A Comprehensive Guide on Understanding the Cost of a VA Loan and How to Save
Greetings, dear reader! If you’re a veteran or an active-duty military member looking to buy a home, a VA loan is often the most affordable and attractive financing option available. However, like any other loan, you need to factor in the cost of a VA loan before you apply or sign on the dotted line.
Therefore, in this article, we’ll discuss everything you need to know about the cost of a VA loan, including the current VA loan rates, fees, closing costs, and other expenses involved in the process. Additionally, we’ll provide you with some tips that can help you reduce the cost of your VA loan, so you can save money and make your dream of homeownership a reality.
So, let’s begin by understanding what a VA loan is and how it works.
What is a VA Loan?
VA loans, also known as Veterans Affairs loans, are mortgages backed by the Department of Veterans Affairs (VA), which are designed to help veterans, active-duty military members, National Guard, and eligible surviving spouses purchase, build, or improve a home. VA loans offer numerous benefits, such as no down payment, lower interest rates, no private mortgage insurance (PMI) requirement, and flexible credit and income requirements.
However, VA loans are not entirely free, and borrowers may have to pay certain fees, closing costs, and other expenses, as we’ll discuss below.
What are the Current VA Loan Rates?
Loan Type |
Interest Rates |
|---|---|
Purchase Loans |
Starting from 2.25% |
Refinance Loans |
Starting from 2.25% |
The current VA loan rates are subject to change, and they depend on several factors, including the loan amount, type, term, credit score, and the lender’s underwriting criteria. However, VA loans typically offer lower interest rates than conventional loans, which can save you thousands of dollars over the life of your loan.
What are the Fees Associated with a VA Loan?
VA loans typically come with a funding fee, which is a one-time charge that varies based on the loan amount, type, down payment, and whether you’ve used your VA loan benefits before. The funding fee helps offset the cost of the VA loan program and enables the VA to make more loans with fewer taxpayer dollars.
The funding fee for a VA purchase loan ranges from 1.4% to 3.6% of the loan amount, while the funding fee for a VA cash-out refinance loan ranges from 2.3% to 3.6% of the loan amount. However, some borrowers may be exempt from paying the funding fee, such as those who receive VA disability compensation or surviving spouses of veterans who died in service or from a service-connected disability.
What are the Closing Costs of a VA Loan?
Just like any other mortgage, a VA loan comes with closing costs, which are the fees and charges associated with the loan transaction. Closing costs can include origination fees, appraisal fees, title search and insurance fees, recording fees, and other expenses.
Typically, closing costs for a VA loan range from 2% to 5% of the loan amount, and they can be paid by the borrower, the seller, or shared between them, depending on the terms of the purchase agreement.
What are the Other Costs to Consider?
Aside from the interest rates, funding fee, and closing costs, there are other expenses involved in a VA loan that borrowers need to factor in, such as:
Home Inspection: A home inspection is a crucial step in the homebuying process that can help you detect any potential issues or repairs that may cost you money in the long run. A home inspection can cost between $300 and $500, depending on the location and size of the property.
Appraisal: An appraisal is an assessment of the property’s value by a licensed appraiser. An appraisal can cost around $500, depending on the location and complexity of the property.
Moving Costs: Moving costs can vary depending on the distance, size, and weight of your belongings, as well as the moving company you choose. The average cost of a long-distance move within the US is around $4,000.
How to Reduce the Cost of Your VA Loan
Now that you know the cost components of a VA loan let’s dive into some tips that can help you save money on your VA loan:
1. Improve Your Credit Score
Your credit score is one of the most critical factors in determining your VA loan interest rate. By improving your credit score, you may qualify for a lower interest rate, which can save you money over the life of your loan. You can improve your credit score by paying your bills on time, keeping your credit balances low, and disputing any errors on your credit report.
2. Shop Around for Lenders
Not all lenders offer the same interest rates, fees, and closing costs, so it’s essential to shop around and compare at least three to five lenders before choosing one. By getting multiple loan estimates, you can compare the total cost of each loan and choose the one that offers the most favorable terms.
