First-Time Home Buyers And The VA Home Loan

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5 Ways VA Home Loans Benefit First-Time Homebuyers 

As a current or former member of the military, you proudly served your country and made your share of sacrifices along the way. Now it’s time to consider buying your piece of the American dream and becoming a homeowner. Why not just rent, you ask? The primary reason is that buying a home builds long-term wealth through a system of forced savings. The math is simple. Each month you make a mortgage payment, which pays down your loan and automatically accumulates equity in your home. See? Your equity is money in the bank that you didn’t have to make an effort to save. When you pay off the mortgage, you’re left with a tidy sum that you probably never would have stashed yourself.  

At Aligned Mortgage, we can’t think of a better way for our military family to get into their first house than by availing themselves of the federally-backed VA loan program that comes loaded with benefits traditional loans can’t touch. For instance:

No down payment required

Let’s face it, buying a home for the first time and putting between 3 to 20 percent down as many conventional loan programs require is a Herculean feat for most people. That’s a considerable chunk of change to gather when you consider that a 3 percent down payment for a $250,000 house is $7,5000, and 20 percent comes in at a whopping $50,000. The ideal house might pass you by in the time it takes to save up for that hefty down payment, which is why taking advantage of $0 down by using a VA loan makes a lot of sense.

Veterans don’t pay private mortgage insurance (PMI)

Private mortgage insurance is coverage that homeowners are required to have if they’re putting down less than 20 percent of the home’s price for a conventional loan. In simple terms, PMI is designed to offer lenders a safety net if a borrower defaults on the loan. What borrowers pay for PMI varies depending on the loan amount, the amount of down payment, and credit scores.
It’s well known that the VA loan program affords military borrowers incredible benefits. Although the loan isn’t made by the government, it is guaranteed by the U.S. Department of Veterans Affairs, which means lenders take on fewer risks with a VA loan than with conventional mortgages because the federal government insures 25 percent of the loan. One of the significant upsides to taking out a VA loan is that borrowers don’t pay PMI due to the entitlement. That’s a considerable amount of money that goes into your pocket each month rather than an additional premium into the mortgage payment. Remember that when you are paying PMI each month, you’re also paying interest on it.

Lower funding fees for first-time homebuyers

Every VA loan and refi gets hit with a funding fee. The funding fee doesn’t go to the lender. Instead, it goes straight to the Department of Veterans Affairs to keep the wheels turning by helping to cover losses and keeping the VA loan guaranty program intact for veterans and active military members hoping to buy homes in the future.

How much will you have to pay in funding fees?

It depends on the amount of the loan and the type of loan you take out. Your funding fee may also be based on your down payment and whether this is your first time using a VA-backed home loan. As of January 1, 2021, if you put less than 5 percent down, you’ll pay 2.3 percent on your first VA loan, with an increase to 3.6 percent on subsequent VA loans. This governmental funding fee changes periodically, and the current fee structure will remain in place until January 1, 2022.

You should know that the funding fee doesn’t apply to the home’s purchase price but only to the loan amount. So, let’s say you’re applying for your first VA-backed loan on a $200,000 home, and you’ve got a 5 percent down payment ($10,000). Your funding fee will come out to $3,135 or 1.65 percent of $190,000 — your loan amount minus your down payment. 

The VA funding fee is due at the time of closing and is considered one of the closing costs for the borrower. It’s your lender’s responsibility to collect the funding fee and have it sent to the Veterans Administration on your behalf. You can pay it in a lump sum at closing, or you can roll the funding fee into the loan amount, allowing you to purchase a home with little to no cash out of pocket. As a third option, you can ask the seller to pay as a concession. According to the VA, sellers can pay specific costs on behalf of the buyer as long as the concessions don’t exceed 4 percent of the loan.

Not every borrower has to pay the VA funding fee. 

That’s right. To determine if you’re eligible for an exemption to the VA funding fee, check out your VA loan Certificate of Eligibility (COE), which states whether or not you’re exempt. Changes were made to the funding fee exemption rules in 2020, allowing specific Purple Heart recipients to receive an exemption. Others exempted from paying funding fees include individuals who receive compensation for a service-related disability, individuals who are eligible for a service-related disability pay but receive retirement pay or active service pay, and surviving spouses who meet the eligibility requirements for the VA loan program. 

Lower qualifying credit scores

As one of the most powerful benefits of military service, VA home loans continue to make homeownership possible for millions of service members and their spouses. But the reality is that many veterans and active military are still in the process of building strong credit histories and might not yet qualify for favorable interest rates on a conventional loan. The good news is that the U.S. Department of Veterans Affairs, which insures all VA home loans, doesn’t set a minimum credit requirement. Of course, private lenders issuing VA loans may have their own minimum credit score requirements that borrowers must meet. Typically these FICO scores range from 580 to 660. Although scores hovering around 600 are still considered favorable for first-time homebuyers using the VA loan program, higher scores will get a better interest rate, which, in turn, will lower the monthly mortgage payment.

VA loans are cost-effective

For first-time homebuyers using a VA home loan, the overall cost of buying a home is significantly lower than for the average civilian home buyer with a conventional loan. Combining the benefits of having a no-money-down loan, no PMI, low funding fees, and the ease of qualifying without a perfect FICO score makes using the VA Home loan the most cost-effective way to purchase a home.

Buying a home is a significant milestone in anyone’s life, and especially for first-time buyers who might see using the VA home loan program as overwhelming and complicated. At Aligned Mortgage, we are keenly aware that our military men and women face more complex challenges than many traditional homebuyers. Finding and connecting with a trusted source who can guide you through the VA home loan process is key. Our experienced professionals specialize in demystifying the VA home loan benefit and are attentive to the specific needs of veterans and military personnel as they proceed through the VA loan process. Our loan officers are always available to answer any questions you may have regarding VA home loans. 

Want to Learn More About The VA Home Loan Benefit?

Aligned Mortgage offers a free VA Home Loan Benefit Seminar every month, explaining the power of the VA benefit. Join Hawaii’s #1 VA Lender and learn how to use your BAH to build your legacy. Contact us today at 210.866.6900.

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