHA loan to buy a home when the better option would have been a VA home loan. This happens in Orange County quite often. The reason tends to be because there a lot of lenders in Orange County who don’t understand the VA home loan program and think it is a difficult program close. And of course, that is not true. This is also why a Veteran looking to use VA financing in Orange County should track down an experienced VA lender in Orange County. Getting back to the point of this article, what happens when a VA eligible home buyer uses FHA financing to buy a home? Well, probably the first option to consider is to refinance FHA loan into VA home loan.
Advantages of a VA Home Loan over an FHA Home Loan
- VA will allow financing up to 100% of the property value. So while the 3.5% down payment is already a part of the equity in the home, refinancing into a VA loan almost immediately shouldn’t be an issue, at least not based on property value.
- VA does not have monthly mortgage insurance like FHA does. The current monthly mortgage insurance factor used by FHA is 1.35% of the loan amount divided by 12. In Orange County, where a $500,000 loan is fairly common, the monthly mortgage insurance would be approximately $562. ($500,000 * .0135 / 12 = $562). That is over $6,500 per year. A VA loan will not have this monthly payment. Also, for FHA loan closed after June 3, 2013, the monthly mortgage insurance NEVER goes away. Ouch.
- VA is actually easier to qualify for than FHA when it comes to debt to income ratios (lower payment with no mortgage insurance helps) and credit. For those who have had a previous foreclosure or short sale, VA only requires a 2 year wait period where as FHA requires three years.
- Once in a VA loan, the Veteran will be able to take advantage of the Interest Rate Reduction Refinance Loan, or IRRRL, which is also known as a VA Streamline Refinance. There is no appraisal and no income documentation.
The Process of Refinancing From FHA to a VA Home Loan
Refinancing from an FHA loan to a VA home loan is a “full documentation” loan. The lender will require a review of two years tax returns and W2’s, paystubs for the most recent one month, a credit report, and full appraisal. It is also important to note that a clear termite inspection report will be needed prior to closing. Also, similar to the FHA Upfront Mortgage Insurance Premium, which is financed into the FHA loan, VA has a Funding Fee which is financed into the loan. For Veteran who have never used their VA before the VA Funding Fee will be between 2.15% and 2.4%, depending on the Veterans eligibility. However, Veterans who received some sort of disability pay from the Veterans Administration will most likely get their Funding Fee waived. The lender will be able to submit the VA Form 26-1880, Request for Certificate of Eligibility, which will spell out whether or not there will be a Funding Fee.
Before filling out a loan application and paying for the appraisal, the Orange County Veteran should consult with an Orange County VA loan officer who can prepare a custom Side by Side Analysis showing the potential benefits and/or costs of the refinance. Because of the high FHA mortgage insurance, a refinance will quite often make sense for the Veteran. But a refinance doesn’t make sense every time. The borrower should check what the break even time period for the refinance is, and take into account how long they plan to remain in the home. A thorough analysis prepared by a trusted lender should give the Veteran the numbers they need to make an educated decision.
Authored by Tim Storm, a California Mortgage Loan Officer MLO 223456 – Please contact my office at the Emery Financial. Direct line at 949-640-3102. www.OrangeCountyVALoans.comGoogle+
[…] loan. (you do for the IRRRL program, but not for a non-IRRRL). For someone with a Conventional or FHA loan who wants to either refinance to lower their rate and payment, or refinance to pull cash out for […]