Financing in Alabama>Question Details

Shanna, Home Buyer in Alabama

VA or conventional loan?

Asked by Shanna, Alabama Tue Mar 25, 2008

We have used a VA loan before so we'd have to pay the 3.35% funding fee. With VA, I know you don't have to have PMI. We have excellent credit and looking at a house in Alabama for $200,000. I was told we should use a conventional instead of VA. If we go conv., we'd only want to put 3% down, or $0 down on a VA. What do you think? Thanks!

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Dear Shanna while I'm not versed on the counties and cities in Alabama here is a loan I actually use in New Jersey that you can use as well. It is the USDA Rural Home Loan (another goverment backed loan like, VA & FHA). The link below will take you to the eligibility website (for property & income) . It's for moderate income families (not necessarily first time home buyers) looking to purchase a home in a non-city/town setting. It allows 0% down payment and up to 102% financing on APPRAISED value. While I don't avocate borrowing more than the home is worth it helps for people who need to use it. I emphasized apraised value beciuse if the purchase price is $180,000 but the home appraises for $190,000 you can borrow up to $190,000 +2% more and not have negotiate a seller assist for closing. There is also no monthly MI but just like the VA & FHA there is a upfront fee, 2% that is financed into the loan for mortgage insurance. The rate with no points on this loan is 6% very much in line with a conventional or VA loan but with lesser fees. If you have any additional questions please just post them here. Have a great day!
2 votes Thank Flag Link Thu Mar 27, 2008
Hi Shanna,

It does get confusing, but I recommend:

1) negotiate your sales price with assertiveness to get the most house for the lowest price
2)create instant equity with the Conv loan downpayment
3) expect the economy to improve in the next few years
4) watch your home's value increase

Your first benefit of the Conv financing is that your payment will be figured on the lower mortgage balance.

If you do choose the conventional mortgage and put $6000 down on your house, you will only owe $194,000 when you move in. However, if you go VA and pay the funding fee of $6700, you still owe the full price of $200,000! And your payment will be calculated on the higher mortgage balance.

Assuming the rates for VA and Conv are so close as to be essentially the same,(the quote I got today was only % difference) and you pay about $150 for PMI on the Conv loan, it will take 45 months before you pay out monthly PMI equivalent to the up-front funding fee of $6700. Even then, you are still ahead by the $6000 that you paid down on the Conv mortgage!

If you buy your house "right", and you expect the economy to recover (I believe it will), then you can expect a 4-5% appreciation rate. In the first 4 years that you own your house, the value will increase by $36 -$40,000, you can get it appraised then, and request the mortgage company drop the PMI, lowering your payment. If you pay the $150 towards principal each month, you can get your house paid for in a much shorter timeframe than 30 years!

I have a sharp Alabama mortgage banker who can help you....email me if you want his contact information. All the best, Dan Therrell, Fairhope, AL
1 vote Thank Flag Link Wed Mar 26, 2008
Hello Shanna,

You might also qualify for financing under the Alabama Housing Authority Act, which has provisions for up to 103% financing. Yes, you heard that right! Nothing down. Check out the program details here:
http://www.ahfa.com/ . Choose a local lender who participates in the program.

All the best,

Dan Therrell
Fairhope, AL
0 votes Thank Flag Link Mon Apr 14, 2008
Hey Shanna, I got them from my current rates (close to par). Yes, the rates are higher because of the 3% down, I was actually surprised that we had a conventional program with 3% down, typically it's 5%. There was no lender paid MI available for over 95% LTV, in this case (97%). I'm not very familiar with VA loans, I have done a CalVet moons ago and have started loans with VA and ended up going to conventional. So I'm not too sure of the terms, rates, fees, etc, I do believe that my company does them though. The WHOLESALE conforming (80% LTV) rates today are 5.608% as per: http://www.mtgprofessor.com.
0 votes Thank Flag Link Tue Mar 25, 2008
Darren,
Can you tell me where you got the rates for the FHA and conventional loans? I was wondering if its higher because of the low down payment? A VA loan is at 5.75%. Thanks!!
0 votes Thank Flag Link Tue Mar 25, 2008
Look at it this way:

These are Possible Scenarios
VA: Funding fee 3.35% = 6,700, MI = 0, Approx. Rate = ? Payment = ?
FHA: Down Payment = $6,000, MI = 81/mo, Approx. Rate = 6.75%, Approx. Payment = 1358
Conv.: Down Payment = $6,000, MI = 155/mo, Approx. Rate = 6.375%, Approx Payment = 1366

To do the math, find out what the rate and payment is for the VA loan and subtract the FHA and Conv. from the payment (separately). Divide that number into $6,700 (your funding fee) and then divide that number by 12 to see how many years it will take to recoop the funding fee. $6,700 is a big number that could be counted toward your closing/down payment.
0 votes Thank Flag Link Tue Mar 25, 2008
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