VA Funding Fee – Pay it Wisely

If you plan to purchase a home with a VA loan, you won’t have to make a down payment, but you will be required to pay a funding fee. The funding fee may be waived if you meet certain qualifications, including but not limited to having a 10% or more service-related disability. Many purchasers choose to roll the funding fee into their loan. But is that the best option? It might make more sense to pay the fee up front at closing. How much you pay for a home, it’s appreciation rate, and how long you intend to own the home can help you determine

Sales Price

Depending on how the local housing market is performing in your area, you may be able to purchase a home at below market value. It’s common knowledge that if you buy a home at a discount, you have in-built equity at the time of purchase. The greater the gap between what you pay for a home and what the market says it’s worth, the more room you have in which to roll the funding fee into your loan without exceeding the home’s market value. For example, if you pay list price for a home costing $100,000, but then roll into your loan a funding fee at a rate of 3.6% or $3600, its cost will have surpassed the market value, which will make it difficult for you to resell it at a profit in 3-4 years’ time. But were you to pay for that same home at 10% below market or retail price, your overall loan could total only $93,600, even after you rolled the funding fee into its cost. You now have equity at the start with $3600 on hand to force even more appreciation through upgrades. Even if you sold it tomorrow, given those factors, you could still turn a profit.

*Keep in mind, your funding fee will vary, depending on whether you’ve utilized a VA loan in the past or are a first-time home buyer, as well as if you intend to put money down. For more information about the specific fee you would be charged, refer to the table at the end of this article.

Appreciation

Regardless of how the housing market is doing where you live, if you can buy your home below market value and make upgrades, your chances are higher that you can turn a profit when you sell it. This is called forced appreciation. It’s especially helpful to utilize as a military member, because your time at any given station is so limited, so leverage every bit of it effectively. Unless you plan to buy and hold your home for many years, which in that case depends on a home’s appreciation over time, you’re almost fully reliant on forced appreciation to maximize profits at the time of sale.

Time

Upgrading your home is the easiest way to increase its value because you don’t have to wait years for the home to naturally appreciate. You can make modest upgrades to your property which can force appreciation almost immediately. Upgrade the areas of the home that most buyers expect, for example like the kitchen and bathroom, and increase your ability to recoup around 80% of the cost when you go to sell it.  As a result, you can further strengthen your ability to resell at a profit in a short amount of time. And should the local housing market boom, you will gain a profit windfall from both forced and annual appreciation.

The VA loan is arguably one of the greatest benefits afforded military members and their families, and when used effectively can have profound impacts on financial future. The funding fee might be considered a roadblock to building your asset unless you know how to pay it wisely. By considering how to make use of price, appreciation, and time, you greatly increase the likelihood that your home will be more than a home; it will truly be an investment. With the right strategy the old adage, buy low sell high, can apply even to us in the military.

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