If you’re a military member or veteran, should you get a VA loan to buy your next home? Here are a few things to think about as you weigh your options.
VA Loans Don’t Require Mortgage Insurance
The topic of private mortgage insurance, or PMI, comes up a lot with our clients. That’s because it’s a thorn in the side of so many homebuyers. Who wants to pay over a thousand dollars a year in fees? Nobody.
Fortunately, you don’t need to worry about that with a VA loan. This type of loan doesn’t require a mortgage insurance payment – no matter how much you put down. Do you have a lot of cash and can put down 20%? That’s great! But even if you’re a first time homebuyer and have 0% to put down, that’s fine too.
For a lot of qualified people, this alone is a deal breaker.
VA Loans Have a VA Funding Fee
Even though VA loans don’t require mortgage insurance, there is a type of fee you will have to pay. Called a funding fee, this is a one-time fee that’s required when you first purchase the home. You can either choose to pay it in cash or borrow the money required for it.
The amount of the VA funding fee is based on several different factors. For example, it’s different for a first-time user of a VA loan vs. someone who has used it before. It also varies based on the size of your down payment. The larger your down payment, the lower your funding fee will be. Think of it as the VA’s way to encourage you to save up for a down payment.
At this time the highest you can expect to pay is about 3.6% of the home’s purchase price. The lowest is about 0.5% of the purchase price.
Does this fee hurt? It can – 3.6% of a $300,000 house is $10,800. But you have to remember the alternative. If you were paying PMI at 1%, it’d be an extra $3,000 per year. If it took you 8 years to pay off 20% of the house, you’d end up paying $24,000 just in fees.
Something else to keep in mind is not everyone has to pay a VA funding fee. There are some exceptions. If you decide to go this route, your lender will see if any of those apply to you.
Are You Qualified for a VA Loan?
Technically, VA loans don’t have a minimum credit score or debt-to-income ratio. That said, lenders typically like your credit score to be at least 580. If you can get into the mid-600s, that’s a lot better.
As far as debt-to-income ratio, aim for less than 43%. If you can get it lower than 30%, that’d be ideal.
If you aren’t able to meet these qualifications, you may find it more challenging to get a VA loan. In that case, your options are to either improve your credit and DTI or go a different route, such as an FHA loan.
Should you get a VA loan? We can’t answer that for you, but we will say it has advantages over other loans. The biggest advantage is not requiring mortgage insurance, which can save you a lot of money over time.
Have any questions about VA loans or buying a home in general? Give us a call at 949-392-6400. We look forward to helping you anyway we can!