In honor of Memorial Day, The Motley Fool salutes current and former military personnel and their families with a series of articles addressing common financial issues they face. Check out all of the Fool's Memorial Day articles.
Those who have risked their lives in serving our country deserve the best treatment. Yet what used to be a good deal for veterans and current military personnel has lost much of its luster.
The Veterans Administration has programs for current and former members of the military to help them get financing to buy a home. Serving in the military generally makes you eligible to take out a VA loan.
The VA itself isn't a lender. Instead, military members can go to traditional lenders, including banks and mortgage brokers, to obtain loans. Many lenders participate in the VA loan program and therefore offer these mortgages, which have a number of attractive features.
For many, the most attractive feature of VA loans is that you can finance up to 100% of the cost of your home while obtaining some of the benefits of having made a substantial down payment. The VA provides a guarantee of part of the loan amount, which may help you get a loan you otherwise might not qualify for.
There are several other useful features of VA loans. Even with a 100% loan, you won't need to pay for private mortgage insurance (PMI). Mortgages are assumable, and there aren't any prepayment penalties. In addition, the VA offers assistance to borrowers who suffer temporary financial difficulties that force them into default on their mortgages. With the number of people facing default problems, this assistance can be extremely valuable.
Not what it used to be
As attractive as these features are, VA loans aren't as good a deal now as they were in the past. Innovations in the mortgage industry have made it possible for many borrowers who don't qualify for traditional mortgages to get financing. Borrowers can borrow more than 80% of their purchase price and still avoid PMI by taking out a second mortgage. In short, the features that used to give VA loans an advantage over other mortgages are now available from many sources.
More importantly, military members now have to pay funding fees to obtain VA loans. The fee varies depending on whether or not you make a down payment. For purchase loans, if you make no down payment, the funding fee is 2.15% for regular military veterans and 2.4% for reservists and National Guard members. With a 5% down payment, these fees drop to 1.5% and 1.75%, respectively. Even though the VA allows you to finance the fee amount over the lifetime of the loan, these fees offset many of the benefits of VA loans.
What to do
If you're a veteran or currently serving in the military, consider all your options. It may be that a VA loan gives you the best combination of flexibility and savings. On the other hand, a motivated mortgage broker or bank loan officer might find you other programs that have better features. Depending on your particular situation, you may qualify for better rates and terms from other loan programs, such as those that Fannie Mae (NYSE: FNM ) and Freddie Mac (NYSE: FRE ) offer. In addition, your state may have first-time homebuyer programs that provide similar benefits. By understanding all the financing choices available to you, you can choose whatever option will work best for you and your family.
You can learn more about how to get the best mortgage you can find by looking at our Home Center. Also, our Buying or Selling a Home discussion board has many Foolish community members ready and willing to give you advice.
Military families face a number of unique challenges. To get help to resolve your financial difficulties, look no further than The Motley Fool's personal finance newsletter, Motley Fool Green Light. You'll get news you can use to save money and make more from your investments. Try it out with a 30-day free trial and start saving today.
Fool contributor Dan Caplinger never served in the military, but he's proud of those who have -- including his father. He doesn't own shares of the companies mentioned in this article. Fannie Mae is an Inside Value recommendation. The Fool's disclosure policy serves you.