Monthly Mortgage Insurance and Other VA Loan Features

Shannon Hubbard from BlogArizona.Com left a really great comment on my post “The VA Loan: Perfect 100% Home Financing for Veterans“. I had always intended to follow upon on these points but she covered it for me. So, I’m going to use her comment and elaborate where I may be able to add  some value.

The VA Funding Fee

The only thing I don’t like about VA loans is that you have to pay a funding fee of around 2-3% (it varies depending on your circumstances, and I haven’t kept up with it, so don’t quote me on that number!).

She’s right. The VA does charge a funding fee and it varies depending on how much you put down, if this is the first or second time you’re using the VA loan and whether it’s for a purchase or a refinance. For example, if you are doing a  purchase with no money down then you’re looking at 2.00% fee, and its 2.75% if you’re a Reserve/National Guard vet.

If you are using the VA loan for a second time and are not putting less than 5% down, then your funding fee is 3.00%.  Refinancing an existing VA loan only costs your 0.5%, but if you’re refinancing from a non-VA mortgage then the charges are exactly that of a purchase. There are additional variances as well, so make sure to review them with your lender as you discuss the costs of the loan.

Regarding the funding fee Shannon makes a good point in her comments:

The funding fee can be financed into the loan, so you don’t have to pay it up 
front. But veterans who have a service connected disability do NOT have to pay the  funding fee.

This is an important point. The VA certificate of eligibility will specify the kind of disability you have and consequently you may not be required to pay the funding fee. I recently was able to do this for a borrower. It saved them thousands of dollars.

No Monthly Mortgage Insurance on VA

…with a FHA 3% down loan, I think you still have to pay mortgage insurance, which you don’t with a VA loan…

This is an important distinction for the VA loan. With the FHA loan you have to pay monthly mortgage insurance regardless of how much your are putting down (unless it’s a 15-year loan). With the VA you do not have to pay monthly mortgage insurance. So, I guess the hefty funding fee is used to insurance the loan and relieve the borrower of a monthly obligation. A nice benefit if you’re torn between an FHA and VA loan.

Regarding Appraisals

Also, as you mentioned, the appraisal standard is a bit tighter with VA loans. VA appraisals look more closely at certain aspects of the property’s condition. The main things I see VA appraisers call out are broken windows and peeling exterior paint.

When it comes to the Appraisal the VA works a bit differently. Once we have the loan application complete we notify the VA office for an appraisal. They will then assign their own appraiser. The lender has no ability to influence the selection. Additionally, the VA frowns upon lenders or real estate agents contacting the appraiser once the appraisal has been completed. Consequently the appraisal is also tighter with more annotations, notes and observations. The VA is very careful about this and likes to make sure the collateral is in great shape.

I want to thank Shannon for taking the time to comment and also for spurring this conversation. For those who dont’t know, Shannon and her husband Scott are great home inspectors. You should head on over to their blog to learn more.

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