3. Consider a No-Closing-Cost Loan
If you don’t have enough cash to pay for the closing costs upfront, you may consider a no-closing-cost loan, which allows you to roll the closing costs into your loan balance or pay a slightly higher interest rate in exchange for a lender credit that covers the closing costs. While a no-closing-cost loan may sound like a good deal, keep in mind that it may increase your overall loan costs over time.
4. Use Your VA Entitlement Wisely
Your VA entitlement is the amount of home loan guaranty that the VA will provide to your lender in the event you default on your loan. By using your entitlement wisely and not maxing it out, you may be able to save money on your VA loan. For example, you can choose to put a small down payment to reduce the loan amount or use a portion of your entitlement to refinance an existing VA loan.
5. Avoid PMI with a VA Loan
Unlike conventional loans, VA loans don’t require private mortgage insurance (PMI), which can save you hundreds of dollars per month. PMI is typically required for borrowers who put less than 20% down on a home, and it can add a significant cost to your monthly mortgage payment.
6. Consider a Shorter Loan Term
A shorter loan term, such as a 15-year fixed-rate mortgage, may result in a higher monthly payment, but it can save you thousands of dollars in interest over the life of your loan. Additionally, shorter loan terms often come with lower interest rates, which can further reduce your overall loan cost.
7. Refinance Your VA Loan
If interest rates have dropped since you took out your VA loan, you may consider refinancing your loan to lower your monthly payment and save money on interest. Additionally, you can refinance your VA loan from an adjustable-rate to a fixed-rate loan to lock in a stable interest rate.
FAQs about VA Loan Cost
1. Do I need to pay a down payment for a VA loan?
No, VA loans don’t require a down payment for qualified borrowers.
2. What is the minimum credit score for a VA loan?
The VA doesn’t have a minimum credit score requirement, but most lenders require a credit score of at least 620.
3. Can I use a VA loan to buy a second home?
No, VA loans are only for primary residences.
4. Can a surviving spouse of a veteran qualify for a VA loan?
Yes, surviving spouses of veterans who died in service or from a service-connected disability may be eligible for a VA loan.
5. How much can I borrow with a VA loan?
The VA doesn’t set a maximum loan amount, but there are limits on how much the VA will insure, which vary by county and property type.
6. Can I use a VA loan to buy a fixer-upper?
Yes, VA loans offer a renovation loan option called the VA Renovation Loan that allows you to finance the purchase and repair or improvement of a home in one loan.
7. Can I get a VA loan if I have a bankruptcy or foreclosure on my credit report?
Yes, you may be eligible for a VA loan after a bankruptcy or foreclosure, provided you’ve re-established good credit and meet other VA loan requirements.
8. What is the average closing cost of a VA loan?
The average closing cost of a VA loan is between 2% and 5% of the loan amount.
9. Is the VA funding fee tax-deductible?
No, the VA funding fee is not tax-deductible.
10. Can I pay off my VA loan early?
Yes, you can pay off your VA loan early without any prepayment penalty.
11. What is the VA Loan Guarantee?
The VA Loan Guarantee is the amount of the VA’s commitment to repay your lender if you default on your loan. The VA loan guarantee is typically 25% of the loan amount, up to the county loan limits.
12. Can I use a VA loan to buy a rental property?
No, VA loans are only for owner-occupied properties.
13. Can I use a VA loan to build a new home?
Yes, VA loans offer a construction loan option called the VA Construction Loan that allows you to build a new home with your VA loan benefits.
Conclusion
In conclusion, a VA loan can be an affordable and accessible way for veterans and active-duty military members to achieve their homeownership dream. However, like any other loan, it’s essential to understand the cost of a VA loan and how to save money throughout the process.
By following our tips, such as improving your credit score, shopping around for lenders, considering a no-closing-cost loan or a shorter loan term, using your VA entitlement wisely, avoiding PMI, and refinancing your VA loan, you can cut the cost of your VA loan and keep more money in your pocket.
If you have any questions or need further assistance with your VA loan, don’t hesitate to contact a VA-approved lender or seek guidance from the Veterans Affairs office in your area.
Disclaimer
The content of this article is for informational purposes only and does not constitute professional financial advice. The writer and publisher are not liable for any losses or damages that may arise from the use of this information. Consult with a qualified financial advisor or a VA-approved lender before making any financial decisions related to a VA loan.