Being in the military comes with both rewards and certainly challenges. But, one of those rewards includes buying, building, or refinancing a home with a VA home loan guarantee. VA home loans offer current military or reservists, Veterans, and a qualified surviving spouse so many benefits. These include the ability to purchase or refinance up to the full appraised value. Not many home loans offer this. But, there is a lot to VA loans! These extras include no monthly mortgage insurance (keeps the monthly payment lower compared to other mortgages), flexible guidelines (better chances to qualify), and ability to use multiple times (even having two VA loans at once!).
Besides the benefits, there are certain areas we want to highlight for you. Understanding these areas makes for a more informed borrower and informed borrowers make better choices.
What Does a VA Home Loan Guarantee Mean?
A common misconception is that since a VA home loan has a guarantee, that means every Veteran qualifies. Even if a Veteran has a 500 credit score. Regretfully, this is not what the VA guarantee means. First of all, VA itself does not lend the money. VA lenders do. Typically, lenders and banks offer loans up to 80% of the price or appraised value. Yet, lending agencies such as VA provide lenders a guarantee. This guarantee basically says that if the borrower defaults on the loan (stops paying and the home has to be foreclosed) and the lender takes a loss, the VA home loan guarantee offsets that usually big lender loss. Therefore, VA lenders are able to confidently lend up to 100% of the purchase price or appraised value because VA has their back.
In order to receive the VA guarantee, lenders must follow VA guidelines. So, let’s discuss a few of them here to help you understand the make up of a VA home loan.
VA Funding Fee
Even though VA loans do not charge a monthly mortgage insurance premium, there is an up-front form of mortgage insurance. It is called a VA funding fee. This fee must be charged on all VA loans, unless the Veteran is exempt because of a VA disability of 10% or more. Fortunately, this fee is added on top of base loan amount. Thus, the borrower does not have to pay this fee at closing unless he/she wants to. It is even allowed for the seller to pay this fee from VA sales concessions which are discussed below.
The amount of the funding fee is a percentage of the loan amount and is based on several factors. These percentages range from 1/2% – 3.3% of the loan amount. To learn all the details of the VA funding fee, click the button below.
VA Home Loan Guarantee Seller Paid Closing Costs
Yes, VA loans allow a way for buyers to finance the closing costs rather than bringing cash to closing. When buying a home, there are closing costs to pay. But, many VA buyers choose to include seller paid closing costs in their purchase contract. By the seller paying closing costs in the purchase contract, it increases the sales price. Thus, the VA loan could lend up to 100% of the price which includes closing costs in this case. So, really the VA borrower is paying the costs in their loan in these cases.
VA guidelines allow for the seller to pay all of the buyer’s customary closing costs. Yet, there are additional items on top of traditional closing costs. They are called pre paid items and include first year’s premium of any insurance, escrows set up, and interim interest. Additionally, these items may be paid by the seller and fit in a term called maximum sales concessions. The maximum sales concessions allowed equal 4% of the home sales price. Keep in mind, this is on top of the allowed seller paid closing costs. Not only may sales concessions cover pre paid items, it may also cover these valuable areas.
VA Sales Concessions May Pay…
- VA funding fee
- Buyer’s debts
- Buyout of current lease
- Pay off buyer’s collections or judgments
- Down payment (if one is required)
- Pre-paid items such as interim or daily interest, 1st year premium for insurances, reserves for escrows.
These benefits not only allow a buyer to buy with potentially no out of pocket money, it could also cover the above items to help in VA loan qualification. So, if the Veteran, buyer’s agent, and an experienced loan officer can coordinate the numbers before the final contract, the Veteran can maximize their VA mortgage to their benefit.
Should I Pay Points on a VA Loan?
VA borrowers have the option of paying an origination or discount fee. These fees are a percentage of the loan amount. An origination fee is considered an income for the lender. While discount fees (also known as points) are paid to lower a borrower’s interest rate. Usually, either fees are not required to be paid by the borrower. So, the borrower has the choice of paying these fees to lower the interest rate or not pay these fees for a little higher rate. There are benefits for each way and the best option for each borrower may differ. Basically, it depends on the scenario and goals for each borrower.
When choosing to pay points or not, borrowers need to have an extensive conversation with their loan originator. Then, based on the borrower’s goals the right decision may be made.
Are you interested in seeing if a VA home loan guarantee is right for you? Take the next step