VA loans are reserved for a select set of borrowers. These include veterans of the armed forces, active duty personnel with at least 181 days of service, National Guard and Armed Forces Reserve members with at least six years of service and unremarried, surviving spouses of those who have died while serving or as a result of a service->
Closing costs for VA loans are restricted for eligible borrowers. Borrowers can only pay for an appraisal and credit report, title insurance, origination fees and recording fees. In areas where surveys are required, borrowers are eligible to pay for a survey. One of these costs, the largest one as a matter of fact, is the VA funding fee.
The funding fee is in essence an insurance policy the borrowers pay for in favor of the lender. This fee can vary based upon the term of the loan, re-use and any down payment. Its important to note here however that VA loans do not require a down payment, but borrowers may choose to provide one voluntarily. For first time buyers taking out a standard 30 year fixed rate term, the funding fee is currently 2.15 percent of the sales price of the home. For a 300,000 mortgage, thats 6,450.
Thats quite a bit but remember the lender is approving a mortgage without any down payment. Should the loan soon go into default, there wont be any equity. There are also legal fees involved in such an instance so typically the lender is automatically
upside down if the lender is forced to foreclose. However, this is rare as VA loans are some of the highest performing financing products in the industry.
The guarantee to the lender is 25 percent of the loss. Again, with an outstanding mortgage balance of 300,000, the lender is paid 75,000. This guarantee can also allow a lender to approve a zero down loan that it may not have approved with a low down payment conventional loan. Its the funding fee that finances this guarantee to the lender.
