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Veterans and active-duty service members who are considering purchasing a home should evaluate the significant advantages of Veterans Affairs home loans (VA loans). These loans are easier to qualify for than conventional loans and typically include more favorable terms for borrowers.
VA loans are funded by private lenders and guaranteed by the U.S. Department of Veterans Affairs. The department backs VA loans because the loan terms support veterans in purchasing affordable homes. The department doesn’t loan money to borrowers. However, if a borrower defaults on a VA loan the department promises to cover any losses incurred by the lender. Such risk reduction allows lenders to consider applicants who otherwise may have been denied due to poor credit or other risky variables.
1. No Down Payment
One of the most difficult hurdles of affording a home is coming up with the initial costs of a mortgage. Conventional loans require down payments ranging from 5 percent to 20 percent of the sale price of the home. For instance, a down payment for a $200,000 home would cost at least $10,000 and typically $40,000 before closing costs. An enormous advantage of a VA loan is that the buyer is not required to pay a down payment, making homeownership much more feasible.
VA loans offer 100 percent financing with two firm boundaries. First, the home’s sale price cannot exceed its appraised value. Secondly, the U.S. Department of Veterans Affairs limits the total loan amount based on the county of the home. The most common VA loan amount is capped at $417,000. However, in a few counties loan maximums can be as large as $1,094,625. If the sale price of the home exceeds the VA loan limit, borrowers can offer the difference as a down payment. Otherwise, VA loans do not require a down payment.
2. No Private Mortgage Insurance (PMI)
For most loans, a buyer who offers a down payment that is less than 20 percent of the sale price of the home is required to pay private mortgage insurance (PMI). This insurance protects the lender’s investment because the borrower contributes such a minor portion of the total home purchase upfront. The cost of PMI typically ranges from .19 percent to 1 percent of the total loan amount. In general, borrowers continue paying monthly PMI until they’ve earned 20 percent equity in the home.
Although borrowers using VA loans contribute zero percent down, the risk to the lender is reduced because the Department of Veterans Affairs guarantees the loan amount. Therefore, VA loans do not require PMI despite being fully financed.
3. Limited Closing Costs
VA loans reduce the initial costs of purchasing a home by eliminating the down payment and limiting the closing costs payable by the buyer. VA loans prohibit closing costs associated with mortgage broker fees, real estate agent commissions, pest inspections and any attorney fees unrelated to the title of the property.
The U.S. Department of Veterans Affairs allows closing costs to include appraisal fees, credit report fees, taxes, insurance and a lender origination fee of 1 percent of the total loan amount. If lenders charge an origination fee, they are not allowed to charge fees related to escrow or underwriting. Without an origination fee, lenders can charge itemized closing costs including escrow and underwriting fees, but not exceeding a total of 1 percent of the loan amount.
One mandatory closing cost is the funding fee charged by the U.S. Department of Veterans Affairs. This fee ranges in price based on multiple variables but generally does not exceed 3 percent of the loan amount. For instance, borrowers of standard VA loans ($417,000) paying the full 3 percent funding fee would owe $12,510. If the borrower pays some down payment, the funding fee will be reduced. Unlike PMI, this fee can be included in the closing costs paid by the seller. Additionally, the funding fee is not required upfront and is typically wrapped into the loan amount to be paid over the life of the loan.
VA loans allow the seller to pay a total of 6 percent of the closing costs and concessions of the transaction. The loan can be structured to increase the purchase price of the home to enable the seller to pay the closing costs. Again, the U.S. Department of Veterans Affairs limits the total cost of the loan and will only guarantee the loan if the home is appraised at or below the purchase price. Thus, closing costs on a VA loan can be reduced or eliminated with meticulous loan terms.
4. No Penalty for Prepayment
Depending on the terms of a loan, some borrowers are charged fees for paying their mortgages ahead of schedule. VA loans prohibit loan servicers from penalizing borrowers for paying off their mortgages early. Though borrowers may not choose to take advantage of this benefit, it’s an opportunity to save money by reducing the total interest paid over the life of the loan. The sooner the principal of the mortgage is paid down, the less total interest is accumulated.
5. Payment Assistance Programs
The U.S. Department of Veterans Affairs established plans to assist borrowers who are unable to pay their mortgages on time. First, borrowers should contact their loan servicers as soon as possible delinquencies arise, whether it’s due to reduced earnings, family issues or health problems. VA loans offer the benefit of accessible financial counselors, guidance and programs to support borrowers to get back on track with their payments rather than foreclosing.
These programs include a repayment plan where borrowers continue to make their monthly payments in addition to paying a portion of the delinquent sum until it’s paid off. In another program, the loan servicer agrees to refrain from initiating foreclosure until the borrower can pay off the debt. This agreement program is called Special Forbearance and applies to cases when the borrower expects a lump sum of money in the near future, such as a tax refund. A third option of loan modification wraps the total delinquency into the remaining loan balance and recalculates the monthly mortgage payments.
If the borrower’s solution is to sell the home, one option is for the loan servicer to allow extra time for the borrower to arrange a private sale of the home. This is a better option for servicers who then close full-price sales, and better for borrowers who keep their equity. The loan servicer can also agree to a short sale or a Deed-in-Lieu of Foreclosure to circumvent the foreclosure process. These options are available with the guidance of VA loan technicians who support borrowers in foreclosure avoidance tactics.
In conclusion, veterans, military service members and surviving spouses who are eligible for VA loans have a great financial advantage over civilians using conventional loans. The U.S. Department of Veterans Affairs assists veterans with the reduction of initial home purchasing costs, provides them with the freedom to pay off their debt ahead of schedule and helps salvage their loans if tough times arise. Before committing to a long-term mortgage, borrowers should consider all loan programs available to them and select the option with the most beneficial terms for their circumstances.
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