If you’re thinking of buying a home, a VA home loan can help you make it happen. Let’s look at what VA home loans are as well as some of the advantages they offer that traditional mortgages don’t.
A VA home loan is a loan that veterans, active duty service members and some surviving spouses are eligible to apply for. They often come with better qualifying guidelines than a traditional conventional or FHA mortgage. There are specific eligibility requirements to qualify, like the length of your service, which is covered in an accompanying checklist. If you’re eligible (speak to a VA lending specialist) you can apply for a VA home loan at any time during or after your service when you’re looking to buy or refinance a home if the home will be your primary residence. You can also use a VA home loan more than once and under some circumstances a veteran can have two VA loans at the same time. As always there are a few exceptions, can check the VA’s website to find out if you or the home you want to purchase might qualify (https://www.va.gov).
The benefits of a VA home loan over a traditional mortgage:
- Lower interest rates. Since the VA guarantees a portion of the loan, they are less risky for lenders, because the guarantee protects the lender. As a result, lenders might offer you lower rates than you could get with a traditional mortgage. Still, different lenders will offer different interest rates and terms on VA home loans, so it’s worth taking to a qualified lending professional to determine the best loan option for you.
- Generally, there is no down payment required unless you go over the county loan limit set by VA, which means you could finance 100% of the home’s value. For a traditional mortgage, lenders often require borrowers to make a down payment of at least 5% to 20% of the home’s value. If they don’t, the borrower typically must pay private mortgage insurance which can significantly add to the cost of the loan. With a VA home loan, mortgage insurance is not required no matter what loan to value you have. However, not putting anything down means you’ll be taking out a larger loan, so over time you will likely pay more in interest over the life of the loan.
The fees associated with a VA home loan:
- Appraisal fee. This separate inspection is required by the VA by an independent VA appraiser, and in addition to the home inspection your lender may require. These appraisals protect both you and the lender by making sure the home meets the minimum property requirements set by the VA —basically that the property is safe, structurally sound and that your purchase price is a fair value. In most parts of the country, an appraisal will cost you around $500 to $600.
- Funding fee. This is a one-time fee on the loan that is intended as a partial guarantee for VA to protect the lender in the case of a foreclosure. It’s charged as a percentage – from 0 to 3.3% of the total amount of your loan. What you’ll be charged depends on a variety of factors, including some of the details of your military service, how much of a down payment you make on your home – the lower your down payment, the higher your funding fee and how many times you have used your VA eligibility to purchase a home. This funding fee can be bundled with the rest of your loan, so you won’t have to pay for it out of pocket at the closing but bundling it with the rest of your loan means you’ll accrue interest on this fee. When you take into consideration additional interest over the life of the loan, this fee can be significant so if you can afford it, making just a small down payment, and even paying the funding fee upfront, can save you money over the life of the loan. The US department of Veterans affairs has a funding fee table that can help you estimate what percentage you might pay at www.va.gov.
Down the road, the VA can be a source of assistance and support if you encounter financial hardships and can’t make your monthly loan payments on your home. They can help negotiate with your lender on your behalf and help you find an alternative to foreclosure if you need it.
A VA home loan can be a great benefit for those who qualify — especially if you want to buy a home but haven’t yet saved enough for a full down-payment.