In addition to not requiring a down payment, VA mortgages are now a superior choice to FHA mortgages in most cases. The reason is simple. While the upfront costs are usually higher than a FHA loan, there is no monthly mortgage insurance on a VA loan.
Upfront costs, referred to as the mortgage insurance premium (MIP), for FHA mortgages are currently 1% of the loan amount. In addition, there is the annual mortgage insurance premium which is paid monthly. This will be increasing to 1.15% on April 18, 2011. On a FHA mortgage of $200,000, the upfront MIP would be $2,000, bringing the loan amount to $202,000, and the annual mortgage premium would be $191.67 per month.
Upfront costs on a VA mortgage are referred to as the Funding Fee. The funding fee for purchase mortgages are as follows:
* ZERO for a veteran with a service related disability
* 3.3% for a veteran who has used his eligibility before.
* 2.15% for first time buyers who are on Active duty or Veterans.
* 2.4% for reservists and National Guard.
For streamline VA refinances the funding fee ranges from zero to 0.5%. A first time buyer with a funding fee of 2.15% would have $4,300 added to a $200,000 mortgage for a total loan amount of $204,300. While this is $2,430 more than a FHA mortgage, the buyer is not paying the monthly mortgage insurance of $191.67. The buyer is money ahead after 13 months.
I recently did a purchase mortgage for a Vet who could have come up with the down payment for a FHA mortgage. After looking at his options, he wisely choose the VA mortgage. The $10,500 he would have used for his down payment was instead used for home improvements on his new home. His earnest money was $1,500, which he received back at closing. All in all, a win-win deal.
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