How To Choose A VA Loan: Three Things To Consider

Military members have access to one of the best homebuying programs around – the VA loan. A VA loan is a mortgage provided by a private lender, sponsored by the Department of Veterans’ Affairs. VA loans make it easier for military members and veterans to qualify for a home loan through a unique arrangement in…
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Military members have access to one of the best homebuying programs around – the VA loan.

A VA loan is a mortgage provided by a private lender, sponsored by the Department of Veterans’ Affairs.

VA loans make it easier for military members and veterans to qualify for a home loan through a unique arrangement in which the VA guarantees a portion of the loan amount.

This allows lenders to provide the VA loan at competitive rates.

Some of the significant VA loan benefits include:

  • No down payment requirement
  • No private mortgage insurance (PMI) requirement, even when making a down payment of less than 20%, or when having less than 20% equity
  • VA Streamline Refinancing, also known as the IRRRL, or Interest Rate Reduction Refinance Loan.

The IRRRL allows VA loan holders to refinance their home loan with substantially less paperwork.

With that said, buying a house is a significant undertaking.

Regardless of the type of loan, a prospective homeowner should research their purchase, ensure it works within their long-term budget, understand the loan terms, and shop around for the best interest rates before purchasing their home.

With VA loans, here are three considerations:

  1. 100% Financing
  2. Rates vs. Conventional Loans
  3. Multiple VA Loans

You Can Finance up to 100% of a VA Loan (But Should You?)

how to choose a va loanMost lenders require homebuyers make a 20% down payment when they purchase a home using a conventional mortgage.

Buyers who make a lower down payment are usually required to buy Private Mortgage Insurance (PMI) to protect the lender in the event the buyer defaults on the loan. PMI is not required with a VA loan, because the VA guarantees a portion of the loan if the buyer defaults.

But just because you can buy a home with no down payment doesn’t mean you should.

There are some advantages to making a down payment when buying your home. One such argument is the benefit of having “skin in the game.”

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 home buyer who was able to save $50,000 in the first place may be in a better overall financial position than someone who is looking to finance 100% of their mortgage.

In many cases, it will be more prudent to save money for a down payment instead of trying to finance 100% of the home loan.

This becomes more important if you have big career or personal life events coming in the next few years, such as a planned PCS, retirement, etc.

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 critical as you get closer to the VA loan limits. You don’t want to finance more than you can afford to pay off.

Finally, making a large downpayment reduces the cost of your monthly mortgage payment, which gives you additional financial flexibility.

How Does The VA Loan Rate Compare To Conventional Loans?

While many veterans automatically assume VA loans are the best, you should compare the numbers before choosing a VA loan.

This article compares VA loans and traditional mortgages in more depth.

There are a few considerations to examine, including:

  • the VA loan funding fees
  • interest rates
  • closing costs, and
  • other costs

Let’s take a more in-depth look at these.

VA Loan Funding Fee

The VA loan funding fee 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.

You can choose to pay this fee in cash at closing, or you can roll the funding fee into the cost of your home (most do the latter, but you can do it either way).

Whichever you choose to do, this needs to be accounted for when comparing the overall cost of your home loan.

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, closing costs, funding fees, mortgage, principal, and mortgage interest) for a VA & conventional mortgage, then make your decision.

VA loan interest rates are always competitive with conventional mortgage rates and are often lower.

However, sometimes rates may be higher, depending on prevailing interest rates and other factors.

Go with the lower interest rate for your mortgage, unless you don’t have a large enough down payment to avoid PMI for a traditional mortgage and the PMI would increase your carrying costs above those of a VA loan.

Remember, a higher interest rate can cost you thousands.

Other Considerations

Don’t forget to account for origination fees, closing costs, and additional costs, which can be included in a VA mortgage.

And remember, 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.

You CAN Have More Than One VA Loan

We bought our first house in Norfolk in 2002, then refinanced 3 times over the subsequent 12 years, going from 6.75% down to 3.75%.

We used the VA’s Streamline Refinance program each time we refinanced, which minimized paperwork and cost.

Each time we refinanced our VA loan, the VA provided us with a new certificate of eligibility and reset our mortgage balance.

We bought our current home in 2014, using a VA loan.

Because we had used less than our VA loan entitlement (then $417,000) for our previous home purchase, we still had some remaining VA loan entitlements. We were able to use these when buying our home in Tampa.

We had to make a downpayment to fit within our remaining entitlement amount, but this was something we had in our budget, so we were able to buy a second home backed by the VA loan guarantee program.

How does this apply to you?

Well, as military members, we tend to move frequently. As a result, you may find yourself in a position of being able to buy another property at a reasonable price.

If so, then consider this as an option for your next home.

If you are transitioning and happen to have an existing mortgage, you 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 (this is a different refinancing process).

These are only three considerations regarding a VA loan. Buying a home can be a complicated process with many variables.

There is a lot of information on the VA’s website.

Finally, most lenders have VA loan specialists who can walk you through the process of buying a home with a VA loan.

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About Forrest Baumhover

Forrest Baumhover is a Certified Financial Planner™ and financial planner with Lawrence Financial Planning, a fee-only financial services firm. As a retired naval officer, Forrest helps veterans, transitioning servicemembers and their families address the financial challenges of post-military life so they can achieve financial independence and spend more time doing the things they love.

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