A common question from California Veterans when applying for a VA loan is “What is the VA Funding Fee?” The VA mortgage program has many benefits, including no down payment and no monthly mortgage insurance. There is one unique cost however, that is known as the VA Funding fee. The funds from this fee go directly to the VA to help cover potential losses on mortgages that default. The VA Funding Fee is based on a percentage of the loan amount that is dictated by the type of military service that the Veteran performed. Other factors that play a role in the size of your Funding Fee include whether you are paying a down payment or are a first time VA borrower. When it comes to paying the VA Funding Fee, the borrower has the option to either include the VA Funding Fee as part of the loan amount or to pay it in cash upon loan closing.
Example of First Time Use VA Funding Fee
In most cases the Veteran will choose to finance the VA funding Fee into the loan. For example, using the chart below, let’s assume a Regular Military Veteran is purchasing a $400,000 California home with $0 down payment and will be using the VA Home Loan benefit for the first time. The VA Funding Fee will be 2.15%. To calculate the VA Funding Fee, we multiply $400,000 x 2.15% to get $8,600. If the Veteran chooses to finance the Funding Fee, then the total VA loan will be $408,600. **(In 28 years of closing VA loans I do not remember a case where a Veteran chose to pay the VA Funding Fee out of pocket. But it’s possible.) **
Example of Subsequent Use VA Funding Fee
If a California Veteran uses VA financing at a later time, whether to purchase a different home or to do a VA cashout refinance, he would then be subject to a 3.3% VA Funding Fee if the down payment is less than 5%. Assuming the same $400,000 purchase price, but this time for a Veteran who had used VA financing previously, the VA Funding Fee would be $13,200 and the total VA loan would be $413,200. If the Veteran had the ability to put even just 5% down to make the base loan $380,000, the VA Funding Fee would only be 1.5% $5,700. So a “move up” buyer could save on the VA Funding Fee by putting at least 5% down.
It’s important to note that when refinancing to pull cash out, the VA Funding Fee will either be 2.15% for First Time Use(2.4% for National Guard or Reserves), or 3.3% for subsequent use. The loan to value of the refinance will not help or hurt the Funding Fee calculation.
This chart below lays out what the funding fee will amount to on a VA purchase loan:
This following chart shows you the funding fee percentage for VA cash-out refinances:
Can the VA Funding Fee be Waived?
For those Veterans with a service connected disability and disability rating issued by VA, the Funding Fee will be waived. Whether the rating is 10% or 100%, the Funding Fee will be $0. The VA Certificate of Eligibility will verify for the lender whether a Funding Fee will be required.
VA Funding Fee on an IRRRL
The VA Interest Rate Reduction Refinance Loan, or IRRRL, is a great way for a current VA borrower to take advantage of lower interest rates. There is no income documentation and no appraisal. It is a “VA streamlined refinance“. And to make it even better, the VA Funding Fee on an IRRRL is only .5%.
Authored by Tim Storm, an Orange County VA Loan Officer specializing in VA Loan. MLO 223456. – Please contact my office at the Home Point Financial. My direct line is 949-640-3102. www.CaliforniaVALoanExpert.com. I will prepare custom VA loan scenarios which will be matched up to your financial goals, both long and short term. I also prepare a Video Explanation of the your scenarios so that you are able to fully understand the numbers BEFORE you have started the loan process.
When it comes to financing a home in California, the options seem nearly endless. Even homeowners who’ve been through the process many times will tell you that it can be a challenging just trying to choose a lender. And each lender you speak with will have their own recommendations for what’s best for you. Because of this, many California Veterans who are perfectly eligible for a VA Loan, will frequently choose a non-VA loan. After spending more than 25 years helping Veterans finance their homes here in California, I can tell you that the most common reason for a Veteran choosing a non-VA loan product, is because the loan officer they worked with either didn’t know enough about the benefits or they simply didn’t offer it.
