VA Home Loans are one of the best ways for veterans to finance a home purchase. VA Loans offer veterans a chance to buy a house with little to no money down, and in many cases, the VA Loan interest rates are competitive with conventional mortgage rates, sometimes they are even lower. This was the situation my wife and I found when we recently used a VA Loan to purchase our home.
We would have easily qualified for a conventional mortgage since we have excellent credit scores, and since we put down over 2o% of the purchase price we would not be required to pay PMI, equalizing one of the benefits of using a VA Loan, since VA Loans are backed by the government and don’t require PMI. A conventional loan also would have been less work on our end – it would have required less paperwork and probably would have closed a few days more quickly. However, we were able to secure a lower interest rate, which saved us several hundred dollars per year and made it well worth applying for a VA Loan.
The final issue we had to consider, in addition to the interest rates, was the total amount of fees associated with the loan. This is where understanding how VA Loan funding fees work is important.
No closing costs with a VA Loan, but you have to pay a funding fee
Many veterans choose to use a VA Loan to finance their home is because they don’t have to pay any closing costs on their purchase and they don’t have to make a down payment. This can save home buyers several thousand dollars on the closing date. But VA Loans may be subject to a funding fee, which is required by federal law and is something that conventional loans don’t have. It’s important to be aware of these fees, and account for them when comparing a conventional and VA Loan.
VA Loan funding fees
The VA Loan funding fee is currently assessed at 2.15% of the purchase price of the home for veterans who are using a VA Loan for the first time and don’t put any money down.Veterans buying a home without a down payment and using a VA Loan for a second time are required to pay a 3.3% funding fee.
So a $200,000 house would have a $4,300 funding fee for a first time VA Loan user, and $6,600 for a second time VA Loan user. The VA Loan funding fee is required by federal law to have veterans help pay for the benefit of being able to buy a house with no down payment (this helps US tax payer dollars go further). This fee can be paid at closing, or it can be rolled into the purchase price – allowing the veteran to buy the house with no down payment.
VA Loan Funding Fee Reductions
Borrowers who make a down payment may be entitled to a reduction in their VA Loan funding fees. A down payment of 10% will result in a first time funding fee of 1.5%, greater than 10% will be 1.25% of the loan. The fess are 1.75% and 1.5% respectively for second time VA Loan users.
Members of the Guard/Reserves may pay a 2.4% fee for first-time use with no down payment, a down payment up to 10% requires a 1.75% fee, and a down payment of 10% or more comes with a 1.5% funding fee. Guard/reserve veterans using the VA Loan a subsequent time are required to pay a 3.3% funding fee if they are not making a down payment, a 1.75% fee for a down payment up to 10%, and a 1.5% funding fee for a 10% or greater down payment.
VA Loan Funding Fee Exemptions
There are some exemptions for the funding fee – for example, veterans may be exempt if they receive service connected disability compensation from the VA, and veterans who would be entitled to receive compensation for service-connected disabilities if they did not receive retirement pay. Additionally, surviving spouses of veterans who died in service or from service-connected disabilities may be exempt from paying VA Loan funding fees.
Be sure to speak with your lender if you believe you may be eligible to have the VA Loan funding fee waived. If you are eligible for this exemption, you will need to provide documentation of your VA disability to your waiver. You can accomplish this by contacting your regional VA center with your lender’s information and they will fax the appropriate documents to your lender. Allow for approximately 1 business week for this, though in some cases it can be accomplished within a day or two.
Being Aware of Funding Fees Helps You Compare
The VA Home Loan funding fees can make a big difference in the bottom line, and in some cases, might equalize the closing costs if you were to use a conventional loan. The best way to compare a VA Loan to a conventional loan is to list all associated costs, determine your down payment, and decide which option is best for your specific situation. If you are making a large down payment (20% or more), then you can probably make a case for either loan. If your down payment is small, or non-existent, then it may be best to go with a VA Loan. Again, run the numbers for your situation, and see which option is best.