Should you try a VA home loan?

If you need a home loan, you might consider hitting up your Uncle Sam.

Department of Veterans Affairs home loans -- VA loans for short -- are a popular option with home buyers. In the past fiscal year alone, the government has guaranteed 300,000 VA loans totaling more than $38 billion.

And with good reason. The loans require no down payment and are available from most lenders. In addition, the government limits the amount of closing costs and origination fees lenders can charge, as well as the appraisal fees. In general, the loans are available to some veterans, active service members, reservists and members of the Public Health Service.

Another big benefit to VA home loans -- no private mortgage insurance. Not only does the VA not require PMI, it also prohibits lenders from requiring it, says Bob Finneran, the VA's assistant director for loan policy and valuation.

"We're putting a guarantee on the loan, so we're not expecting them to get other insurance and charge the veteran for that," he says.

On a $126,000 loan, PMI would run approximately $40 to $64 a month for the first three to five years of a 30-year loan, says Jeff Lubar, spokesman for the Mortgage Insurance Companies of America, an industry trade group. Total savings: $1,440 to $3,840.

Rates generally follow the market, just like any other home loan, says Keith Pedigo, the director of loan guaranty services at the VA.

"Rates are generally in line with conventional rates," he says. "The advantage of going VA is that you do not have to make a down payment."

And, according to VA statistics, 91 percent of VA buyers skip the down payment.

There is one down side. Starting in 1982 Congress levied a one-time funding fee on VA loans, says Pedigo. Fees range from 1 1/4 percent to 3 percent, depending on the veteran's service and whether it's a first or subsequent loan.

"The typical fee is 2 percent," he says.

The VA will lower the fee if the borrower makes a down payment of at least 5 percent.

For refinancing loans, the fee ranges from a half percent to 3 percent, with a half-percent being the usual fee, says Pedigo.

Many buyers simply finance the fee along with the home. But that can have a hidden cost. On a $126,000 mortgage -- the average amount borrowed last year -- a 2-percent fee can bloom into $14,474 over the 30-year life of a 6-percent loan.

The fact that buyers can qualify for a VA loan doesn't mean they should automatically use one, says Tim Doyle, a director in the government affairs office of the Mortgage Bankers Association of America.

"Prospective homeowners should still shop around," says Doyle, who recommends that home buyers also evaluate conventional and FHA options. "But if they don't have a down payment and are offered as good an interest rate as what they would get elsewhere, it's a good option."

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