Veterans have the benefit of a no-down payment VA loan. It sounds like a no-brainer. Who wouldn’t want a loan with no down payment? What if you added flexible guidelines and low costs to it? It certainly sounds like a great deal.
Sometimes, though, the VA loan isn’t all it’s cracked up to be. There are certain situations when you may be better off with other options. Let’s take a look at these situations.
You Have a Large Down Payment
The VA loan is known for its lack of down payment needs. That doesn’t mean you can’t put money down on a home, though. If you have, say 5% down, you’re still in good hands with VA financing. But, if you have 20% you can put down, you may want to explore other options.
By other options, we mean conventional loans. 20% down is the golden rule of the mortgage industry. It gets you out of paying Private Mortgage Insurance. It also helps you secure many loan programs, including conventional loans.
If you stuck with the VA loan, you’d pay a funding fee of 2.15%. This would be on top of your 20% down payment. Let’s say you buy a $100,000 home. You put down $20,000 or 20%. You’d still pay $1,720 to the VA for their funding fee, though. Suddenly the VA loan got more expensive.
What are you paying that fee for though? Unless you have bad credit or an exceptionally high debt ratio, you’re probably better off with conventional financing than the VA loan.
You are Married to a Non-Veteran
VA loans help veterans, but there’s a catch. If you are married to someone that isn’t a veteran, you may not get the full value of the VA loan. Most notably, you may have to put more money down. The VA guarantees 25% of the loan amount for veterans. Since you are borrowing the money with a non-veteran, the VA guarantees half of their usual amount. This means 12.5%. This also means you must put down the other 12.5%.
Again, you must add the funding fee. In this case you’ll pay 1.25%. Suddenly you are paying close to 20% for the loan. You might be better off waiting until you can secure a conventional loan. If you have a few credit issues or need more stable income, you can work on those factors and then apply for the loan.
You are Refinancing a VA Loan
Refinancing a VA loan may save you money on your monthly payment. However, it’ll cost you. Not only will you pay closing costs; you’ll also pay the funding fee. This time it will likely be much higher. It could be as much as 3.3% of your loan amount.
If you are taking cash out of the home’s equity with the loan, the funding fee will decrease the amount you receive. This may defeat the purpose of refinancing your loan. Before you decide, you should figure out the cost of refinancing. Then determine how long it will take you to recoup those costs. If you won’t be in the home long enough to break-even, it doesn’t make financial sense.
Normally, the VA loan is a great idea. Who doesn’t love getting a loan with no money down? We encourage you to explore all of your options, though. Sometimes, it makes sense to take the conventional alternative.
Look at the big picture. See how much each loan costs over its entirety. Don’t focus on the interest rate. Instead, focus on the total cost of the loan. How much will the closing costs be? How much does the funding fee add to the loan? Do you think you’ll refinance in the future?
You should consider these things before deciding. Then shop around with several lenders to find the one that has the best offer for your situation. You may just find that the VA loan is the one for you.