I'm working on the Kashman family's two, five and ten year financial plans,* and I've discovered that I know less than I thought about Department of Veterans Affairs (VA) mortgage program funding fees. It seems I had some misconceptions all along, and I hope that you can learn from my errors.
As part of the big picture, the Kashmans hope to buy another house, someday. I'm making sure that we'll have enough down payment, and that our debt-to-income ratio is OK. As you know, we have two houses that are currently rental properties, and they both have mortgages. Even though they are doing well for us, those mortgages still count as debt. So we need to plan and prepare if another house is in our future.
That's where my confusion happened. When you get a VA home loan, you pay a funding fee. This is unique to VA loans. Funding fees on your first VA loan are less than on subsequent loans IF YOU HAVE LESS THAN 5% down payment. I wrote that in all caps because that was the part that confused me. Somewhere along the way, I got the misconception that the funding fee was always very high on subsequent mortgages. I wasn't completely wrong, because it is high if you have a very low down payment, but the funding fee on second and subsequent purchases is exactly the same as for first VA loans, if you have 5% or more to apply as a down payment.
My husband used his VA eligibility when we purchased our first home, back in the dinosaur era. We've used conventional financing since, because I was scared of the maximum 3.3% funding fee on subsequent usage. As it turns out, the funding fee would only be 3.3% if we had less than 5% down payment. For down payments between 5% and 10%, the funding fee would be 1.5%. For down payments over 10% of the purchase price, the funding fee would be 1.25%.
What does this mean for me, and for you? It means that a VA loan can remain a viable option for loans, even if you've already had a VA loan in the past. VA funding fees do increase the cost of your loan, but sometimes VA loan rates are lower than regular rates, and you might find the total cost of the loan is the same. In the case where you have less than 20% down payment, and would be required to make Private Mortgage Insurance (PMI) payments on a conventional loan, a VA loan will nearly always lower your monthly payment. In addition, VA loan debt-to-income guidelines are slightly more generous than conventional loan guidelines. Borrowers like me, who already have other mortgages, might find that they are able to qualify for a VA loan when they do not qualify for a conventional loan.
As always, knowing the facts is an important part of making a plan. I've learned some new facts today, and I hope you have, too.
* Yes, I am a dork.