How do you determine if a VA home loan is the best option for you?
Here are three questions to consider when weighing your loan options.
Do You Have Funds for a Down Payment and Closing Costs?
Veterans purchasing with a VA home loan don’t need a down payment, whereas other loans usually require at least 5% down. A conventional home loan -- a loan not backed by the government -- may require as much as 20% of the total loan cost upfront to get the best interest rate and avoid paying private mortgage insurance.
The VA charges a funding fee on purchase and refinanced mortgages to sustain its loan program, but veterans don’t need to pay the fee at closing.
“Most choose to finance it into their loan,” said Chris Birk, vice president of mortgage insight for Veterans United Home Loans.
Birk said that fee typically ranges from 1.4% to 3.6% of the total loan amount, depending on whether you have used a VA loan previously, and whether you made a down payment.
But you might not have to pay the fee at all. The VA waives its funding fee for veterans who have a 10% or greater VA rating for a service-connected disability, Purple Heart recipients on active duty, eligible surviving spouses and certain others.
Even if you have to pay the funding fee, the VA loan may still be cheaper than other options. Veterans don’t pay certain third-party fees on a VA loan, like attorney fees, notary public fees and buyer broker expenses.
Larger fee differences can vary by lender. Some lenders that charge no lender-specific fees for a VA loan may require fees on other types of loans.
“A question to ask your lender is how many months in the future it will take to repay their fee on a VA loan versus any other type of loan,” said Sara Valesano, financial adviser for Edward Jones Investments. “You can then determine whether you will keep your loan for at least that long.”
How Long Are You Planning to Live in the House?
If you are planning to move in the near future, start thinking about what you plan to do with the home you’re buying now. You may not be able to sell it at the same time you buy your next home.
Birk said it is possible to have more than one VA loan at a time. Having two loans can buy you time to sell your first home or rent it out, as long as you have met certain requirements.
Veterans looking to fund another home purchase with a VA loan must have sufficient VA loan entitlement and also might need to make a down payment on the second mortgage, he said.
If you’re planning to flip a house or use it as a secondary or vacation home, you may want to consider a conventional home loan.
“VA buyers must intend to occupy their new home as their primary residence,” Birk said. “But after living in it for a time, they can look to rent out the property.”
The typical occupancy requirement for a VA home loan is about one year. Other government-backed loans, like from the Federal Housing Administration and U.S. Department of Agriculture, have similar occupancy requirements.
Will the House You Want to Buy Pass a VA Appraisal?
VA home appraisals have more stringent requirements than conventional loans. If you have your heart set on a fixer-upper, you might want to consider a VA renovation loan or a conventional home loan.
According to Michelle Wendt of Wendt Appraisal Services, VA appraisers focus on three major requirements: the home’s safety, sanitariness and structural integrity.
“We’re going in and making sure we’re looking with an extra open eye at any concerns that jump out at us,” she said.
“We’re looking at things like bowed walls, buckling basement concrete, rotten boards. We look for any potential safety issues that would possibly come about while you’re living in the home. There can’t be mold or peeling paint in an older home that could present a lead hazard down the road.”
Peeling paint, bare wooden areas like under-eaves and poor drainage or water permeability around a home’s foundation might pass another home appraisal, but it won’t pass one for the VA, Wendt said.
– Brittany Crocker is managing editor for Three Creeks Media.
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