Should I use my VA eligibility to buy or refinance my home?

Question of the week:  Should I use my VA eligibility to buy or refinance my home?

Answer: Probably.

I realize this applies to a slender slice of readers of the Weekly Rate & Market Update, however for those it does apply to there may be tremendous benefit.

Quick overview of VA loans.

  • The Department of Veterans Affairs, aka VA, guarantees of portion of home loans for eligible veterans. This guarantee results in lenders being able to fund mortgages with more favorable terms and qualifying than those for conventional or other mortgages.
  • To be eligible a veteran must meet certain requirements that include length of service, duty status and “character of service.” Essentially, most veterans who have received an honorable discharge, or active military or military reserve, likely have VA eligibility.
  • VA loans may only be used to purchase a primary residence the veteran must move into within 60-days.
  • Depending on the price and location of the home, a veteran can purchase a home with no down payment; or refinance and pull cashout up to 100% of the appraised value.
  • Regarding location, VA uses the same maximum county loan limits as those for conforming loans, $647,200 for the all counties, up to $970,800 for “high-cost counties,” such as Los Angeles and Orange Counties.
  • Veterans can purchase a home with a VA loan up to $2-million dollars with a relatively low-down payment; an example is below.
  • VA loans have a funding fee that is added to the loan amount. The amount of the funding fee ranges from 1.4% to 3.6% of the loan amount depending on purpose of loan, if veteran has used their VA eligibility before, and loan to value. Veterans with a disability rating higher than 10%, recipients of the Purple Heart, and surviving spouses of veterans who died in the line of duty are exempt from the funding fee.
  • The only co-signers allowed with the veteran on a VA mortgage are the veteran’s spouse, or another veteran or active service member. All signers on the loan must occupy the home as their primary residence. Note, non-spousal partners are eligible per the VA to co-sign, however most lenders will not accept this type of co-signer as the amount of the loan the VA will guarantee is greatly reduced.
  • Income qualifying is easier for a VA loan vis-à-vis conforming mortgages as debt-to-income ratios are not used. VA loans qualify with “residual income,” how much money you have left each month after making your new house payment plus other obligations.

Back to our question of the week, should you use your VA eligibility to purchase or refinance your home?

Going through the basic guidelines above, one stands out: 100% loan to value, or reduced down payment for high priced properties.

In the current market, another benefit is the current VA 30-year fixed rate is significantly lower than a conforming mortgage, and extremely lower than high-balance and jumbo mortgages (loans over $647,200). Today’s rate for a VA loan is 4.25% for the same cost as today’s conforming rates below.

Consider, you wish to purchase a $650,000. For a conforming loan you put 5% down ($32,500), for a $617,500 mortgage; because of this down payment amount you will have mortgage insurance. With rate of 4.75% and mortgage insurance your monthly mortgage payment will be $3375 per month.

A $650,000 purchase with no down payment for a first-time user of VA eligibility will have a loan amount with funding fee of $664,950. With a rate of 4.25% your monthly payment will be $3270 per month.

Using your VA eligibility, you save $32,500 in cash to close and have a loan payment that is $105 less per month.

For very high-cost areas, a veteran using VA benefits can purchase a $1.5 million home with about 8.8% down, and have a 30-year fixed rate mortgage at 4.25%. For most jumbo loan programs, a minimum of 20% ($300,000) would be needed for this transaction and the rate would be about 5.375%. The VA loan will need $167,700 less in down payment, and the payment would be only $120 more per month.

Should you use your VA to purchase a home? In this market the answer is yes, you can save money on the purchase and on your monthly payment.

For real estate agents reading this, please strongly consider VA offers on your listings. The conventional wisdom in the industry is that more cash down is a better offer. As well, too many agents are ignorant of how VA mortgages work and the think “they take too long to close.” VA loans are easier for qualifying and take the same amount of time to process and underwriter as other mortgages.

Like all transactions, if a buyer, lender, and buyer’s agent have done their diligence to ensure the buyer is pre-approved with all the documents required for loan approval in the file, a VA loan with no down payment is no less risky to a conventional mortgage with 25%, or 30% or even 40% down.

If you, or someone you know, is a veteran considering purchasing a home, please contact me to run through options and qualifying. If you, or someone you know, with VA benefits own a home and want to explore refinancing, possibly pulling cash-out for home improvements, debt consolidation, college costs, or whatever, I can assist with those options as well.

Have a question? Ask me!

Minutes released from the Federal Reserve meeting had a glimmer of positive news. While indicating the Fed will likely increase its benchmark rate by 0.5% at its June and July meetings, there was language that after that perhaps future increases would be the more traditional 0.25%. After the early summer rate hikes the Fed will reassess the economy and possibly release the target final rate after hikes. Currently the federal funds rate (controlled by the Fed) is 1.00%, after being essentially zero prior to the rate hikes. The Fed considers 2.5% as “neutral,” below that being expansive to encourage economic growth, above that being restrictive to limit growth. Many experts feel the Fed will likely increase rates to 3.00% by the end of 2022. The Fed minutes were well received as it appears there is a decent chance the rate increases will slow later in the year, the beginning of the end of the rate hikes.

Data released today also buoyed investors, as the Personal Consumption Price Index (PCE, which confusing as there is not “E”) rose only 0.2% in April, the smallest increase in a year and a half. Year over year the index dropped from 6.6% in March to 6.3% in April. This is very important as the PCE is the index the Federal Reserve uses to gauge inflation. This data supports tempering rate hikes in the future as inflation begins to slow.

Fears of recession were abated with data showing consumer spending and personal income for April. Consumers increased their spending by 0.9% in April, well above the increase due to inflation. Spending continues to outpace income, which rose 0.4% for the month—like spending beating inflation. The increase in spending exceeding increases in income resulted in another drop in personal savings, which dipped from 5% to 4.4%. There are a few theories on the lower savings rate, one is that consumers are spending the rest of stimulus funds they received, the other is that they are dipping into savings to make major purchases, or take vacations for the first time in two years.

Rates for Friday May 27, 2022: Rates drop for the third Friday in a row, the first time this has happened since April 2020 when rates fell after the spike following the economic shutdown nationally, and globally, in March 2020.

FIXED RATE MORTGAGES AT COST OF 1.25 POINTS LOCKED FOR 45 DAYS FOR PURCHASE TRANSACTIONS:

30-year conforming                                        4.75%      Down 0.125%

30-year high-balance conforming                   5.375%     Down 0.125%

Please note that these are base rates and adjustments may be added for condominiums, refinances, credit scores, loan to value, no impound account and period rate is locked. Rates are based on 20% down with 740 FICO score for purchase mortgages.

Thank you to everyone who sent the well-wishes and congratulations following last week’s WR&MU letting you know we were in Boston for our daughter’s graduation. While the ceremonies were very good, the best part was our family being together for several days; something we know will occur less often in the future as they go out on their own paths.

For those enjoying a vacation day on Monday, please take a moment to recognize the reason for the holiday and give thanks to those who lost their lives in service to our country, defending our liberty and freedoms.

Have a great week,

Dennis

Past Weekly Rate & Market Updates can be found on my blog page at my website www.DennisCSmith.com/my-blog