Perhaps the absolute best home loan option for those who qualify and want to come to the settlement table with as little out-of-pocket cash as possible is the VA home loan. The VA loan doesn’t need a down payment and is one of only two such government-backed programs with this feature. The other option is the USDA program but there are geographic and income limitations for the USDA loan. There are no such restrictions with a VA mortgage.
In addition, there is no monthly mortgage insurance premium paid. Mortgage insurance funds an insurance policy that compensates the lender for part or all of a loss due to default. VA loans do carry a guarantee to the lender at 25 percent of the loss and is financed with what is referred to as the Funding Fee. This fee is rolled into the loan amount and is not paid for out of pocket. So, what’s new with the VA loan in 2020?
Speaking of the funding fee, that’s one of the changes borrowers will see. For those using the VA program for the first time and using the zero-down option, the funding fee goes from 2.15% to 2.3% and for subsequent use, the funding fee rises from 3.3% to 3.6%. For borrowers who choose to make a down payment and use the VA loan, the funding fee is 1.65% with a down payment of 5.0% and 1.4% with a down payment of 10% or more. Further, the distinction between active duty and Reserves or National Guard has been eliminated. For 2020, they all pay the same rate. There are also those who are exempt from paying this fee. Those exempt include veterans receiving VA compensation for service-connect medical issues. For 2020, this exemption now extends to those actively serving and awarded the Purple Heart.
Perhaps the biggest change for 2020 is the new VA loan limit, or perhaps the elimination of VA home loan limits. In the past, the VA loan limit mimicked the conforming loan limit. For 2020, conforming loan limits for most parts of the country for a single-family home is $510,400 which would have made the VA limit $510,400 for a zero down loan. In the past, borrowers would have to make a down payment of 25% of the amount over the conforming limit but that is no longer the case for 2020. Note however that just because the VA has eliminated loan limits does not mean individual lenders no longer have a limit. If you’re thinking of buying in this price range, it’s important to contact me first to go over the details.
It’s also important to point out that just because these changes have been implemented doesn’t also mean other aspects of a VA loan approval have changed as well. You still have to be approved based upon credit and employment history as well as provide evidence you have enough cash to cover the closing. Even though there is no down payment requirement there are still various fees that need to be covered and for those that you are allowed to pay, we need to make sure you have available funds in an account you own.
The easiest way to document this is with recent copies of your bank or investment statements. Again, with a simple phone call or an email, I can provide you with a list of potential costs we’ll need to address. Note here too, VA borrowers are restricted from paying certain kinds of closing costs, another big VA advantage.
There are several positive features with the VA program, but it may not always be your best option, even though you’re eligible for the program. Primarily if you have a down payment of 10% or more, it would be wise to consider other options and compare. That’s my job, to gather information from you, review and prepare several options from which to choose. When coming to the table with such a down payment, a conventional loan might also be considered. Remember, with a VA loan, there will still be a funding fee required which will be added to your loan amount. It’s not a lot relative to your loan but an increase nonetheless.