The VA Home Loan is a significant benefit for active duty service members and veterans. Those who qualify to use a VA home loan can avoid making large down payments and paying monthly Private Mortgage Insurance (PMI). They may also have a greater choice of lenders. However, not every lender or borrower understands the intricate benefits and details of a VA home loan. And that’s why it’s important to research and understand the VA Home Loan process and benefits before purchasing your home.
First, it’s important to note that the VA is NOT the lender. The VA works with private lenders to establish your mortgage loan framework and then partially guarantees your mortgage payment to the lender. VA Home Loans are popular with financial institutions because of this guarantee. However, this does not make all lenders equal. Just because a lender works with the VA to provide you a home loan, it does not mean that every lender is equally experienced in VA-backed mortgages.
The no-down-payment feature of a VA home loan is almost always the number one reason to use this benefit. When using a VA home loan, buyers can qualify for 100% financing of the home. A conventional loan requires a buyer to put down 5% to 20% of the home’s value. A $250,000 home would require the buyer to pay $12,500 to $50,000 in cash before the lender would finance a mortgage.
It’s also important to understand there is a cap on the amount a buyer can borrow with the no-down-payment option. Depending on the geographical area, the cap is $417,000, or in high-priced housing markets like Northern Virginia, the cap is $625,000. For an amount borrowed above the cap, the buyer must pay 20 percent at closing. A $700,000 mortgage in a high priced area would require a $15,000 down payment.
With VA home loans there’s no monthly mortgage insurance fee or PMI. This fee guarantees an insurance company will pay the mortgage holder if the homeowner doesn’t pay. This expense is passed to the homebuyer and is usually $80 or more per $100,000 of the loan amount. The VA does not allow private lenders to charge PMI since the VA is insuring the loan. However, instead of paying PMI on a home loan, they buyer pays a one-time “funding-fee.” This fee can usually be rolled into the loan and is tiered – based on your down payment (if any) or number of VA loans you have used. The tired schedule can be found on the va.gov website.
Some analysis of mortgage rates show that VA home loan rates can be lower than conventional interest rates. While this may be true to a point, remember that the VA is not the one providing the loan or setting the interest rate. It’s the financial institution that sets the rate – based on their risk evaluation. VA home loan rates are usually a lower risk because the VA insures them.
If using a VA home loan, you’ll still have to financially qualify within the guidelines of the finical institution you’re working with. Consumers should consider all the factors and options. Shop around for the best lender and carefully consider each aspect of the loan. Buying a house may be the largest purchase you’ll ever make and it’s important to understand your loan and the long-term commitment you’re making.
Jonathon Rowles Captain, USMC (Ret.)
Disclaimer: (have to do it) – This blog should not be considered financial, investment, legal or tax advice. Consult your licensed financial professional, tax advisor or legal counsel. This blog is for educational purposes only.