To be sure, many Veterans don’t understand the program well enough, or they may have been told that the process of obtaining a VA loan is too complicated or too expensive. If you are a Veteran who’s about to enter into the process of financing a home, the very best thing you can do is to get informed about how the VA Loan Program works. You need to become your own expert advisor. And if you want to avoid getting bogged down in the minutiae of program details, you might start with a more “bite-sized” approach like the Top Ten VA Loan Benefits for a California Veteran.
Let’s take a little bit of time to understand the primary benefits of using the VA Loan.
- Zero Down Payment
Most people have to save for many years to come up with a sufficient down payment necessary to buy their first home. That’s not the case for eligible Veterans or their surviving spouses. In most cases, this is absolutely the biggest benefit to the program. Even an FHA loan requires a minimum 3.5% down payment. On a $500,000 purchase, that’s $17,500. So if you haven’t yet saved up that kind of money, financing 100% of the purchase price could make a lot of sense.
- No Monthly Mortgage Insurance
You’re likely familiar with the term “skin in the game”. In the case of a Zero Down Payment loan, the homebuyer has no skin in the game. Statistically, when homeowner’s buy a home without putting any of their hard-earned savings into buying the property, they are more likely to walk away when unexpected events affect their household income. So Lenders impose something called Mortgage Insurance to offset the risk of that happening. Or at least, non-VA lenders do.
For example: Let’s say you’re buying a $500,000 home using an FHA loan with 3.5% down and 96.5% Loan to Value (LTV). You’d need to pay more than $300/month in addition to your mortgage payment. However, if you used your VA eligibility and financed 100% of that $500,000 purchase price, you would pay no Mortgage Insurance at all. That’s another Zero for you.
- Lower Rates than Conforming Loans
Not all 30 Year Fixed Rate Mortgages are created equal. As you begin your search for a suitable lender, you’ll begin to notice a difference in the interest rate lenders offer. Whether you’re looking at a Conventional Conforming, an FHA Conforming, or a VA Conforming 30 Year Fixed Rate mortgage, they all come with essentially the same terms; fully amortized with a fixed rate for the entire 30 years. However, one of the key differences is the rate offered on each.
Using our hypothetical $500,000 loan amount, a 0.25% discount to the rate works out to a little over $70 per month. That may not sound like much, but after a year, you save over $800. And after 30 years of making monthly payments on the loan, you would have saved approximately $26,000 in Interest. The choice is yours, you can either pay the bank that money, or use the VA Loan with a lower interest rate and save the expense altogether.
- Multiple Purposes
In the mortgage business, there are only 3 different types of transactions. Every time you finance a home, you will be engaged in one of these three types. You’re either buying a home, refinancing a current mortgage to improve your rate & terms, or you’re refinancing to take cash out of the equity in your home; a Purchase Transaction, a Rate & Term Refinance, or a Cash Out Refinance respectively. Unlike some other loan products (like the CalVet loan which can’t be used for refinancing), the VA Home Loan can be used for either of these transaction types.
The Purchase Transaction is pretty straightforward and is of course used for the purchase of a home using VA financing.
There are two types of VA refinance programs. Let’s look at the VA Cash Out Refinance. If your current mortgage is either a Conventional Conforming, or an FHA loan, you can use your VA Benefits to refinance your mortgage debt into a VA Loan. Many Veterans will use this approach to pay off non-VA loans, which often have costly Mortgage Insurance included into their monthly payments. In this situation, you might lower both the rate and the monthly payment AND get rid of your Mortgage Insurance at the same time. Even if you are not receiving cash “in hand” at the closing, VA considers the refinance of a non-VA loan into a VA to be “cash out”. If your home has appreciated in value since you bought it, you’ll have created Equity – skin in the game – in your home ownership. You can turn that equity into cash by refinancing with a VA Loan. This VA Cash Out Refinance is available to all eligible Veterans, even if your current loan is not a VA Loan. With this type of transaction, your home is now worth more than your current loan balance and you can use the VA Loan to borrower up to 100% of the value of the home, At the close of escrow, you will be issued the cash, which you can use for any purpose you choose. So if you have other debts at a higher interest rate, or you’re looking to make some home improvements, this option could be available to you.
