A buyer's first mortgage involves a lot of big decisions. When sorting through VA, FHA, USDA and conventional loans, how can a buyer make the right choice?
Loan costs should definitely factor into the evaluation. Fortunately for eligible military buyers, it is possible for VA loans to be less expensive up-front and over the long haul than other loan options.
Knowing how VA loans work is the first step toward getting the home of your dreams, and our VA loan calculators could help you find out how much you could save. But are they cheaper than other loans?
The down payment is often the biggest up-front expense for home buyers. Most conventional lenders require a down payment of at least five and sometimes 20 percent. On a $200,000 home, that down payment could range between $10,000 and $40,000.
Enter the VA loan: one of the only mortgages that don’t require a down payment. Eligible buyers can choose to finance 100 percent of a home (within a VA lender’s guidelines) and bypass a substantial down payment.
Don’t mistake “no-down-payment” financing with “less expensive” financing. A no-down-payment loan isn’t “cheaper.” Buyers do end up paying more interest over the long run. But that tradeoff can prove worthwhile for eager buyers without a large chunk of cash
VA loans also let buyers sidestep PMI. PMI (private mortgage insurance) is typically required when borrowing more than 80 percent of a home’s value. The fee for PMI is tacked onto a monthly mortgage payment and usually ranges between .5 and 1 percent of the total loan amount.
Since a portion of VA loans are backed by the federal government, VA lenders do not ask borrowers to buy PMI. It’s a handy perk that cash-strapped homeowners quickly come to appreciate.
The VA strictly regulates the type and amount of closing costs that can be paid by VA loan borrowers. That oversight keeps closing costs in line with, and sometimes below, conventional closing costs.
Another nice benefit of VA loan closing costs is that they can be paid by the seller. But remember: This concession must be hashed-out during buyer/seller negotiations.
One of the biggest determinants of a loan’s interest rate is the amount of risk involved with the loan.
The government backing provided with each VA loan lessens a lender’s risk. Less risk gives lenders greater flexibility with interest rates. As a result, VA loan interest rates can often feature lower interest rates than conventional mortgages.
VA loans do incur one unique cost: the VA Funding Fee. The VA Funding Fee offsets the VA’s administrative costs, and ranges in value from 1.4 to 3.6 percent of the total loan amount (veterans with a service-connected disability are sometimes exempt).
| Down Payment Made | First Time Use | Subsequent Use |
|---|---|---|
| none | 2.30% | 3.60% |
| 5% - 10% | 1.65% | 1.65% |
| 10% or more | 1.40% | 1.40% |
Numbers represent a percent of the total loan amount.
| Down Payment Made | 1st-time Use | Subsequent Use |
|---|---|---|
| none | 2.30% | 3.60% |
| 5% - 10% | 1.65% | 1.65% |
| 10% or more | 1.40% | 1.40% |
Numbers represent a percent of the total loan amount.
Keep in mind that the Funding Fee doesn’t have to be paid up-front. Military buyers can choose to roll the fee into the total loan amount.
Is a VA loan cheaper than other loan options? Maybe. Maybe not. Every buyer, seller, purchase and lender are different. It’s impossible to say that one loan program will ALWAYS be cheaper than another.
But with a plethora of low-cost benefits, VA loans definitely have a shot at being the cheapest way for eligible buyers to finance a home.
To find the best financing tool for you, talk to an experienced loan officer. Make sure your lender has experience with different lending programs (VA, FHA, and conventional), and can provide a comprehensive assessment. Buyers can reach a Veterans loan specialist by calling Doug Pyne with Caliber Home Loans locally at 707.447.9962
