There are two primary sources of mortgage money in today’s marketplace- conventional and government backed loans.
Conventional loans are those underwritten to standards issued by mortgage giants Fannie Mae and Freddie Mac.
By far making up the largest share of all mortgage loans made today, Government-backed loans are those who carry some type of guarantee to the lender and are underwritten to VA, USDA and FHA guidelines.
Should the borrowers default on one of these three government-backed loans the lender is compensated for part or all of the loss.
Here in San Diego, the VA loan approval is more prevalent than in other areas due to the high concentration of active duty military, veterans and reserves.
However, if you have VA eligibility, should you use the VA loan approval to buy a home?
The answer isn’t an automatic one.
Originally, only those who returned from WWII could take advantage of this program and the returning soldiers had to buy a home and use the VA program within two years from their discharge date or two years from the end of WWII.
Today, there are no such cut-off dates and the home loan benefit can be used more than once. Those that are eligible include veterans, active duty personnel with at least 181 days of service, National Guard and Armed Forces Reserve members with at least six years of service as well as remarried spouse of VA eligible borrowers who have died as a result of a service-related injury.
If you’re not sure if you qualify for a VA home loan approval, you can contact the VA directly and obtain a copy of your Certificate of Eligibility or work with a lender who can request the certificate on your behalf.
If you let a lender make the request, your certificate will arrive in a matter of moments. If you work directly with the VA, it can take several weeks.
VA Loan Approval Advantages
The VA loan program/VA loan approval was first introduced in 1944 as part of the original G.I. Bill and over the years has changed to help more VA eligible borrowers buy and finance a home with no money down.
The only other loan program available today that does not require a down payment of any kind is the one issued under USDA criteria yet this program requires the property be located in a rural or semi-rural area and the borrower’s monthly income cannot exceed certain limits. With the VA loan approval, there are no such limitations.
Without requiring a down payment, veterans don’t have to save up as much money or reach deeper into savings to finance a purchase. In addition to no down payment, the veteran is restricted from paying certain closing costs, saving even more money. The only closing costs veterans are allowed to pay are reserved for an appraisal, credit report, title, origination and recording fees. The veteran is also allowed to pay for a discount point in order to lower an interest rate on a mortgage. This reduction in required fees is another advantage VA loans have over other programs.
If you look at conventional and even FHA loans with a low down payment, you’ll discover there is an additional monthly fee required, adding to the monthly payment and making it more difficult to finance a purchase. This additional fee is an amount for a mortgage insurance premium. This premium finances a pool that supports either the government-guarantee or compensates a lender for the difference between 20 percent down and the borrower’s own down payment.
VA loans do require a funding fee which is used to compensate lenders in case of default but that fee can be rolled into the loan amount and does not have to be paid for out of pocket. Further, there is no additional monthly mortgage insurance payment, only principal and interest plus a monthly amount for property taxes and insurance to fund an impound account. Other loan programs can ask for a slightly higher interest rate when the borrowers put down less than 20 percent on a conventional loan. With a VA loan approval, there are no such adjustments.
When You Have a Down Payment
When borrowers have funds for a down payment, they can buy a more expensive home yet still borrow an amount they feel comfortable with. A lower loan amount will mean lower monthly payments and when the mortgage is at or below 80 percent of the sales price of the home there is no mortgage insurance requirement. Monthly payments can be a bit lower compared to someone with just 3.5% down and using an FHA loan, for example.
Having a down payment also reduces perceived risk and a larger down payment may help get someone an approval when a lender is deciding whether or not to approve a loan application. There are loan programs that allow for lower credit score requirements with a larger down payment.
This is the point to consider- when you want to make a down payment on a home it’s probably to your advantage to look at a conventional loan with 20 percent down.
Why?
The Funding Fee Requirement On VA Loans
The funding fee on a first time purchase using a VA loan is currently 2.15% of the loan amount.
On a $400,000 home, the funding fee is $8,600 and is added to the loan amount of $400,000. If you take a sample 30 year interest rate of 3.75%, the principal and interest payment on $400,000 is $1,852.
A loan amount of $408,600 with the same rate comes to $1,892. Not a great amount, but over the course of the next 60 months that’s $2,400 in additional interest.
If someone has 10 or 20 percent down and is VA eligible, it might make better sense to select the conventional program. However, for those who do not wish to make a down payment and reduce closing costs on a loan, there is no better choice than the VA program.
If you’re not sure which direction to go, speak with one of our loan officers and let’s review your loan options. The VA home loan benefit is earned by those who qualify for the program and is hands-down the best choice when financing a home. But get the numbers first and then decide.
