When a VA Loan is NOT Your Best Bet
If this is your first home or your final retirement castle, if you're fortunate enough to have VA loan eligibility then you've likely explored the option. VA loans are approved using slightly different underwriting standards compared to FHA, Fannie Mae or Freddie Mac loan programs. The differences are sometimes minor but different nonetheless. There are however significant differences with VA loans that other loan programs simply can't compete with. Yet there are times that VA loans are not your best option.
VA Home Loan Benefits
Let's review some of those benefits now and remind us once again just how beneficial VA home loans really are. It's a benefit not enjoyed by civilians and is indeed an entitlement earned.
The most obvious benefit is the no-money down option. No down payment whatsoever is required from the veteran as long as the loan does not exceed maximum VA lender guidelines. Most loans are limited by VA lenders at $417,000, higher in certain areas that are deemed "high cost."
Anyone that buys a home knows how difficult it can be to save up enough funds for a down payment and closing costs. Even FHA loans that require a 3.5 percent down payment can still be a challenge, especially for first time home buyers who save and save to buy their first home. Zero down is a huge plus.
Lower Closing Costs
VA loans also restrict the types of closing costs that the veteran is allowed to pay for. This restriction is found on no other loan type and is yet another example of how veterans can save money using a VA loan to finance a home.
For example, a lender might charge a borrower that is using an FHA loan or Fannie or Freddie mortgage $1,000 or more in lender fees. Lenders typically charge underwriting, processing and document fees on all of their loans, but VA borrowers may not pay for those fees and either the lender or the seller can be forced to pay them on the veterans' behalf.
And when compared to loan programs with even a minimal amount down, say 3.5 to 5.00 percent, monthly mortgage insurance premiums are a requirement, adding to the cost of the loan as well as reducing the qualifying loan amount. Depending upon the program, the amount down and other factors, monthly mortgage insurance premiums can add another few hundred dollars to a monthly mortgage payment.
No money down, low closing costs and no monthly mortgage insurance premium are the most attractive features of a VA loan. But sometimes you don't want that.
VA Loan? Maybe Not.
There are a couple of specific instances where a VA loan isn't your best bet. First, if you're refinancing your mortgage and you want cash out during the process, you're typically limited to 90 percent of the value of the property. If you've acquired enough equity in your home in order tap into your equity and pull out additional cash, the amount received will be less when the Funding Fee is added to your final loan amount.
The funding fee also plays a role in any refinance transaction. The funding fee is a charge used to finance the VA's loan guaranty program and can range in amount from 2.15 to as high as 3.30 percent of the loan amount. If you're pulling cash out, on a $300,000 loan amount, your cash could be reduced by $9,900.
If you have equity in your property, regardless of any cash out, you may want to refinance into a conventional mortgage, restoring your VA entitlement. Conventional mortgages don't have a funding fee and with sufficient equity, you can refinance your mortgage at a cheaper cost and still get cash out at your discretion.
VA loans are perfect for those who qualify wanting a loan with no down payment and fewer closing costs. Yet if you do have a down payment of 20 percent, you should consider another choice, avoiding the funding fee charged on all VA loans.