If you are a veteran or active military service member, you have the choice of financing your home through the Department of Veterans Affairs via a VA loan, or through a conventional or FHA loan. The VA loan program offers several significant benefits to home buyers who qualify. However, there are times when a conventional loan may be better, depending on the specifics of your situation.
No Down Payments
The primary benefit of the VA loan program is the ability to buy a home with no money down. Unlike conventional loans that require mortgage insurance on any loans for over 80 percent of a house’s value, VA loans do not require any mortgage insurance. The program does charge buyers a funding fee, but it can be rolled into the loan, meaning the new VA mortgage on a zero down-payment transaction would be for more than the purchase price on the house. In addition, the VA sets restrictions on closing costs, so your actual out-of-pocket costs for the purchase will be minimal. If you are a veteran and don’t have a large chunk of money available for a down payment, VA is the best loan program to use.
Only for Owner-occupied Homes
The VA established its loan program for the expressed intention of putting more veterans into homes. Thus, the program is only available for the purchase of an owner-occupied home. A veteran who wants to buy a property as an investment will need to do so with a conventional loan. The one exception is for active service members stationed away from their long-term place of residence. If you already have a VA loan on a home but want to move without selling your previous home, you have two options. You can buy another house with a conventional loan and keep the VA loan on the previous home intact. Or you can first refinance out of the VA loan, thus regaining your eligibility to use a VA loan for the new purchase.
Interest Rate Reduction Refinance Loans
The VA offers a streamlined refinance program, so those with established VA loans can take advantage of lower interest rates. Qualification requirements are reduced, and refinancing often is possible without requiring a new appraisal. Thus, even if you your income is less, or the value on your home is lower than when you first got the loan, you may be eligible for this streamlined refinance. The VA funding fee for this program also is reduced.
Full Refinances Including Cash-Out
Since the VA’s goal is to promote home ownership for veterans and active service members, its terms for refinances (excluding IRRRLs) are not as favorable as for purchase loans. The funding fee increases dramatically for full refinances, especially when taking cash out of the property. If you need to access the equity in your house via a cash-out refinance, a conventional loan is probably a better option. An exception would be if the cash you need exceeds 80 percent of the value. Conventional loans do not allow for cash-out refinances above 80 percent loan-to-value, while a VA loan permits up to 90 percent.
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