VA Mortgages
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How VA Mortgages Financing Works
Although it may seem that a VA mortgage would be one provided
by the government, this is not the case. Private lenders, such as
banks or mortgage companies, actually make available this special
type of home loan to US Armed Services veterans. The upside for
the lender is that the VA guarantees a portion of this loan will
be paid in the instance where the borrower is unable to fulfill
his or her payment requirements.
In financing your VA mortgage, you'll hear the word
"entitlement" used a lot. This set amount of money isn't
given to you, nor is it a cash payment to the bank. Your
entitlement is what the VA promises the lender will receive in the
event that you must default on your mortgage. Currently, the set
entitlement for first-time buyers using their VA benefits is
$36,000 for properties under $144,000, and $60,000 for properties
between $144,000 and $240,000.
Financing of your VA mortgage begins with filing and receiving
a Certificate of Eligibility. This shows the lenders that you are,
in fact, eligible for VA loan entitlement and benefits. While a
Certificate of Eligibility is required by banks, this does not
mean that they will approve your credit application. All other
forms of typical credit checks are mandatory when filing for a VA
home mortgage.
There are fees associated with a VA mortgage, for both you and
possibly the seller of the home you intend to purchase.
Funding fee. The
funding fee is paid by you, the borrower. It
is non-negotiable and required by law. However, the rates of the
funding fees fluctuate depending on whether or not this is your
first VA mortgage, or if you are submitting a down payment on the
home you are purchasing. VA mortgages typically do not require a
down payment, which is one of their many benefits. But there is a
funding fee associated with this perk, and it is normally financed
in with the final amount. The funding fee is designed to allow the
veteran to contribute towards his VA mortgage without added burden
to the taxpayers. The normal funding fee for a first-time VA
mortgage with no down payment is 2% (or 2.75% for Reservists).
Second-time home buyers using the VA mortgage program with no down
payment will pay a 3% funding fee, but this can be incrementally
reduced by providing higher down payments.
Other fees. In the normal loan process, there are other fees
that are charged by escrow companies, lenders, title companies,
and other entities. These fees are classified as
"non-allowable." Non-allowable fees are not paid by the
borrower who uses a VA mortgage. The VA (and FHA) prohibits the
buyer from paying these fees, but they are often (nearly always)
charged anyway. Thus, the burden of these fees falls on the
seller. In the conventional mortgage process, non-allowable fees
are commonly paid by the buyer, so this can prove difficult in
finding a seller who will agree to pay them. When financing your
purchase of a home through the VA mortgage program, sellers will
often agree to pay the fees, but there will be little to no
bargaining room on the original price of the home.
Although the added fees for both you and the seller may appear to make VA financing an unwanted prospect, there are several benefits to keep in mind.
- Financing is usually 100% with no down payment required.
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Private Mortgage Insurance is not required.
- There are no penalties assessed if you prepay the loan.
- All closing costs may be paid by the seller.
- Interest rates are competitive.
- Loan qualification can be easier than a conventional loan.
- VA provides servicing and counseling options to those with financial difficulties.
- Competitive in terms of financing options and lengths as compared to traditional loans.
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