It’s easy enough to look at the benefits of the VA loan program and label it the most borrower-friendly mortgage option out there. And for many veterans and military members, it’s absolutely that, although every person’s circumstances are different. But beyond VA loans, there are other mortgage options out there that could be a good fit. Talk with a lender about what mortgage product might work best for your specific circumstances.
Now let’s look at a few of the common types of mortgages.
Eligible service members, veterans and certain surviving spouses can take advantage of VA loans, which come with no down payment. They also eliminate any need for private mortgage insurance (PMI) every month. VA loan entitlement enables qualified veterans to have two VA loans at once or get another loan even after a default. Mortgage lenders often look for credit scores around 620 for VA loans.
The VA funding fee is 2.30 percent of the loan amount for most first-time homebuyers, but is not required for veterans who receive compensation for service-connected disabilities or Purple Heart recipients. Prospective borrowers who’ve experienced foreclosure, bankruptcy, delinquency or just fair credit may find the VA loan program may work for their needs.
Native American veterans are eligible for this program, which is a branch of the VA loan program, but can be used on Federal Trust Land. The land’s tribal government must sign a Memorandum of Understanding (MOU) with the Secretary of Veterans Affairs. An MOU delineates how the VA loan program will work on the trust land.
For NADLs, the funding fee is 1.25 percent of the loan value for first-time borrowers, and 0.50 percent to refinance a VA loan.
Besides VA loans, USDA loans are the only other no-down-payment mortgage option. However, these loans are not the easiest to attain. Borrowers are required to live in a rural area, as defined by the USDA. Income restrictions mandate that borrowers earn 115 percent or less of the property area’s median income. A 2.75 percent funding fee is due up front, and 0.50 percent mortgage insurance is paid annually.
At 3.5 percent, FHA loans’ down payment is lower than what’s required for most conventional loans. The downside to FHA loans lay in their mortgage insurance that’s more expensive than other loan options. The annual mortgage insurance is commonly 0.85 percent of the loan amount, and the funding fee is 1.75 percent, the latter of which is due upfront and typically added to your loan amount. The annual mortgage insurance charge is something FHA buyers now pay for the entirety of their loan term.
Outside of the government-backed home loan industry, lenders assume more risk. That’s a big reason why conventional loans tend to come with the highest down payments. Lenders want to curb the risk they’re assuming, so they require more money up front. There’s an upside to that: Equity. Once you’ve paid that down payment, you’ve earned equity in the property.
Conventional lenders often require a 5 percent down payment. Some may accept just 3 percent. Putting down 20 percent typically eliminates PMI, otherwise you may have to pay this cost until you build sufficient equity.
On the whole, for veterans and service members interested in homeownership, each mortgage option has its pros, cons and opportunities. Work with a loan officer to determine which mortgage option fits your circumstances.