During our recent home buying experience, I gained a whole new perspective/education on the VA loan.
I too once believed the rumors about the VA loan (you can only have one, you shouldn’t use a VA if you have a down payment, etc.), but as with most rumors, they turned out to be only half true.
There’s not one correct answer in the VA v. Conventional Loan debate, as usual it depends on your specific situation. Here are some of the big factors that you’ll want to consider/will make you say “gee wiz, that’s nifty.”
Funding Fee vs. Private Mortgage Insurance
In a conventional FHA loan, if you don’t have the 20% required for a down payment, you are required to pay private mortgage insurance until your equity reaches 20%. This insurance is not for you, but for the mortgage company in the event that you don’t hold up your end of the bargain and skip payments.
The cost of PMI typically runs between .5 and 1% of your total mortgage annually. On a $100,000 loan, that’s up to $83/month.
In a VA loan where you aren’t making a down payment, the VA is basically backing you up, which is as good as insurance as far as the mortgage company is concerned. Although you aren’t required to purchase PMI with a VA loan, you are required to pay a one time funding fee each time you borrow (which you can add in to your loan).
On your first VA loan, the funding fee is 2.15% of your total mortgage (the rate increases to 3.3% each subsequent loan you take), or about $6/month for a $100,000 loan.
$6 vs $83 is a pretty substantial HUGE difference.
VA Loans with a Down Payment
Without a down payment, the funding fee for the VA loan is 2.15% the first time and 3.3% every time after that.
BUT if you make a down payment, the fee goes down.
No matter how many VA loans you’ve had:
If you make a 5% down payment, the fee drops to 1.5%
If you make a 10% down payment, the fee drops to 1.25%
Now keep in mind, that if you have a full 20% to put down on your home, you won’t have to pay PMI on a conventional loan. In that case, your decision would be based on a comparison of interest rates and the 1.25% funding fee.
You Can Have More Than One VA Loan
I kid you not.
There is a limit to the amount of VA benefits you can take advantage of, and this limit is determined by your location and by the amount of benefits you already have in use. Best to check with your lender for the exact amount you have available.