The United States Department of Veterans Affairs (VA) is one of the most flexible and helpful lenders for eligible borrowers who may be having a bit of trouble getting a conventional loan. VA loans give veterans and their spouses many advantages over other kinds of home loan programs; however, any program that you consider should be property vetted in order to make sure that it is the best option for you. Here are four things to keep in mind when you are comparing loan programs to each other.
1. Will I pay more overall under a VA loan than a conventional loan?
The VA gives eligible borrowers many upfront benefits that are quite attractive to the average borrower. There are many fee waivers, an opportunity to pass on or roll in closing costs, and a loosening of the down payment minimum that is usually imposed by a lender. However, you may end up paying more over the life of a VA loan, all else being equal.
Although you do not have to pay the usual 20 percent minimum down payment up front, that unpaid principal is still gathering interest that is compounded over time. This accounts for a great deal of the extra interest that veterans will often end up paying in a VA loan when compared to a conventional loan. However, if the origination and closing costs are rolled into the loan, those charges are gathering interest as well. These are fees that would normally gather no interest, because they are flat fees that are usually held in an escrow account. They tack on quite a bit if they are not paid in full and rolled over.
2. Does the VA give me additional exit strategies out of a home?
You actually gain a few more options to leave a property when you take the loan under the VA. First, your loan can be assumed by any other VA approved borrower if you want to transfer ownership. This is an option that is only available within the auspices of the VA, and it greatly expands the buying audience of a property when you want to selling it. There is no prepayment penalty, so you can pay off the loan early as an exit strategy without incurring any extra charges. You can actually come out well ahead of a conventional loan if you have the cash on hand to pay off a VAÂ loan without having to pay the fixed costs that the VA helps you to avoid.
It is also easier to find a proper refinancing option when you do business with the VA. The exclusive audience of the VA includes lenders as well as borrowers. VA approved lenders are well versed in the program, and they tend to hold money aside for VA homeowners and borrowers. Many borrowers will refinance to a lower rate as part of an exit strategy to extend funds while finding a buyer.
3. How advantageous are the benefits that the VA gives me?
The looser credit requirements of the VA seem to be an advantage all around; however, the higher interest rates that are associated with a lower credit score may end up making you pay tens of thousands of dollars more in interest over the decades that you hold the property. The same goes for the higher debt to income ratio that is allowed within the VA bubble. Lenders will charge a higher interest rate in compensation for the additional risk, and this adds money into the total payout of the loan. It is very important to weigh the advantage of low standards against the additional charges that they incur.
There is a definite advantage to you if you have suffered a recent bankruptcy. The waiting period for a borrower under the VA is only two years, a much shorter period than a borrower who is under an other government program or a conventional loan. The complete waiver on the private mortgage insurance (PMI) payment is a huge advantage as well, saving you around one percent on each and every monthly payment. This is an especially huge advantage considering the new rules that stick a PMI payment to a loan for its full tenure with no equity cutoff.
4. Can I use a VA loan for whatever property I want?
This is one of the major limitations of the VA loan program: The loan must be used on a primary residence. You are not allowed to use it for a second house or for a home that you might be able to gain a rental income from in a commercial property. Although it is not discussed at length, the economic cost of losing out on rental income is substantial enough to buy another house over the life of the average VA loan. In essence, you are paying for an extra house because of the interest and missing out on yet another house because of no rental income opportunity.
When you compare your mortgage options, do not automatically assume that the VA is the best thing for you just because you happen to be a veteran. If your credit score, payment records, and other financial metrics are in order, a conventional loan may actually provide you with a better opportunity to build wealth for yourself and family.
2 Point Highlight
Although you do not have to pay the usual 20 percent minimum down payment up front, that unpaid principal is still gathering interest that is compounded over time.
The looser credit requirements of the VA seem to be an advantage all around; however, the higher interest rates that are associated with a lower credit score may end up making you pay tens of thousands of dollars more in interest over the decades that you hold the property.
