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Katherine Said:

What is the advantage of a VA Loan?

We Answered:

I would also like to first thank you for your service to our country.

Next, I think it's important for you understand that a "VA Loan" is not a program whereby the (US) government lends you money; rather, it is simply a guarantee the (US) gov't makes to private lenders that they are protected against loss if the veteran fails to repay their loan obligation. Each lender will have their own requirements - within set gov't guidelines - for final approval of loans within their individual VA programs.

The first step in applying for a VA loan is to obtain a Certificate of Eligibility (using VA Form 26-1880). You can download it for review at www.homeloans.va.gov, but recommend using your lender's ACE program to expedite receipt. Given you'll have the opportunity to finance up to 100% of the loan (inclusive of funding fees & closing costs), while having $100K in purchasing power - 43% of purchase price - consider the value of the mortgage interest deduction on your taxes in relation to how much you want to spend on the down payment, and how much you want to keep as liquid assets. All depends upon your qualifying ratios and your long-term plans, i.e. how long you intend to hold the home.

Although interest rates are sometimes slightly higher with VA loans, note that seller contributions are sometimes REQUIRED under a lenders VA program. Typically limited to a range of 3 to 9 percent, depending on the loan program and other factors, these seller "concessions" help offset your closing costs (and possibly the amount of your loan, depending upon how you work the deal), For example, if a lender requires seller pay for buyer's closing costs such as appraisal, survey and title insurance and those benefits would be worth, say $2,000, that would negate the $1,625 funding fee that John correctly calculated (thanks, John!). Who knows - lender may require seller pay significantly more; I'm under contract for a Buyer/Client right now where the lender required a 4% seller contribution, immediately saving my Buyer $8K on the purchase price.

These requirements, while obviously a buyer benefit, can sometimes jeopardize a deal though. Most sellers will flat out reject offers that come in with too many concessions that detract from the purchase price, so it is important that both sides clearly understand what is required (seller's required contribution is <$x.xx or x%>, what is allowed (cannot exceed <x% loan amt>) and what their obligations are before finalizing an offer.

But what if you could make a seller concession worth far more than its original cost, yet still not seem like a big deal or exceed conventional guidelines... While shopping mortgages, ask lenders about the ability to "buy down" their stated interest rates - whether you go the VA route or not - and if it's permissible to have seller contribution fund the "buy-down", A very powerful seller concession I pursue while negotiating on behalf of my Buyers is, rather than (or in addition to) paying cash at settlement to offset closing costs, seller pay points so that the buyer can get a lower rate. For example, if I can get $2,000 in seller concessions to "buy down" my Client's mortgage rate by 1 point, (maybe in addition to what VA requires ;-) that $2,000 would yield a potential buyer benefit of more than $20,000 in reduced interest charges on $100K loan.

This long-term benefit is worth far more than the reduced closing costs at settlement, and it's all good, as long as we remain within conventional guidelines. Make sure you have an experienced REALTOR Buyer's Agent advocate for your side of the transaction and ensure they specify adequate timelines for certain events in the Offer to Purchase & Contract.

PROS:
- VA prohibits lenders from charging PMI, given loans are guaranteed by the gov't
- gov't limits the type and amount of closing costs veteran can pay for
- "VA Escape Clause" form typically used, limiting buyer's risk if property appraises for less $$ than contract purchase price
- no down payment (unless required by the lender or purchase price is more than the reasonable value of the property)
- can finance the VA funding fee
- VA assistance to veteran borrowers in default due to temporary financial difficulty

CONS:
- some sellers wary of paying buyer closing costs
- lots of additional paperwork required.........lots.
- can take more time to receive report for VA appraisal
- can take more time to receive final loan commitment letter from lender

Good luck, and Semper Fi