What are the real differences between banks or mortgage companies when it comes to VA Loans?
Where do I even start?
It’s probably what you were thinking as you began your quest to shop for a VA Loan. The home loan market is convoluted, there is an overload of information, and not all of it is helpful. Searching for “VA Loan” returns an optimized mix of advertising that screams “click me” so loud that the noise makes it hard to click anywhere. Where is the site that clearly and definitively lays out what to look for, how to compare offers, and what to watch out for when shopping for a VA Mortgage?
Well, I guess you’re looking at it.
Simply put, here are the basics of how to shop for a VA Loan. I’ll also spell out what to watch out for in your quest.
Factors that determine the quality of a VA Loan Offer:
- Interest Rate
- Lender Fees and Points (NOT overall closing costs; I’ll explain)
- Expertise with VA Lending (most Loan Officers can do VA Loans, but rarely actually do them due to low opportunity and high complexity)
- Responsiveness of the Loan Officer
Factors to watch out for/pitfalls to avoid:
- Large difference between Note Rate and APR
- Confusion about the most basic factors of a VA Loan—i.e. Funding Fee, COE, Down Payment amounts, etc.
While a few of these are either self-explanatory or conversely too nuanced to explain clearly in a short, easily digestible article like this, there are a couple I’d like to describe further.
Interest Rate vs. Fees and Points; APR vs. Note Rate
In reality, you cannot separate the discussions of Rate and Fees. Anyone who tries to separate the two is trying to hide something from you, and that’s never good. Why? Well, let me explain how mortgage pricing works, in an oversimplified statement that isn’t exactly true, but should help you understand, then I’ll explain the truth. Ready?
You can have any interest rate you want on your mortgage, it’s just a matter of how much you are willing to pay to get it.
While that’s mostly true, there are two caveats.
One, it has its limits. There is a threshold below which you cannot go (for complicated reasons), so the better statement is: You can have any interest rate you want on you mortgage within a varying range, it’s just a matter of how much you are willing to pay to get it.
Secondly, this actually works the same way in reverse. Within a range, you can allow yourself to be given a higher rate, and thereby reduce the initial cost of your loan.
While different companies have different prices, the price always, ALWAYS, includes a relationship between closing costs and interest rates, and they vary inversely (meaning as the rate goes up, the fees go down and vice-versa). Therefore, neither attribute can nor should be talked about on their own in isolation, they are a package deal. Offered a rate of 3% on your 30 Year Fixed loan? That’s nice, but it means nothing without knowing how much you are paying to get it.
But even when you get a cost estimate, it can be confusing to know what fees matter—which are lender controlled—as opposed to 3rd party fees that are levied at closing by other interested parties. Typically, there are six different groups that have something at stake in the consummation of a purchase closing: buyers, sellers, realtors, a lender, a title company and the government (VA, county, and sometimes state). There are two less for a refinance, as sellers and realtors don’t apply, and even if you are buying, their interests really are not your problem. Also, you’re no longer a buyer, but an owner. That leaves four interested parties with their hands in your cookie jar, and you’ll see their fees in your official Loan Estimate.
Large difference between Note Rate and APR
The APR, or “Annual Percentage Rate”, is sometimes helpful in comparing the costs between lenders. While it was created and mandated for this reason, to factor closing costs into the rate and give a singular “cost of funds”, it can also be misleading if used on its own. It’s accuracy when disclosed is rarely double checked, and is usually quoted based on limited inputs in a system instead of the whole transactional picture. However, calculating and understanding your exact APR is hardly necessary. What you want to look out for is a large gap between your note rate and your APR. What is a “large gap” in relation to a VA loan? It’s somewhat of a moving target, but I would at least question any difference of a quarter percent, 0.25%, or more.
Let me give you an example.
This was a snapshot I found on USAA’s website today, that does a pretty good job showing you how cost affects APR by clearly displaying the points associated with a few different rate options (good job especially compared to Veteran’s United, who’s rates I couldn’t even find without submitting my information, another red flag if you’re shopping for the best deal).
I circled the top one there as an example of how when you get closer to paying 1-point or more, that APR starts to drift up to or outside of the 0.25% difference threshold.
Oftentimes, we start the VA Loan conversation at the zero-point level and go from there. In fact, more and more we are choosing negative point options to help our clients pay some of the other parties in the transaction, which I explain here, in What Are Lender Credits Anyway?
Responsiveness of the Loan Officer
A few months ago, we wrote a short eBook called 5 Biggest VA Loan Mistakes Revealed, and (spoiler alert) the biggest mistake we think you can make is to not interview your loan officer. You can only get the eBook by signing up for our newsletter, but let me share an excerpt about how important it is to work with a good VA Loan Officer.
This mistake is #1 because there are hundreds of other mistakes you can make along the way, but if you pick the right partner to guide you through, you can really save yourself a ton of headache. You want to make sure that you are working with the best. There is a tremendous amount of benefit to a VA Loan, but also a tremendous amount of risk in charting the wrong course…. Look for affirmative phrases like, “I can help with that”, or “It’s my job to make sure you understand your loan”. Encouraging and open dialog is a good way to make sure you have a confident, knowledgeable and transparent loan officer.
We continue to bring this up because it truly makes a difference in your experience, and can have tangible effects on your financial situation. A good loan officer is not hard to spot. Does he return your calls promptly, within 24 hours (or sooner)? Does she talk around your questions, or does she answer them? Does he demonstrate knowledge of Veteran loans, or hide the fact he rarely does them? Does she have reviews and testimonials that are clearly from VA Loan transactions?
Ask questions. Get answers. You deserve it!