August 31, 2012

VA Mortgage Pros and Cons

If you’re a qualifying veteran or servicemember, a VA mortgage can be one of the best deals going. But is it always the best way to buy a home if other options are available?
VA mortgages offer a lot of benefits, including being one of the few ways you can still buy a home with no down payment. However, there are certain situations where you may be better off going with a different option, such as an FHA mortgage or a conventional loan backed by Fannie Mae or Freddie Mac.
Advantages of a VA Home Loan:
First, some of the advantages of a VA mortgage. The government guarantees at least one-quarter of the loan amount on a VA mortgage, which is why you don’t need to put up a down payment. It’s also why you don’t have to buy mortgage insurance, which is required on FHA loans and conventional mortgages with less than 20 percent down.
Closing costs are also limited on VA loans, with the lender’s fees limited to 1 percent of the loan amount and restrictions on the types of fees that can be the buyer’s responsibility. On the other hand, the seller may pay all closing costs plus an additional 4 percent in concessions, which effectively reduces the purchase price of the home.
In addition, the maximum you can borrow is typically greater than what you can get in an FHA or even conventional Fannie Mae or Freddie Mac loan. Although the standard loan limit is only $144,000, in reality you can borrow far more, up to $1,000,000 in certain high-priced markets. By comparison, the maximum you can get on an FHA or Fannie/Freddie loan in even the most expensive areas is $625,500.
Finally, if you eventually run into financial difficulty, it’s usually easier to obtain forbearance on a VA mortgage than on other types of home loans.

Downsides of a VA Mortgage:
On the downside, you do have to pay an upfront fee to obtain a VA loan, which varies from 0.5 percent to 2.8 percent of the loan amount, depending on your service background, down payment or whether you’ve previously obtained a VA loan. By comparison, the upfront fee on an FHA loan is a flat 1 percent. However, on FHA mortgages you have to pay mortgage insurance equal to as much as 1.15 percent of the loan balance annually, so the VA loan will still likely be the better deal.
Conforming loans backed by Fannie Mae or Freddie Mac don’t charge additional fees beyond the regular closing costs, but you do have to obtain private mortgage insurance (PMI) if you’re putting less than 20 percent down. However, if you are putting down 20 percent or more, a conventional mortgage could be the better deal.

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