Qualifying for a loan through the U.S. Department of Veteran Affairs (VA) allows you to obtain a mortgage for a home purchase. There are many benefits to using your VA loan privileges, but not everyone meets the requirements. Once you have been approved, you will find that closing the loan comes with certain costs and fees, but it still may be less expensive than a traditional mortgage.
If you are a veteran of the U.S. armed forces who served active duty with a discharge that was not dishonorable, you may qualify for a VA loan. You are required to have served 181 days continuously or 90 days during times of war. VA guarantees 25 percent of the loan against default, with a maximum loan amount of $417,000, as of 2011. However, loan limits can vary in areas of the country with higher property values. You can apply for a VA loan with a private lender or mortgage company, and the property must be your primary residence to qualify.
Closing costs for a VA loan consist of charges by the lender you use. The origination cost of the loan is a processing fee for the lender to recoup expenses. It averages about 1 percent of the loan amount. This fee pays for the application, document preparation, settlement, notary and other administrative costs. Another charge is in the form of loan discount points. If you want to lower your interest rate, you will pay 1 percent of the loan amount for each incremental deduction in your rate. Your credit report and the appraisal fee also are necessary costs of obtaining the VA loan.
There is no private mortgage insurance (PMI) requirement for VA loans. However, a one-time “funding fee” is charged instead. The less money you put down, the higher the fee. For no money down, the fee is 2.15 percent, as of 2011. Ten percent down will require a 1.5 percent funding fee. The cost is 1.25 percent for down payments of more than 10 percent. If you do not have the money to pay the cost upfront, the VA allows you to roll it into the loan principal to be paid off over time. You also will be responsible for paying your hazard insurance premium, title insurance and a recording fee at the close.
The VA allows the seller to pay concessions to reduce your closing costs. As of 2011, sellers can contribute up to 4 percent of the amount of your loan to cover the funding fee, property taxes, insurance premiums and discount points. Other closing costs are not counted in the 4 percent seller concession amount. Therefore, the seller may be able to contribute more than the maximum allowed if other costs are covered separately.