VA Insured Loans: No Down Payment Required, But A Good Deal?

VA insured loans do now require a down payment or private mortgage insurance. But it might be difficult for veterans to enjoy these benefits.

Veteran's Administration (VA) insured mortgages are the only mortgages available with a zero down payment required. And lenders cannot require private mortgage insurance (PMI) because the loans are already insured by the VA for up to 25 percent of their value. Despite these incentives, are VA backed mortgages really a good deal?

Qualified but Denied

It would seem that the obvious answer to the question would be a resounding yes. However, according to an article in The Press-Enterprise, at least some veterans are finding that this benefit for their military service is not so beneficial. The Press-Enterprise story highlights the plight of the Southern California family of Jonathan HoSee, a master sergeant in the Marine Corp with 20 years of service. He and his family meet all of the eligibility requirements for a VA backed mortgage. Yet their offers on two homes were declined. Here's why.

Conservative Appraisals

The VA only insures loans, it doesn't not fund them. So veterans must go through the regular channels of finding a property, a Realtor, and a lender, just like everyone else. But beyond that, the VA requires that property under consideration be inspected by independent appraisers that work at the behest of the VA. The appraisers are assigned on rotation so that there is no bias, but some claim that this method also results in low-ball assessments of a property's value due to lack of local familiarity. Even when familiarity is not an issue, VA appraisers are reputed to appraise conservatively. This is exactly what happened with both the homes on which HoSee submitted offers. The VA appraisals came in far below what the the sellers were asking, and the sellers rejected the offers. One of these houses was appraised by the FHA, another federal insurer, for $55,000 over the VA appraisal, not a trivial amount on a home whose asking price is in the mid $300,000s.

Comps and Conditions

A further twist in the appraisal mix is that unlike the FHA, which has a program to fund the purchase and repair of fixer-uppers, the VA does not. Veterans are on the sidelines in the current market, which has many good deals on foreclosures that are in less than pristine condition. Even when the VA gives a property a green light appraisal, they do not advocate for the buyer if the property is later found to have problems. In other words, the VA program is inspecting for comparable value, not for condition, yet will deny to insure based on condition. FHA appraisals always include checking the condition / habitability of the home.

VA or FHA?

If you are a veteran looking for a home, you may be wondering whether to forgo your VA benefit and instead apply for an FHA-insured loan. There are several major differences between a VA-backed mortgage and one insured by the FHA.

To reiterate, with a VA mortgage there is no down and no PMI, both of which apply to FHA backed loans. VA insured loans do require a funding fee of between one and a half and three and a half percent; however, the funding fee is rolled in to the mortgage, so you do not bear that cost out of pocket at the beginning of the loan.

A second difference is that with a VA insured loan, you must meet all the lender's requirements for credit and income. The FHA has more tolerance for lower credit and allows income from more sources.

A third and crucial difference is that FHA-insured loans require an upfront insurance payment plus monthly insurance payments (MIP) while VA funding fees are one-time deals.. VA mortgage benefits can be used over and over, as long as one loan is completely paid off before the next one is begun, allowing you to move up to a better house or a better neighborhood more than once without ever having to come up with a down payment. many FHA borrowers are finding that the program still works best for them even if they are no longer first-time buyerss.

A final difference is the home loan limits for which the VA and FHA insure. The VA insures up to 25 percent of loans based on loan limits by county. Check http://www.homeloans.va.gov/docs/2009_county_loan_limits.pdf for details. The FHA also limits its loan amounts depending on location. Of course, this does not limit the price a property you can purchase, only how much the FHA will insure. The amount of your down payment will determine how much house over its limits you can buy.

Use a Loan Calculator to Analyze your Options

So, how do your decide what is your best option? You can use loan calculators to do all sorts of analysis. Start with a prequalification calculator to find out a ball park range in which to look for a home. Do some what if's with hypothetical VA and FHA loans with a mortgage calculator. You might want to look at an amortization calculator too, to see how much you could save by paying off your loan ahead of time if you become able to down the road. Only by understanding your options before you buy can you really get the best deal.

Posted By :
Lorraine Watkins is a regular contributor to business and education websites. She is a notary in California specializing in loan documents. She holds an MA in English from California State University, East Bay.

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