And finally, no discussion of VA Refinance deals can be complete without talking about the Interest Rate Reduction Refinance Loan – “IRRRL“ (pronounced Earl). This is a Rate and Term Refinance since there is not cash out allowed. This is used when you’re refinancing an existing VA Loan in order to improve either your rate or your terms – or both. Remember when we said earlier that the mortgage process can be challenging for even the experienced home owners? Well, the IRRRL simplifies everything for eligible Veterans. In a normal mortgage transaction, applicants are required to provide their lender complete tax returns for at least 2 years, all W-2 Earning Statements for the previous 2 years, Paycheck stubs from the past 30 days, complete bank statements for the previous 2 months and a full appraisal. And that’s just to get your application in front of an underwriter. With an IRRRL, all of that goes away. It streamlines the process for Eligible Veterans, giving you a faster, less expensive and relatively stress-free option to improve the rate & terms of your mortgage debt. Read up on other facts about the IRRRL program here.
- Good for Condos
Some of the most affordable housing options for first time home buyers are condominiums. Both from a size and practicality standpoint, buying a condo when you’re young, gets you into the housing market. In many cities, a Condo might be your only affordable option. Unfortunately, many Realtors and lenders feel that financing a Condo with a VA Loan is either too difficult or can’t be done at all. One reason for this is that condominium projects must be approved by the VA before they can be financed with a VA Loan.
For all of these reasons, it’s important to work with a lender who is familiar with VA Approved condominium projects in your area. The VA keeps a list of all VA Approved Condo projects and that list is updated regularly. As a consumer, you (and your lender) have the ability to access this list and discover whether or not the Condo project you’re looking at is VA Approved. You can find that search engine here. All you need is the name of the project, the City, State & County, and you’ll be able to avoid a lot of unnecessary gridlock later on. You can even use this tool to find how many projects in your city are already approved by the VA. A California VA loan specialist can help with determining whether a condo project is VA approved. In Orange County there is a great website listing VA approved condos for sale.
- Surviving Spouses May Be Eligible
If you are the surviving husband or wife of a Service member who was killed in action, and you have not yet remarried, you can buy a new home with Zero Down Payment and no Mortgage Insurance using your fallen spouse’s benefits. Additionally, under these circumstances, your VA Funding Fee would also be waived. We’ll discuss the Funding Fee in more detail later. The VA Loan benefit was created to honor the debt of service our country owes Veterans. And although there’s no way to ever repay the debt paid by our fallen Service members, the program allows Surviving Spouses the opportunity to move forward after their loss. You can find more information about benefits for Surviving Spouses on the VA website.
- More Lenient Credit Guidelines
As our country continues to emerge from the “greatest recession since the Great Depression”, consumers all across the country are rebuilding their credit. Whether dealing with something as devastating as a Bankruptcy or a mortgage Foreclosure, or far more common like the overall Credit Score or a few late payments, VA Credit guidelines are among the most lenient in the mortgage industry. So when you go comparing lenders and the loan options they offer, a VA Loan makes it easier for eligible Veterans to get into a home loan.
Perhaps the best example of this can be demonstrated with Foreclosures. Consumers who have foreclosed on a property in the past, must wait 7 years before they can become eligible for Conventional Conforming financing. FHA guidelines require a 3 year waiting period, which is significantly better. However, the VA feels that Veterans need only wait 2 years before applying for a VA loan after foreclosure. Generally speaking, eligible Veterans who have experienced either moderate or significant credit challenges in the past, will have an easier time qualifying for a VA Loan. Again, the goal is to make home ownership accessible to eligible Veterans, and the VA Loan does exactly that.
