Buying a house at any time is a scary and exciting experience all rolled into one. It’s likely to be the largest purchase you’ll ever make so of course you want to be sure you are making the right decision in regards to your loan. The VA Home Loan Guaranty Service was set up to help military members achieve the dream of home ownership.
Conventional Mortgage Loans
Typically, a mortgage lender would like to see a 20% down payment made when you purchase a home. Not only does this help to insure the lender against fluctuations in market prices but it also means it is less likely you will just walk away from a house if you have invested your own money.
If you don’t have 20%, there are other loan programs available. But the majority of these require private mortgage insurance, otherwise known as PMI. Lenders typically require this because it helps to protect them from loss in the event of foreclosure. Basically, you are buying an insurance policy for the 20% that you are not putting down on the mortgage loan. The cost for this insurance is added to your monthly payment. Rates can vary based on your credit, mortgage amount and loan to value but can be anywhere from .2% to 1.75% (or higher) of your loan amount.
For example, let’s assume you are buying a $100,000 home. The bank would like for you to put down $20,000 (or 20%). If you can’t do that, you will pay PMI. We’ll assume your PMI rate is 1% or $1,000. The premium is divided up monthly so you would have to pay an additional $83.33 per month for this coverage.
VA Guaranty
When you use your VA home loan option, the VA is guaranteeing the down payment you aren’t making. In essence, it is replacing PMI. While you don’t have to pay monthly for this service as you do with PMI, there is a funding fee that is paid when you close on your home loan. The fee can be financed into the loan amount to limit your out of pocket expense.
Below is the funding fee chart from the VA’s website. The fee is based on the mortgage loan amount. For our $100,000 house with no down payment and first time use, the funding fee would be 2.15% or $2,150.
| Type of Veteran | Down Payment | First Time Use | Subsequent Use for loans from 1/1/04 to 9/30/2011 |
| Regular Military | None5% or more (up to 10%)
10% or more |
2.15%1.50%
1.25% |
3.3% *1.50%
1.25% |
| Reserves/National Guard | None5% or more (up to 10%)
10% or more |
2.4%1.75%
1.5% |
3.3% *1.75%
1.5% |
Other Considerations
When you are considering a VA loan, be sure to check with your lender about the closing costs and loan rates of a VA loan vs. a conventional mortgage loan. While not having a down payment is nice, if there is a large difference in rates, you may still be better off financially with a conventional loan with PMI. Your lender will be able to estimate costs for you to show the best option for your situation.
Visit the VA website for more frequently asked questions about VA loans as well as to find out if you are eligible for the program.