Most veterans understand the basic idea behind getting a VA loan but there are still questions about the details behind VA financing. So before you Inquire about a No Cost VA Loan, below you will find some helpful information about the ins and outs of VA financing.
Is VA a Lender?
VA is not a lender nor does it provide financing for brokers. It is a mortgage insurer, similar to FHA and USDA. VA charges a funding fee to all veteran borrowers that do not have a service connected disability and uses that money to offset the losses incurred from other veterans that have defaulted on their VA loans.
Loan Costs Defined
No closing cost mortgage is not a new concept. It’s been around for quite some time. It has also been referred to as no point, no fees loans (NPNF) or no cost loans. Most generally this means No charges will be incurred by the customer from the lender for a market rate mortgage. However, there are sometimes, in the case of refinances, TOTAL NPNF loans. It is best to analyze the cost/benefit factor before pursuing a loan that drastic though. The reason is rates become affected as the lender has to absorb more than is comfortable from a business standpoint and that cost will need to be offset somehow. In the case of VA loans, because there is so much profit on the secondary market, it is easy for some banks to waive their fees. The important thing that needs to be noted is ALL mortgage loans have costs (waived or not), associated with them and these costs generally fall into three categories:
Points – are the essentially pre-paid interest on a loan. They are often called discount and origination fees. Discount fees are points paid to the lender who actually funds the loan and the origination fee goes to the lender or broker who processes the loan. For example one point equals 1% of the loan amount. Therefore on a $300,000 mortgage 1 point is $3,000 and 2 points, $6,000. Simple concept. On a VA loan, VA says it’s ok for the lender to charge points equal to 1% origination plus any reasonable discount. What veterans don’t realize is they can shop for a lender that doesn’t charge this fee. By finding a VA lender that doesn’t charge these points for the same or lower rate, the veteran could end up with a lower priced house and spend thousands less out of pocket.
Non-recurring Closing Costs (NRCCs) – these include appraisal, credit, title, escrow, notary, recording fees, lender “garbage fees” which can include: document preparation fees, underwriting fees, administration fees, processing fees and the like. Points may also be included in this category as well. These are fees that are associated directly with obtaining the loan and are fees you would not otherwise be paying for outside of the loan process. When points are excluded from this figure, the total may also be referred to as a borrower’s base closing costs.
Recurring Closing Costs – they are your current mortgage interest, property taxes and insurance. These are fees that you would otherwise have to pay regardless of whether or not you were applying for a new loan and are not true costs of obtaining a loan but may be required to be paid at closing anyhow because of the timing of the loan closure as well as when these costs would normally need to be paid. VA requires these costs to be included, however, if it is possible, you should consider paying these costs out of pocket because to do otherwise would mean financing any pro-rated interest, property taxes and homeowners insurance over 30 or 15 years, thus increasing the interest expense to you.
How Does the Lender Make Money if they Don’t Charge Fees?
For a broker it is very hard to do this as they are a middle man searching for a bank to fund the loan for them. In essence, you have another person with “skin” in the game. So by skipping the middleman, you get the loan direct and can skip the middleman costs. Most mortgage loans are sold on the secondary market and in the case of VA loans, there is a higher premium paid out for these. In most cases the premium is high enough to absorb the lower bank fees for the veteran borrower.
