One of the basic benefits of joining the military is being eligible for a VA loan. A VA loan is a mortgage provided by a private lender, sponsored by the Department of Veterans’ Affairs. VA loans help servicemembers and their families qualify for home mortgages by guaranteeing a portion of the loan. This allows lenders to provide the VA loan at competitive rates.
Some of the major benefits include:
- Being able to get a mortgage with little or no down payment
- Not having to pay private mortgage insurance (PMI) for a home with less than 20% equity
- Streamlined refinancing, also known as Interest Rate Reduction Refinance Loan (IRRRL). As interest rates go down, an IRRRL allows a lender to refinance a mortgage with much less paperwork.
With that said, buying a house is a significant undertaking. Regardless of the type of loan, a prospective homeowner should do a lot of due diligence, research, and budgeting to ensure they’re able to afford the home.
With VA loans, here are three considerations:
1. With VA loans, you can finance up to 100%, but should you?
Lenders generally require a 20% down payment on the purchase of a home, or they will require that the borrower obtain private mortgage insurance. This is to protect the bank’s investment in the case of a default. However, there is another argument that can be made: ‘skin in the game’ is an important consideration.
For example, a couple buying a $250,000 home would be much less likely to default on a mortgage if they paid a $50,000 down payment, than a couple buying a similar home with zero down payment, since the first couple made a considerable investment. While there are studies that support both sides of this argument, we can at least assume that a couple with the financial discipline to have saved $50,000 in the first place may be better positioned to pay their mortgage than the couple that did not.
Instead of trying to finance 100% of a home purchase, it might be more prudent to save money for a down payment, particularly if you’re still planning to make career-related moves. When you’re considering a home purchase within 5 years of retirement, you need to seriously consider if that is the home you’ll retire to. If you think you’ll move after retirement or separation, you need to think twice about committing to a home purchase in the first place.
The amount you finance becomes even more important as you get closer to the VA Loan limits. You don’t want to finance more than you can afford to pay off.
2. Know all the costs of owning a home with a VA loan. Then run the numbers with a traditional mortgage.
Think about some of the things that you have to consider with a VA loan. You’ve got:
VA mortgage funding fee. This can range from .5% of the mortgage for an IRRRL to 3.3% for a zero-percent down purchase of a subsequent (not first-time homeowner) purchase. Most people should calculate the VA funding fee into the cost of their mortgage. However, there are several exceptions to the VA’s funding fee policy, where this fee does not apply.
- If you are a veteran receiving disability benefits (or would otherwise be eligible for benefits except that you are retired or still on active duty)
- If you are a surviving spouse of a veteran who died in service or from a service-related disability
Interest rate differences. VA loans have different interest rates from conventional mortgages. This may or may not be a significant difference. However, you should run the numbers (down payment, total closing costs, principal and interest) for a VA & conventional mortgage, then make your decision. Sometimes rates are slightly lower or higher, depending on prevailing interest rates and other factors. All things considered, go with the lower interest rate for your mortgage. A higher interest rate can cost you thousands.
Other considerations, such as types of closing costs, which can be included in a VA mortgage.
However, with a VA loan, you won’t have to pay mortgage insurance. You should take the time to do the math and determine for yourself whether the VA loan is better for you in the long run.
3. You can have more than one VA loan at a time, depending on the circumstances.
We bought our first house in Norfolk in 2002, then refinanced 3 times over the following 12 years, going from 6.75% down to 3.75%. Each time we refinanced under the VA’s IRRRL program, which minimized paperwork and cost. Also, each time we refinanced, the VA reset our mortgage balance and issued a new certificate of eligibility.
In 2014, we purchased our current home in Tampa. Because we had used much less than our entitlement (then $417,000) for our Norfolk house, we were able to use the remaining entitlement amount on our Tampa home and have a second VA-backed mortgage. We still needed a down payment, but this was something we had planned and budgeted for. Again, just because you can, doesn’t always mean that you should.
However, we do move around a lot in the military. As a result, you may find yourself in a position of being able to buy another property very inexpensively. If so, this might be a viable option. If you are transitioning and happen to have an existing mortgage, you really want to think about your options. If you choose to refinance your current home mortgage, your certificate of eligibility will reset to your new mortgage amount. This will most likely free up additional entitlement on your new loan unless you do a cash out refinance.
These are only three considerations regarding a VA loan. There are many other variables that can impact your decision. There is a lot of information on the VA’s website, Also, most lenders have specialists who are knowledgeable about VA loans and can walk you through the process of applying for one. If you’re still overwhelmed by the options, you should schedule an appointment to talk with a fee-only financial planner in your local area. Working with a trusted professional is the best way to make sure that you are making decisions that serve your best interests.