Mortgage Options for Veteran Home Buyers
The VA loan program may appear to be the most attractive option available to buyers. In most cases, it is. However, every home buyer’s situation is different, and veterans should ensure they research all mortgage options that are available, including those outside the VA program. Always consult an authorized lender to learn more about what is on offer for your unique situation.
Common Mortgage Types
If you are a qualifying veteran or service member or are the surviving spouse of a veteran, you have the option to take advantage of VA loans. One of the biggest advantages of VA loans is that they are available without any form of down payment and private mortgage insurance (PMI) monthly charges. According to the current VA loan stipulations, eligible veterans are permitted to hold two VA loans at any one time and can even secure a loan following a default. To be eligible for a VA loan, you will typically need to have a credit score of around 620. To access a VA, you will need to pay a funding fee, which is currently 2.15% of the total loan amount. However, anyone who is eligible for service-related disability compensation is not required to pay this fee. If you have experienced bankruptcy, foreclosure, or delinquency, the VA program may be highly advantageous to you.
Native American Direct Loans
The Native American Direct Loan (NADL) program is a special branch of the VA loan program that is focused on Native American Veterans and can be used to purchase property on Federal Trust Land. For veterans to access this form of loan, the tribal government that oversees the land is required to sign a
Memorandum of Understanding (MOU) with the Secretary of Veterans Affairs. This MOU clearly outlines the way in which the VA loan will be applicable to the trust land. NADLs have a funding fee of 1.25% of the value of the loan for first-time borrowers. Those wishing to refinance an existing VA loan will be charged a fee of 0.50%.
United States Department of Agriculture Loans
Apart from VA loans, the United States Department of Agriculture (USDA) loans are the only mortgage options that can come without a down payment requirement. However, USDA loans are notoriously difficult to secure. To access these loans, the buyer must be living in an area that is defined as rural according to the USDA requirements. In addition, there are income restrictions in place that stipulate that those applying for the loan should earn 115% or less of the property area’s median income.
To secure a USDA loan, buyers will be required to pay a 2.75% funding fee and 0.50% mortgage insurance.
Federal Housing Administration Loans
Federal Housing Administration (FHA) loans require a down payment of 3.5%, which is lower than that associated with the majority of conventional loans. However, one drawback of FHA loans is that they come with higher mortgage insurance fees than alternative loans. Specifically, the mortgage insurance fee is typically around 0.85% of the amount of the loan, while the funding fee is 1.75%. Of these fees, the latter needs to be paid upfront; however, it can be incorporated within the total loan. The mortgage insurance fee is charged on an annual basis, and the buyer will need to make the annual payment for the full duration of the loan.
When financial institutions lend money outside government-backed programs, they encounter a higher level of risk. It is for this reason that conventional loans are associated with higher down payments: To reduce their level of risk, lenders ask for more money to be paid up front. However, down payments are not necessarily a bad thing. When you make a down payment, you assume equity in the property.
Down payment requirements can be as low as 3% of the value of the property; however, they are more typically around the 5% mark. If you are in the fortunate position of having a 20% down payment, you can potentially eliminate the need for PMI. If not, you will be required to pay the mortgage insurance fees until you have built up equity to this level.
Every loan option comes with its inherent advantages and disadvantages. Service members and veterans are advised to work closely with the financial institutions that are available to find the mortgage that is right for their needs.