Andrew Vierra, VA Home Loan Specialist and Branch Manager with WealthWise Mortgage Planning and VALoansOfCalifornia.com, discusses FHA financing, how veterans end up in it and the effect it has on buying power.
So many times when I am talking to veterans who have bought a home and they’re not in VA, they are in FHA financing. When I asked them, “How did you end up in FHA when you were eligible to use VA at the time?”
A majority of the time, they say that the real estate agent or lender told them they could use VA financing, but sellers aren’t particularly interested in this type of financing.
They are told that sellers tend to like FHA financing more because they understand it and that there are a lot of issues with VA. Leading them to ask them to come up with 3.5% for a down payment, so they could put them FHA financing and hopefully get their offer accepted sooner.
Well, nobody wants to wait around to buy a house! When you’re ready to buy a house, you’re going to buy a house so you choose to go FHA financing.
Once you’re in FHA financing, a few things happen as a result. One, your buying power has been reduced by 13-15% because you’re paying an additional fee with FHA financing called mortgage insurance. Now, while you may have got into your home, that additional fee means that you have a higher payment even though you put money down.
And two, let’s say that you’re buying a $300,000 home. In the first three years, your out of pocket cost between the down payment and mortgage insurance is almost $15,000 more with FHA than if you were to use VA financing. This means more money out of your pocket and less buying power. Who wants that?!
If you go with VA, there’s a lot of reasons to do it:
- Lower interest rate
- No mortgage insurance
- Lower monthly payment
- $0 closing cost possibility
If you want the option of getting in with no money out of your pocket or no closing costs
net out of your pocket is that somebody else has to be paying those closing costs on your behalf. There’s always closing costs with a loan. Those costs would be underwriting and processing with a lender, an appraisal, along with title and escrow fees. You have one time fees with every loan. VA has it. Conventional has it. FHA has it.
With the VA home loan, you are allowed to get somebody else to pay those costs. Traditionally, the seller was required to pay those costs on your behalf, causing them to steer you away from using VA financing. However, that is no longer the case. You have the ability to pay the costs, while using your VA home loan benefit, and the seller is not out any more money.
As of January 1st of 2020, with the Blue Water Vietnam Veterans Act, if you have full entitlement to use your VA loan, you can buy a house with no money down. If you search for county loan limits, those are there. FHA puts limits on how much you can buy and your loan amount. With VA, there is no cap. For us, we can actually go up to $2 million on a loan amount with certain restrictions. Of course not everybody is going to buy up that high, but that’s how high we can go.
Along with that, the VA loan is easier to qualify for and there is no prepayment penalty. Another bonus of the VA home loan benefit is that the loan is assumable anyone. It does not have to be a veteran. This means that anybody can work with the lender you’re making your payments to, and they could take over your payments if they qualified to do that.
And finally with the VA loan, if you want to do a refinance down the line and you want to lower your rate in payment, you can use the Interest Rate Reduction Refinance Loan (IRRRL). In order to use the IRRRL, you must be able to lower your interest by at least 0.5% compared to where you start and it is a super easy process! At this point, there’s no income qualifying, appraisal, etc. so the process can be quickly streamlined.
If you are having issues making payments, the VA is there to help you. And if you want to refinance down the line, you can refinance with no equity, meaning you could do 100% financing.
Don’t keep this information a secret! Share it with your battle buddies. An remember, when it comes to the VA home loan benefit, the answer is no if you don’t ask, so please just ask!