One of the most important things a borrower can do when considering the purchase of a new home is to compare loans, loan types and loan options.
Once you begin making these comparisons, it's easy to see why many veterans choose a VA guaranteed mortgage as opposed to a Federal Housing Administration mortgage loan or conventional mortgage. VA loans feature some of the best down payment options for qualified borrowers.
Conventional lenders require down payments of at least 3 percent, and more commonly lenders require 5 percent down or more. Borrowers with bad marks on their credit can struggle to qualify for conventional financing. A mediocre credit history can negatively affect interest rates and other loan terms available through conventional mortgages.
Ultimately, to get the best terms for the life of a traditional mortgage loan, borrowers may need excellent credit and to make a down payment in the 20-percent range. Unless borrowers put down such a large sum of money, their conventional loan will feature private mortgage insurance (PMI).
When you compare FHA loans to conventional mortgages, the government-insured loan does provide a much better down payment minimum of 3.5 percent. But mortgage insurance for FHA loans is usually the highest in the housing market. Mortgage insurance figures into the monthly payments for the life of a loan, and it can make the loan substantially more expensive in the long run.
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VA mortgages are available for no money down for qualified borrowers, and never have any private mortgage insurance (PMI). The no-money-down VA-insured mortgage gives borrowers dealing with tight budgets more flexibility in the all-important early years of the home loan.
Although about 90 percent of borrowers use VA loans with no down payment, there’s a perk to paying down as little as 5 percent. Once a VA loan borrower puts down at least that amount, the VA Funding Fee shrinks. For a first-time VA loan borrower, the funding fee is typically 2.15 percent with no money down. But if that borrower makes a 5 percent down payment, the fee drops to 1.5 percent of the loan’s value. The fee dips again if borrowers pay down 10 percent or more.
Conventional, FHA and VA loans allow borrowers to use gift funds toward down payments and closing costs. The gifted money needs to come from somebody or some entity close to the borrowers. Lenders want paper trails for the gift money, which means you can’t just have someone hand you a bunch of cash for your loan closing. Nobody involved in the VA loan process can gift you money for these purposes.
Most lenders require a letter when gift funds are used for down payments and closing costs. The letter needs to include the donor’s information, relationship to the borrower, details about the gift amount and transaction, plus legal phrasing that specifies no repayment is necessary.
Lenders may have their own guidelines and requirements for gift funds. Talk with your loan officer for more information.