With the increasing difficulty of finding low down payment mortgage programs and the tightening restrictions of FHA guidelines (due to increased losses), more eligible borrowers are turning to their VA options when it comes to purchasing their home.

    To give a brief idea of how VA insured mortgages work, let’s looks at the eligibility requirements first. Per the Department of Veteran’s Affairs:

    So assuming you fall within the eligibility requirements, there is still the option of using a VA insured mortgage or going the traditional route.

    The strongest reason one typically chooses a VA mortgage is the lack of required down payment. VA will cover your mortgage up to 100% of the home’s value. This means that if you also negotiate for the seller to credit you for closing costs, you will not have to bring any funds to close. This is in contrast to current conventional Mortgage Insurance limits of 90% (95% in some states and special programs.)

    This 100% coverage of your home purchase is also of great benefit to those families who have to move constantly, as is common in the armed forces. Not having to worry about pulling together a down payment in addition to all the stresses and costs of relocation is a huge help.

    Although the assistance provided by a VA insured mortgage is excellent, there are some cases where it is better to go with conventional financing. Consider the following downsides that you should be aware of:

    VA’s funding fee:  The funding fee is a percentage of the loan that is added onto the mortgage amount but it excluded from interest and from regular closing costs. The fee is paid down as you pay your regular mortgage payment and over the life of the loan, is usually minimal. The percentages for the funding fee depends on a few factors, but in the case of regular military and a first time purchase, less than 5% down is a 2.15% fee, 5% to 10% is a 1.50% fee, and 10% or more is a 1.25% fee. If this is not your first use of VA home loan benefits, the funding fee percents are to 3.30%, 1.50%, and 1.25%, respectively. Reserve and National Guard funding fees are slightly higher at 2.4%, 1.75%, and 1.5% for first-time use, and 3.30%, 1.75%, and 1.50% when used thereafter. For further information on how this fee is included in your mortgage, speak with your loan officer or contact us and we’ll be glad to go into further depth on your situation.

    It is also important to note, this funding fee does not go to the lender but goes back to the VA to insure any losses they may incur and funds the program for future use.

    Seller concession limit: The most a seller can credit toward your closing costs is 4% of the sales price. For instance, should your purchase price be $200,000, the most they can credit you is $8,000. This is usually more than enough to cover costs, but make sure your real estate agent is aware, should this come up.

    Restrictions on housing: VA wants to ensure that the home you purchase is livable. These guidelines follow FHA’s rules, including functional utilities and a finished interior and exterior (exposed outside walls, flooring, building codes, safety issues.) Special restrictions apply to condos as well; ask your agent if the project is FHA approved. When getting the property appraised (one of your few upfront costs,) the functionality and safety issues are left up to the appraiser to determine. They may seem subjective, but if it is stated as required by the appraiser, it must be done.

    As you can see, there are some strings tied to a VA insured mortgage. However, for most, the benefits outweigh the costs. There is much more that could be discussed in regard to these two types of mortgage financing, but this should give you an idea of where to start. If you are still unsure on which loan works best for you, or if you would like more information on either type, let us know.

    More information on VA’s guidelines can be found here.

    At Financial Performance Group, we're all about openness. An educated buyer is a smart buyer. With this blog, we intend to teach you about real estate, mortgage financing, escrow, and all other important aspects of buying and selling a home or refinancing. From time-to-time we may have guest writers who will contribute their knowledge and experience as well. That means you won't just get our two decades of financing and real estate experience, but also that of individuals outside of the industry.

    Although we're based in Orange County, California, we intend for our posts to be relevant to situations nationwide. We encourage comments and open discussion. If there is a topic you'd like to know more about, contact us and let us know.