VA Loan Overview
The U.S. Department of Veterans Affairs (VA) guarantees loans made by qualified lenders, such as Navy Federal, to eligible servicemembers, including Active Duty personnel, veterans, reservists, National Guard members, and sometimes, surviving spouses who haven’t remarried. Because the VA backs a portion of the loan, lenders can offer more favorable loan terms for new home purchases and refinancing.
The VA charges borrowers a one-time funding fee to help cover losses on the few VA loans that go into default, which is when borrowers are unable to pay back their loans. Fees range from .50-3.6% of the loan amount. Your lender can include this fee in your loan. You can reduce the amount of the fee by putting at least a 5% down payment on the house purchase. Some veterans receiving VA disability compensation may be exempt from this fee.
Benefits of a VA loan include:
- less money up front: VA loans allow you to finance 100% of the home’s sale price, which means you don’t need to dip into your savings for a down payment.
- no private mortgage insurance (PMI): You won’t have to worry about the monthly cost of PMI, as VA loans don’t require this type of coverage. Most lenders require PMI on conventional loans with a down payment less than 20%.
- lower closing costs: The VA helps keep borrowers’ upfront costs in check with restrictions on how much lenders can charge in closing costs.
- no prepayment penalty: You can make extra payments on your mortgage in order to pay it off early without penalty.
- VA assistance to veteran borrowers: If financial difficulties get in the way of you making your mortgage payments, the VA has loan specialists who can help you work with your lender to avoid foreclosure.
VA Option Clause
The rules of a VA mortgage stipulate that the VA won’t fund a home loan for more than the appraised value of the home. So you aren’t stuck paying the difference between the appraised value of your home and the loan amount, make sure to include a VA Option Clause in your purchase and sales agreement. Here’s the “escape clause” the U.S. Department of Veteran Affairs recommends:
It is expressly agreed that, notwithstanding any other provisions of this contract, the purchaser shall not incur any penalty by forfeiture of earnest money or otherwise be obligated to complete the purchase of the property described herein, if the contract purchase price or cost exceeds the reasonable value of the property established by the Department of Veterans Affairs. The purchaser shall, however, have the privilege and option of proceeding with the consummation of this contract without regard to the amount of the reasonable value established by the Department of Veterans Affairs.
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