First off, let me say this, “VA loans are THE BEST loan products out there”. There are no mortgage products available with such low rates, no down payment requirements and no mortgage insurance.
Now getting to the question…yes. Veterans can roll the VA funding fee into their VA loans, thus financing it rather than having to bring that money to closing. This saves the veteran literally thousands of dollars out of their pockets.
Recently I wrote a pre-qualification letter for a veteran customer. In his search for his next home, he ran into one of his neighbor friends down the road. It just so happens she is selling her home as well. They talked a little bit about it and realized they liked each others homes. They also realized it would benefit them tremendously to buy each others home versus spending equity on realtor commissions as neither has the equity to do so.
During their discussion, my customer expressed how happy he has been working with me and what I was able to offer him...so much so, he recommended she call me as well.
A couple days later I got the call and discussed her plans with her. One of her goals for the new loan was not paying monthly mortgage insurance. Neither she nor her husband were veterans. That eliminated VA loans from future discussions. FHA has monthly mortgage insurance on top of having an upfront Mortgage Insurance Premium. So that, along with the fact that her loan amount was going to exceed the FHA loan limits in that county left the Conventional loan product as her only alternative.
She had already spoken to a broker about it. She knew she wanted to put 5% down and pay a single upfront mortgage insurance premium, which you can do with Conventional loans. Luckily she and her husband qualified. Conventional loans with less than 20% down have very strict DTI (Debt to Income) requirements. In addition, Mortgage Insurance Premium companies have their own restrictions as well. That is why any number of home buyers, if they were veterans, could qualify for VA loans, yet often times cannot qualify for conventional loans. This is one of the greatest benefits to VA loans. More importantly, being able to finance the funding fee into the loan becomes a tremendous benefit.
The benefits of Financing the Funding Fee became much more apparent when comparing the two loans...
The upfront mortgage insurance premium on Conventional loans is very comparable to the funding fee on VA loans for first time use AND 0% down. I researched 5 different companies and the cheapest MI company was charging 2.15% of the loan amount for their mortgage insurance. That equals the funding fee for an active duty service member or veteran that is using their VA eligibility for the first time, while putting zero down.
Yet she had to put 5% down. If that were a VA loan, her funding fee would have only been 1.5% if she was active duty. Even if she was a Reservist, it still would have been less at 1.75%.
Where VA really helps out is being able to finance that upfront funding fee. On her conventional loan, she has to come up with $6,654 PLUS all of the other costs involved, PLUS her 5% down payment!
In the end, she and her husband have to come up with over $37,000. My veteran customer only needs a little over $7,000, which if either of these homes were somewhere other than New York, they both would pay respectively about $5,000 to $10,000 less.
If you’re doing the math, yes, that would only leave him with only $2,000. There are tremendous lender credits available for VA loans, which I’m able to get for him. This is yet one more benefit veterans get with VA loans.
All in all, VA loans are a tremendous product. It’s hard to say which benefit is the best, but one thing is for sure, not having to come to the closing table with thousands of dollars for the funding fee has to rate in the top 3 best benefits to VA loans.