By Sabrina Karl

For homebuyers with a military connection, a VA loan offers perks that other Americans can’t access. But there’s a trade-off, so it’s critical you understand the details of these special mortgages.

VA loans are offered by private lenders, but the U.S. Department of Veterans Affairs provides insurance that reduces the lender’s risk should you default. As a result, VA loans do not require homebuyers to pay for private mortgage insurance (PMI).

Other advantages include a potentially lower rate than on a conventional mortgage, relaxed credit score thresholds, and no down payment requirement.

VA loans are available to veterans, active military, reservists, National Guard members, and qualified survivors of a deceased veteran. The loan must also be for a primary residence.

So with no down payment, competitive rates, easy credit score requirements, and no PMI, what’s the catch? The trade-off is the VA Funding Fee. At 1.25% to 3.3% of your total loan amount, this fee can be heftier than many homebuyers expect.

Though you can roll this one-time cost into your total loan package, it will raise your monthly payment, and may even raise your interest rate. So it’s worth considering how to lower the fee.

The No. 1 way to do this is by making a down payment. Putting 5% down will drop the fee by a substantial amount, and 10% down will drop it to its lowest level. Your category of military service and whether you’ve previously taken out a VA loan also determines the fee.

If 5% down isn’t an option, and you have a low credit score, a VA Loan could still be your best bet. Just be sure to carefully compare what you’d pay for PMI if you go with a conventional mortgage vs. what the VA Funding Fee will cost you.