Like every loan, you will pay interest on your mortgage. VA loans will generally offer lower interest rates than other types of loans. How much interest will be influenced by the rates when you buy (which you cannot control) and your credit score (which you can mostly control). Your credit score impacts your mortgage interest rate and how much you will need for a down payment with certain loan programs. If your score isn’t great, you might not even be approved for a home loan.
You can check your credit report at annualcreditreport.com, or by contacting one of the three credit bureaus: Equifax, Experian, or TransUnion. But if you find you fall into the lower range of credit scores, it is not the end of the world. Check out these tips for improving your credit score from Tom Quinn, Vice President of Scores at FICO.
One of the biggest advantages of the VA loan is that there is no down payment or mortgage insurance required. However, the more you put down on your new home, the better. In recent history, the down payment goal was ideally 20% of the purchase price. This is because you’re considered a lower risk to the lender by having a significant amount of your own money invested in the property. As a result of a larger down payment, you will receive a better interest rate, have lower monthly payments, and will not have to pay for private mortgage insurance or PMI.
PMI is a type of insurance that lenders require you to pay if you are unable to make a full 20 percent down payment on a Conventional Mortgage Loan. This protects the lender in the event you default on your loan— and it’s not cheap. PMI can cost up to about 2 percent of the total loan amount. PMI is either required to be paid upfront or rolled into your monthly mortgage payment.
With some loans, you won’t have to pay PMI forever but check with your lender for more details.
If you do not have a 20 percent down payment, there are alternative options, such as government programs that require just 3.5 percent down payments, USDA loan programs, and VA Home Loans. Each of these, along with other programs with less than 20 percent down payments have certain criteria and guidelines that you must meet to qualify, like income levels, and the area in which you buy your home.
3. CLOSING COSTS
Closing costs include things like title insurance, appraisals, and attorney fees. Plan on these closings costs being anywhere from 3 to 7 percent of the total loan amount on top of the down payment. For military or veterans, the closing costs can be from 3 to 5 percent with a VA loan.
In some housing markets, it is customary for the seller to contribute toward the buyer’s closing costs. The VA loan allows for this option. Be sure to talk to your Real Estate agent about negotiating in this area to help mitigate costs.
4. HOMEOWNERS INSURANCE AND PROPERTY TAXES
While you’ll secure your property insurance and know the current tax bill for your property, it is possible for both of these expenses to increase. Be prepared!
In many cases, buyers choose to add an “escrow” account to their mortgage, which allows them to contribute towards your homeowner's insurance and taxes with each mortgage payment. The Lender then pays the bills from your escrow account as they become due.
While it is a fabulous arrangement, creating an escrow account on top of your mortgage can add hundreds of dollars to your monthly mortgage payment.
5. MAINTENANCE AND UPKEEP
Homeownership will come with some unexpected expenses. These increases could be energy costs, the price of new appliances, homeowner’s association fees, or even just the expense of maintaining your yard. So make sure you’ve accounted for all these in your budget. And for good measure, start an emergency fund for those things you cannot prepare for. Learn more by reading How To Start Your Savings Journey