- Potential Funding Fee Waiver
In order to offset the costs associated to offering the VA Home Loan program to eligible Veterans, the VA charges something called the VA Funding Fee. Depending on several variables, this Funding Fee can be as little as .50% or as much as 3.3% of the loan amount. While that may sound expensive, it’s important to keep in mind the objectives of the VA Home Loan program; to get more Veterans into homes without requiring a lot of money “out of pocket”. In other words, in most cases, this funding fee can be wrapped into the mortgage loan amount.
Some Veterans will not need to pay for the Funding Fee at all. If you are a disabled Veteran and part of your compensation is the result of a service connected disability, you may be exempt from the Funding Fee. A quick review of the Certificate of Eligibility will determine whether you are eligible for the Funding Fee Waiver. And one last point on the Funding Fee Waiver: Waivers can be given to more than just the Disabled Veteran. Spouses and Surviving Spouses of Deceased Veterans are also covered.
- Limit on Closing Costs
Since the VA Home Loan program involves a Veteran’s benefit, VA policy has evolved around the objective of helping Veterans use their benefit to buy a home when they might not otherwise qualify. In light of that goal, the VA limits the amount of fees that can be charged a Veteran to obtain a loan. More restrictive limits cannot be found with other types of loans.
One example of this is the Lender’s Fee. Unlike other loan products, the VA limits the amount a Lender can charge the Veteran to a flat rate of 1%. Additionally, there’s a list of Prohibited Fees, including Attorney’s Fees, Brokerage Fees, Inspection Fees and even some fees associated to appraisals In a Conventional Loan, these fees can add up to thousands of unexpected dollars, but are prohibited under VA guidelines.
- Reusable Benefits That NEVER Expire
Many Veterans believe that they can only use their VA Loan benefits once. However, the truth is far better. You can use your VA loan eligibility multiple times. many Veterans buy their first home when they are young and often single. And as their immediate family grows, so too do their needs for living space. When your family outgrows your current home, it begins to make sense to sell it and then buy a larger home that is better suited to meet your family’s needs. After you sell your home and pay off your original VA Loan completely, your VA Benefit entitlement is restored and you can use it again to buy another home. Even if you keep your home, Veterans can also receive a one-time restoration of benefits after they pay off their existing VA Loan. Even if you keep the home after refinancing into a Conventional loan, you can still receive this benefit restoration.
Saving the best for last, it’s crucial to know that your benefits Never Expire. So whether you served 10 years ago or 50 years ago, your VA Home Loan benefits never go away. The first step in home buying process is to retrieve your Certificate of Eligibility. The easiest way to do this is to have your California VA loan specialist retrieve your Certificate of Eligibility for you. You are also able to do it on your own by going to the the VA Benefits Gateway website and request a copy of your Certificate of Eligibility.
There are a lot of other real benefits available to eligible Veterans with the VA Home Loan program. And whether you’re a First Time Home Buyer, or a seasoned veteran of home ownership, the California VA Home Loan program may be right for you. Get informed about your eligibility, become your own best expert, and work with a Lender who is an expert in VA Home Loan financing in California.
Thank you for your service to our country.
Authored by Tim Storm, a California Loan Officer specializing in VA home Loans. MLO 223456. – Please contact my office at the Home Point Financial. My direct line is 949-640-3102. I will prepare custom VA loan scenarios which will be matched up to your financial goals, both long and short term. I also prepare a Video Explanation of the your scenarios so that you are able to fully understand the numbers BEFORE you have started the loan process.
