For those who are eligible for a VA home loan, it’s really quite the program. It’s one of the few home loans that do not require a down payment, probably its biggest feature. But in addition to no down payment, there is no monthly mortgage insurance payment. This increases buying power. Other loan programs with a low down payment ask for monthly mortgage insurance, both for government-backed programs like FHA and USDA but also for conventional loans.
Those who are eligible for a VA loan include not only veterans but also active duty personnel with at least 181 days of service, National Guard and Armed Forces Reserve members as well as unremarried, surviving spouses of those who died while serving or as a result of a service-related injury. VA loans are also assumable. This means someone can buy the home and instead of getting outside financing, the sellers can transfer the note over to the buyers. This can be especially appealing to the buyers if the existing VA note has better terms than what the current market is offering. Lenders must approve the transfer.
With VA loans, there is a form of mortgage insurance called the Funding Fee but it’s an initial, upfront fee that isn’t paid for out of pocket but instead rolled into the final loan amount. This fee varies but for first time buyers using a 30 year fixed rate loan, the current funding fee amount is 2.15 percent of the loan amount. This “loan guarantee” is a guarantee to the lender.
Should a VA loan go into default, the lender is compensated at 25 percent of the loss. VA loans going into default is actually rather rare compared to other loan programs and is one of the highest performing loans in the industry. This despite no initial “skin in the game” from the home buyer.
There is no down payment but there are closing costs. There are closing costs with all home loans. Even so-called “no closing cost” loans. When borrowers see the term no-closing cost, it’s important to understand what’s being offered. For example, say someone is offered a 30 year fixed rate at 3.50 percent with no discount points. But the borrower is also offered a rate of 3.25 percent with one discount point. A discount point is expressed as a percentage of the loan amount. Conversely, the borrower can lock in a rate of 3.75 percent, or 0.25 percent more than the no-point loan, lenders can then extend a one point credit toward the borrower’s closing costs. There are closing costs, they’re just reflected in the higher rate.
VA guidelines however restrict the borrowers from paying certain kinds of closing costs, another benefit with the VA program. Borrowers are only allowed to pay for an appraisal, credit report, title charges, origination fees, recording and survey fees where required. The other buyer fees must be paid for by someone else. Often times it’s the sellers of the property. When an offer is made, and the sellers see the buyers are obtaining VA financing- it will state so on the offer- they know they’ll be asked to pony up some additional funds at closing to pay for the additional fees.
But the sellers are under no obligation to do so. As an incentive to the sellers, a potential buyer might increase the offer to compensate for the additional costs. Note, these additional costs really don’t add up to much compared to the entire set of closing costs, but additional costs they are.