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One of the perks of joining the military is that service members and their families are eligible for a variety of financial benefits, including VA loans. This program from the Department of Veterans Affairs help service members and their families qualify for home mortgages through a private lender. Some of the major benefits of the VA loans program include:
- The ability to get a mortgage with little or no effective down payment.
- Not having to pay private mortgage insurance when purchasing a home with less than a 20% down payment or refinancing with less than 20% equity.
- Streamlined refinancing, also known as an Interest Rate Reduction Refinance Loan. As interest rates go down, an IRRRL allows a lender to refinance a mortgage with much less paperwork.
Even with these advantages, buying a home requires a lot of due diligence, research and budgeting. If you’re thinking of making the leap and you’re eligible for a VA loan, here are three important aspects to consider:
1. VA loans let you finance up to 100%, but should you?
Lenders generally require homebuyers whose down payments are less than 20% to obtain private mortgage insurance to protect the lender in case of a default. The argument is that the more skin in the game buyers have, the more committed they’ll be to their investment.
Although studies have both supported and refuted this argument, it’s safe to assume that a couple with the financial discipline to have saved 20% of the value of a home in the first place may be better positioned to pay their mortgage than a couple who did not. Instead of trying to finance 100% of a home purchase with a VA loan, it might be smarter to save money for a down payment, particularly if you’re still planning to make a career-related move.
2. Know all the costs of owning a home with a VA mortgage and compare those numbers to a traditional mortgage.
First, you’ll likely pay a VA-mortgage funding fee, ranging from 0.5% to 3.3% of the mortgage depending on a variety of factors. (There are some exceptions, but most people should plan to calculate the VA funding fee into the cost of their mortgage.) Other restrictions, including types of closing costs that can be included in a VA mortgage, could come into play as well.
Also, VA mortgage interest rates differ from rates for conventional mortgages, sometimes significantly. Analyze the numbers (down payment, total closing costs, principal and interest) for both a VA loan and a conventional mortgage before you make a decision.
3. You can have more than one VA-sponsored mortgage at a time, depending on the circumstances.
As a former naval officer, I have firsthand experience with VA loans. My wife and I bought our first house in Norfolk, Virginia, in 2002, then refinanced three times over the following 12 years, bringing our rate down to 3.5% from 6.75%. Each time we refinanced, we did so under the VA’s IRRRL program, which minimized paperwork at a low cost. And each time we refinanced, the VA reset our mortgage balance and issued a new certificate of eligibility.
In 2014, we purchased our current home in Tampa, Florida. Because we had used much less than our entitlement (the loan amount the VA will guarantee) for our Norfolk house, we were able to use the remaining entitlement amount on our Tampa home and have a second VA-backed mortgage.
The entitlement calculation is directly related to how much of a VA loan you can get from a lender. The VA promises to pay a quarter of the loan amount. The current cap is $417,000 (four times $104,250, which is the basic entitlement plus the secondary entitlement), unless you live in a VA-designated high cost area.
We still needed a down payment, but buying a second home was something that made sense for us and that we had planned and budgeted for. Since military families do move around a lot, you might be able to buy a second (or third) property very inexpensively. If so, this might be a viable option. But again, just because you can, doesn’t always mean that you should.
In addition to these three items, many other variables can affect whether you should use a VA-sponsored loan. See the VA’s benefits website for more details. Plus, most lenders have specialists who are knowledgeable about VA loans and can walk you through the process of applying for one.
If you’re still overwhelmed by the options, schedule an appointment to talk to a fee-only financial planner in your area. Working with a trusted professional is the best way to ensure you’re making decisions in your long-term best interest.
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