Dan Marchiando's Mortgage News Blog

VA Loans Remain a Viable and Affordable Option

Veterans Affairs (VA) guaranteed loans used to be of little use in higher-cost areas of California, especially in the tri-counties of Santa Barbara, Ventura, and San Luis Obispo counties where home prices usually have been too high to work with the previous low loan amounts possible with the VA guarantee. But all that changed couple years ago, when the limits were raised. Now VA loans are possible up to $1,000,000 (see the chart following). And VA loans can be used by retired vets or people in active military duty, and by veterans of the Reserves and the National Guard. VA loans are used when the borrower doesn’t have the traditional 20% down payment saved; they aren’t necessary or used when the vet has a 20% or greater down payment.

For background, the VA does not actually make loans, and they do not subsidize the interest rates of loans made to veterans. But the VA does make guarantees to mortgage lenders, for loans that lenders make to qualified vets. The government’s guarantee is the incentive or icing that motivates lenders to make VA loans. And currently lenders also likely find it attractive, and perhaps politically-correct and patriotic, to be seen making loans to vets. Plus, the strength of the government guarantee is currently probably considered stronger than the strength of the insurance available from battered private mortgage insurance companies. VA loans typically have rates nearly identical to rates available to conventional borrowers; the rates are usually no worse and no better than rates on comparable government-insured FHA loans, or private-insured Fannie Mae or Freddie Mac (Conventional) loans.

VA guaranteed loans involve a “Funding Fee,” that is paid to the VA, to guarantee the loan. The fee is due up-front at loan origination, and the amount varies based on the amount of the vet’s down payment. If the vet puts no money down (assuming they qualify), then the funding fee is 2.15% of the loan amount. If the vet puts 5 to 9% down payment, then the Funding Fee drops to 1.50%, and if the vet puts a down payment of 10% or more, then the funding fee drops to 1.25%. (The fees are slightly higher for Reserves and National Guard) The fee can be added to the loan amount (assuming once again that the vet qualifies), or it can be paid at the sale/loan closing by the buyer, the seller, or by the lender making the loan. I recently priced a loan for a vet client who had 10% down payment saved, and the vet loan was much cheaper than a privately-insured Conventional Fannie or Freddie loan, and way cheaper than the FHA insured loan. And, in my scenario, the rate was an attractive 5%, and the lender would pay the Funding Fee, and there were no additional points needed.

If you or someone you know is a California vet, in active military service, or is in the Reserves or National Guard, please call or email me to inquire about vet and VA loans in California. Thanks for your interest! Dan