by Maurie Backman | April 19, 2021
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U.S. veterans may be missing one key piece of information on the road to becoming homeowners.
Home prices have risen on a national level as low mortgage rates and housing inventory have fueled buyer demand. That means coming up with a 20% down payment is even more difficult for buyers today.
In fact, it's that lack of having a down payment that may be preventing some U.S. vets from buying a home. According to Veterans United Home Loans' 2021 Veteran Homebuyer Report, 41% of veterans think they need to put down more than 20% of a home's purchase price when they close on a mortgage. But while many buyers do need to come up with that 20%, veterans are often the exception.
With a conventional mortgage, not putting down 20% of a home's purchase price means signing up to pay private mortgage insurance, a costly premium that makes homeownership more expensive. What's more, some conventional mortgage lenders require buyers to put down 20% at closing.
But VA loans work differently. These loans, which are only open to U.S. military members, veterans, or the surviving spouses of veterans, allow you to buy a home with no money down at all. Yet in the Veteran Homebuyer Report, only 3% of veterans thought it was possible to get a mortgage with no down payment.
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Of course, VA loans aren't perfect. One drawback is that when you get a VA loan, you'll need to pay a funding fee, and the less money you put down on your home, the higher that fee will be.
If it's your first VA loan and you're putting no money down, your funding fee will be 2.3% of your loan amount. This means that if you're getting a $200,000 mortgage, you'll pay an additional $4,600.
If it's your second VA loan and you're putting no money down, your funding fee will amount to 3.6%. For a $200,000 mortgage, that's an extra $7,200.
On the other hand, your funding fee will be lower if you manage to put down at least 5% of your home's purchase price, whether it's your first VA loan or a subsequent loan. So while you may not need to come up with a full 20% at closing, it does pay to aim for 5%.
Also, the more money you put down on your home initially, the sooner you'll build equity in your home. (Equity is the portion of your home you own outright, and you can borrow against it when you need money.) So if you can scrounge up a 5% down payment, it could serve you well. If you can afford monthly mortgage payments but don't have funds for a down payment, that shouldn't hold you back from buying if you qualify for a VA loan.
Before you sign a VA mortgage, get offers from a few lenders. While VA lenders often approve applicants with no money down, the interest rates they offer can vary, and comparing offers is a good way to snag a good deal. And if you're new to the process, check out our guide to VA loans to get started.
Chances are, interest rates won't stay put at multi-decade lows for much longer. That's why taking action today is crucial, whether you're wanting to refinance and cut your mortgage payment or you're ready to pull the trigger on a new home purchase.
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