Buying vs. Renting: Which is More Expensive Upfront?
Having little to no money in the bank can be one of the main deterrents to homeownership. In this case, the logical option would be to rent since it would be less cost upfront, right? Well, if you are eligible for a VA Loan, this may not be necessarily true. Let’s do the math!
Meet Cindy, Joe & Mark
Cindy & Joe are both looking to buy a $500,000 property. Joe is eligible to finance the purchase through a VA Loan. Cindy on the other hand is not VA eligible, and will purchase via a conventional mortgage.
Now Mark is eligible for a VA Loan but feels like he can’t afford the upfront costs of buying a home right now, so he’s looking to rent. He’s looking to rent a home for about $2500, which is comparable to the $500,000 property that Cindy & Joe want to purchase (see rentometer.com).
Top 4 Ways To Use a Seller Credit
Right about now, you’re probably getting tired of reading headlines about how bad the real estate market is and that the financial world is on its way to a meltdown. Me too, but there’s another side to all of this, and one that you, on main street, can turn to your advantage. Guess who else is aware of this phenomenon. That’s right, every seller of a home currently listed for sale. Credit is tightening for other loan programs and, in many pockets, prices are lower than they have been in years.
As a VA eligible homebuyer, you can purchase one of these homes at a value not seen in years…and with potentially very little out of pocket expense. How so? Not only can you negotiate on price when buying a house, there’s another tool that can make getting into a home much easier, seller credit. A seller credit is an additional sum of money paid by the seller for you to use to pay the closing costs on your loan. Make sure to discuss this with your real estate agent.
VA Loan Benefit: Reduced Closing Costs
When Congress officially passed the Servicemen’s Readjustment Act of 1944, one of the key elements in this bill was the creation of the VA Guaranteed Home Loan program. With this program, President Roosevelt & Congress wanted to make it as easy as possible for our soldiers returning home from World War II to become homeowners.
One of the biggest obstacles of homeownership for everyone is out-of-pocket expense, which includes down payment and closing costs. We’ve already discussed that you don’t need a down payment with a VA Loan since you can do 100% financing. In addition, the VA Department restricts the amount of closing costs that a VA borrower can pay - essentially breaking up the closing costs into two categories; Allowable Closing Costs & Non-Allowable Closing Costs.
VA Loan Benefit: VA Not Subject to “Loan Level Price Adjustments” Based On Credit Score & LTV
I remember when having above a 700 Fico (credit) score was superb. If you had a 720, you were in elite status and able to get the best loan rates around. Fast forward to 2008 - and a 720 Fico score no longer guarantees a borrower the lowest mortgage rates.
Here’s how this all started. In December 2007, Fannie Mae (FNMA) & Freddie Mac (FHLMC) (the two government sponsored agencies in charge of buying and selling mortgages on the secondary market which helps replenish the supply of capital in the mortgage market) implemented new Loan Level Price Adjustments based on credit score & loan-to-value.
Translation: FNMA & FHLMC implemented a tiered price adjustment matrix which increased closing costs for borrowers with lower credit scores and lower down payment. Why did they do this? To compensate for the losses FNMA & FHLMC were taking on the secondary market due to the increased amount of defaults and foreclosures occurring in the real estate market.
The VA Funding Fee
In our last post I wrote about how on conventional mortgages, a borrower not putting at least 20% down is required to pay for Private Mortgage Insurance (PMI). The cost of PMI will increase the borrowers monthly payments an average pf $150 - $400 per month depending on the loan amount and down payment.
We also discussed how with VA loans, the home buyer is not required to pay for this PMI since the VA Department serves as the insurance backer on these loans. So how does the VA Department insure all these VA loans without being a burden on the US taxpayers? They do this by charging a VA Funding Fee.
The VA Funding Fee is a one time upfront cost that the VA Department charges the borrower on every VA transaction. This fee is collected and pooled into a fund that is used to repay any losses (up to 25% of the original loan amount) that the mortgage lender has incurred when VA loan goes into default and lender has to either short sell or foreclose on the property.
How Much Does the VA Funding Fee Cost?
The cost of the VA Funding Fee depends on three main factors:
- Whether the borrower is/was a member of the regular military (Army, Navy, Marines, Air Force, etc.) or if they were/are a member of the Reserves or National Guard.
- If the borrower is a first-time user of the VA Home Loan Program or a repeat user.
- The amount of down payment (if any).
Paying Points vs. Not Paying Points
If you’ve ever purchased a home before, you’ve probably been asked if you wanted to “points” or not pay “points”. Now, if you are like most people, the common answer would be, “I’m not sure - what would you suggest?”. Well, before we get into the specifics of when it is beneficial to pay points or not, let’s go over what the exact purpose of points when it comes to closing costs.
A point is an upfront fee that is paid at closing to reduce your interest rate. A “point” is always 1% of the loan amount. For instance, using a $300,000 loan amount, one point would cost $3,000 at closing. Now keep in mind - you don’t have to pay points if you don’t want to (except when dealing with adjustable-rate mortgage loans - where sometimes it’s mandatory to pay a point to guarantee the lender a yield) but by doing so, you’ll decrease not only your monthly payments but also the total amount of interest paid over the life of the loan.
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