The VA home loan program is an excellent program for California Veterans. California, which has one of the highest populations of Veterans in the country, also has some of the highest property values in the country. And this is one of the reasons why the VA program has been such a great benefit. ***This article has been updated on Feb 11, 2018 based on the 2018 VA Loan Limits)
No Down Payment Required
There aren’t too many programs these days that will allow a home buyer to get into a home with no down payment. VA is one of the very few. On top of that, when you look at any other low or no down payment program, there are huge monthly costs to cover the risk to the lender. Mortgage Insurance (MI), add’s cost to the monthly payment on Conventional and FHA financing. VA does not have a monthly mortgage insurance. The savings can be $100’s per month. For example, the current MI factor for an FHA loan (at the time of the writing, Feb 11, 2018) is .85% of the loan amount, divided by 12. So if a home buyer uses FHA financing to purchase a home for $453,100, not only do they need a down payment of $15,858 (3.5% of $453,100), but they will also have a monthly mortgage insurance payment of approximately $309. (Base FHA loan of $437,241 x .85% divided by 12) Also, the mortgage insurance on the FHA loan will remain on the loan for the LIFE of the loan. VA has no monthly mortgage insurance. In this example, the California Veteran would not have needed to come up with the down payment of $15,858, and also would not have the $309 mortgage insurance payment. In the first year alone the Veteran would save over $3,708 just in mortgage insurance.
The bottom line is this: A California Veteran should never let a loan officer or real estate agent convince them that FHA is better than VA.
The minimum FICO score requirements can vary from lender to lender. It is important to note that the VA home loan program is guaranteed by the Veterans Administration, but it is lenders, not VA, who actually underwrite and fund/lend the money for the loan. Not all lenders follow the official VA guidelines to a “T”. Some lenders require a minimum FICO score of 640 while some will accept 620. And some lenders will go as low as 580. The FICO score requirements can also vary based on the loan amount. Lenders will tend to be more flexible with FICO scoring for loan amounts under $453,100. But when the loan is above $453,100, then many lenders will require a higher FICO score. For example, a 640 FICO may be needed for a loan over $453,100
High Balance VA Home Loan
The High Balance VA home loan is fairly common in for California Veterans due to the high property values found in many of the counties in California. While most of the counties in the United States have a maximum loan limit of $453,100 with $0 down, California has many counties with VA home loan limits ranging from $463,000 all the way up to $679,650 in Alameda, Contra Costa, Marin, San Mateo, and San Francisco counties. Orange County and Los Angeles County each have a 100% VA financing limit of $679,650. This means that a California Veteran in Orange County can actually buy a home in Irvine (as an example) for up to $679,650 and not need a down payment. Zero Down. Almost hard to believe considering how tight the rest of the mortgage programs are right now.
The Jumbo VA home loan is an extension of the VA home loan. While VA sets the limits for 100% financing, it is possible to get a VA loan that is higher than the county limit. The Veteran would need to come in with a down payment equal to 25% of the difference between the 100% limit for the county and the properties purchase price. For example, a home in Orange County for $779,650 (yes, an equal $100,000 over the 2018 county limit – making it easy for example purposes) would need a down payment of $25,000, which is 25% of the difference between $679,650 and $779,650. The base VA loan would be $754,650. And when you think about it, it is amazing that a California Veteran can buy a home for $769,650 with less than 3.5% down payment and no monthly mortgage insurance.
The first step a California Veteran should take in determining if this is the program for them is to call a California VA loan specialist. The loan officer should be able to provide custom VA home loan scenarios that will show the purchase price, loan amount, payment (including principal, interest, taxes, and insurance), closing costs, and prepaid expenses. It is important that the Veteran is educated on the loan process prior to making an offer on a home. And is almost mandatory that the Veteran is Pre-Approved by the VA home loan lender prior to making an offer on a home.
Authored by Tim Storm, a California VA Loan Officer specializing in VA Loans. MLO 223456. – Please contact my office at the Home Point Financial. My direct line is 949-640-3102. I will prepare custom VA loan scenarios which will be matched up to your financial goals, both long and short term. I also prepare a Video Explanation of the your scenarios so that you are able to fully understand the numbers BEFORE you have started the loan process.