May 17, 2022

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FHA Cash-Out Refinancing vs. VA Cash-Out Refinancing

FHA loans

What are the major differences between VA Cash-Out Refinance loans and the FHA Cash-Out Refinance loan program? 

There are several, and some borrowers may have the option to consider both, including active duty military members, Reservists, members of the National Guard, veterans, and certain surviving spouses of military members who died as a result of military service.

And then there are borrowers who are just trying to compare the options on the market. These house hunters may also be reviewing other home loan options such as USDA and conventional loans. What should people know about the FHA and VA versions of this refi loan option?

As you can guess from the above, VA mortgages and refinance loans aren’t offered to the general public.

Some sources report that in 2019 alone more than 17 million veterans lived in the United States, so in spite of that being “only” about seven percent of the U.S. population at the time, it’s an impressive number. What do these people need to know?

FHA Cash-Out Refinance loans have a loan-to-value ratio cap of 85%. VA Cash-Out Refinances used to have an 90% limit but federal legislation changed that to 100%. For those who have the option, the VA Cash-Out program provides an advantage in this area.

FHA loans typically require both an Up-Front Mortgage Insurance Premium (UFMIP) as well as a monthly premium. While the up-front fee can be paid in cash at closing time or financed into the loan amount, it cannot be avoided. 

You will either pay FHA mortgage insurance for 11 years or the lifetime of the loan depending on certain variables including the size of your downpayment.

VA Cash-Out Refinance loans do not require mortgage insurance of any kind, so a military borrower would realize some important savings here, too. 

A veteran or currently serving military member who chooses a VA mortgage and is also exempt from the VA loan funding fee (see above) will potentially save a lot more out-of-pocket at closing time.

There are also funding fee issues in some cases. Some veterans have to pay a VA loan funding fee, but those who receive or are eligible to receive VA compensation for service-related medical issues can apply for an exemption from that funding fee. For a certain segment of the veteran population that will be a big financial advantage.

All of this makes the VA loan program more enticing. 

But unfortunately for those who don’t have qualifying uniformed service or who otherwise meet the requirements of the VA loan program, the FHA Cash-Out Refinance loan option is the one to choose if you are looking for a government-backed refinance loan program with more forgiving credit qualifications and the ability to finance up-front costs like UFMIP.

There are USDA refinance loan options, too, but these are not cash-out loans. You may be facing a choice between a conventional refinance and an FHA Cash-Out Refinance if you don’t have the ability to qualify for a VA refinance loan.

Joe Wallace - Staff Writer

By Joe Wallace

March 24, 2022

Joe Wallace has been specializing in military and personal finance topics since 1995. His work has appeared on Air Force Television News, The Pentagon Channel, ABC and a variety of print and online publications. He is a 13-year Air Force veteran and a member of the Air Force Public Affairs Alumni Association. He was Managing editor for www.valoans.com for (8) years and is currently the Associate Editor for FHANewsblog.com.

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