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When NOT to Use a VA Loan for a Mortgage

By: Grant Moon 11/03/12 01:41 pm

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When NOT to Use Your VA Eligibility for a Mortgage

 

Without a doubt, the VA mortgage is the absolute best choice for qualified veterans and service members. Interest rates are as competitive with any other program, closing costs are lower and of course VA’s main advantage; no money down.

But sometimes the VA loan isn’t your best answer when it comes to financing a home.  When are those times?

The VA loan requires zero money down. Zero.  All other loan programs require a minimum down payment.  And even considering conventional loans with five percent down, interest rates on conventional loans with five percent down can be higher by one-quarter of a percent or more.  Much higher if credit scores are closer to 620 than 700.

For the qualified VA borrower who has excellent credit and a down payment then a conventional loan might make the best choice. Why?

All VA mortgage loans require a funding fee, typically 2.15 percent of the loan amount, regardless of any down payment. This funding fee is not required for veterans who receive disability payments from the VA due to service-related disabilities but all other VA loans do require this fee to be applied to their mortgage loan.

The funding fee can also vary depending upon such factors as loan type or multiple uses of the VA home loan benefit.  For instance, on a $200,000 VA loan a 2.15 percent funding fee is $4,300 added to the loan amount.  While this funding fee is not an out of pocket expense it’s something that does need to be considered.  The funding fee helps subsidize the VA home loan guarantee to lenders who issue VA mortgages.

In the instance of excellent credit and a 20 percent down payment, you should explore a conventional mortgage.  But if you want to preserve your cash and buy a home with no money down and still get an excellent interest rate…take the VA loan.  There’s nothing better.

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