Veterans gain many benefits when they use their VA home loan benefit. Perhaps one of the largest and most overlooked benefits is the lack of PMI or Private Mortgage Insurance.
If you look at the big picture, you get 100% financing and you don’t have to pay mortgage insurance. That’s a vast difference from a conventional loan that requires you to pay PMI if you borrow more than 80% of the home’s value. FHA loans aren’t even as beneficial, as you have to pay mortgage insurance for the life of the loan.
The VA Funding Fee
What you will pay with a VA loan that shouldn’t be confused with mortgage insurance is the VA funding fee. This fee covers the costs the VA endures by guaranteeing loans for veterans. The funding fee helps the VA continue to be self-funded. In other words, they don’t put the burden of the loan program on taxpayers.
The funding fee that veterans pay depends on the type of loan you take (purchase, refinance) and the type of military you served.
For example, members of the regular military that are buying a home pay 2.15% of the loan amount as a funding fee. Members of the National Guard or Reserves that buy a home, though, will pay 2.4% of the loan amount.
When you refinance your VA loan, you will pay a funding fee as well. If you take advantage of the VA streamline refinance, you only pay 0.5% of your loan amount as a funding fee. If you take a cash-out refinance, though, you’ll pay the same funding fee you paid when you bought the home.
Other Cost Savings With VA Loans
Saving money on PMI can save you thousands of dollars over the life of the loan, especially if you compare this option to an FHA loan. But the mortgage insurance isn’t the only area the VA saves veterans money.
We already mentioned that veterans don’t have to make a down payment. That helps veterans buy a home faster since they don’t have to wait until they have enough money saved. But the savings don’t stop there.
The VA limits the closing costs veterans can pay. Unlike other loan programs, the VA only allows veterans to pay certain closing costs. They include:
- Origination fee
- Discount fee
- Credit report fee
- Appraisal fee
- Recording fee
- Prepaid interest
- Real estate taxes
- Homeowner’s insurance
- Title insurance
In addition, of course, is the VA funding fee that veterans can pay.
The other closing costs that veterans cannot pay must be handled some other way. The VA offers two solutions:
- You can ask for a seller credit – Sometimes sellers are willing to help veterans close on their loan. If there is enough value in the home, the seller can increase the price of the home slightly. This way you can get a higher loan amount. At the closing, the seller will cover the closing costs that you cannot pay as a veteran. They do this in the form of a seller credit. Basically, you are paying the costs but you wrap them into the higher loan amount and the seller still gets the same amount of money for the home.
- You can ask for a lender credit – Some lenders offer credits to veterans to help them cover the non-allowed closing costs. In fact, some lenders may even cover all of your closing costs. They do this in exchange for a slightly higher interest rate. Typically, lenders increase your quoted interest rate by 0.5% to cover the closing costs.
One last option is to pay a flat origination fee. If the lender you choose charges fees the VA doesn’t allow, they can roll them into the origination fee. The VA only allows you to pay a 1% origination fee though, which is equal to 1% of your loan amount.
Adding up the benefits of the VA loan, it makes sense why veterans go this route. They are able to secure 100% financing, pay little money out of their own pocket for closing costs, and they don’t pay mortgage insurance.
It might seem strange, but the VA has some of the lowest default rates in the mortgage industry. They don’t need the mortgage insurance because their default rates have remained low throughout the years. The VA has a good combination of flexible guidelines with just the right amount of requirements that make veterans a good risk.