For eligible active and veteran military service members, the loan program administered by the Department of Veterans Affairs (VA) is an attractive path to homeownership.
The VA loan has helped 79% of veterans become homeowners. This is significantly higher than the 63% of homeowners who are non-veterans.
In this post we’ll look at the common features and questions around VA loans.
Why Use A VA Loan?
Lower interest rates, no down payment, and no minimum credit score are just some of the advantages of using a VA loan.
What Is A VA Loan?
A VA loan is a loan available to eligible active and veteran service members and surviving spouses to buy a home.
The VA does not directly issue the loans. Instead they set the eligibility, mortgage guidelines, and requirements for lenders to follow. The VA also insures the loan, which is issued through a private lender, acting as a financial guarantor.
How Does a VA Loan Work?
The VA partners with private lenders to help eligible veterans and their families buy a home. The VA guarantees a portion of each mortgage, allowing borrowers to skip the typical down payment and private mortgage insurance requirements of other loans, such as conventional mortgages.
While you can’t use a VA loan to buy an investment or vacation property, you can use it to buy or build a new home or make renovations to your existing home.
10 Benefits to Using a VA Loan to Buy Your Home
There are a number of advantages to using a VA loan compared to other mortgages when it comes to buying a home.
1. You Do Not Need A Down Payment To Get A VA Loan
Unlike FHA or more conventional loans, eligible veterans are not required to make a downpayment to get a VA loan.
Considering that an FHA loan requires a 3.5% down payment and most conventional loans require 5% for the first-time homeowner, the no down payment requirement of a VA loan saves you significant money on your home purchase.
For example, with a $200,000 home, an FHA loan would require $7,000 down. You’d need $10,000 for a downpayment on the same home with a conventional loan.
2. You Do Not Have To Pay Private Mortgage Insurance
FHA loans carry with them upfront and annual private mortgage insurance (PMI) fees, and conventional mortgages require mortgage insurance for borrowers whose downpayment is less than 20%.
With a VA loan, you do not have to pay mortgage insurance.
Mortgage insurance rates can range from less than 1% to just over 2%. For an FHA loan with a PMI rate of 0.5% on a $200,000 mortgage, you would be looking at more than $80 every month just in mortgage insurance.
3. There Are Limits To Closing Cost Amounts
The VA loan puts money in your wallet by limiting the closing costs you’ll have to pay.
The VA limits the total closing costs that fall to the homebuyer, requiring some costs to be covered by the lender and seller.
Additionally, under the VA loan, borrowers can request that the seller pay the full amount of any loan-related closing costs and concessions (such as prepaid taxes or land transfer fees, etc) up to 4%
4. Lower Average Interest Rates
Because the VA financially guarantees a percentage of each VA loan, private lenders can typically offer lower than average interest rates.
Interest rates are calculated based on the associated risk of lending to a particular borrower. Because of the government’s backing, VA loans typically have the lowest average interest rate among all loan products. VA loan rates are often between 0.5% to 1% less than conventional interest rates.
For a $200,000 mortgage with a 20-year amortization period, a 2.75% interest rate translates into roughly $5,500 in annual interest fees. With a 1% lower interest rate, that amount drops to approximately $3,500– almost $40,000 in saving over 20 years.
5. You Can Make Additional Mortgage Payments Without Additional Penalties
With a little extra money in the bank at the end of each year, you might be able to make additional mortgage payments or even pay off your mortgage early. Most conventional loans charge a penalty to do this, but a VA loan doesn’t.
You can make additional payments during the life of your mortgage without having to incur financial penalties.
6. Current Homeowners Can Refinance An Existing VA Loan
If you purchased your current house using a VA loan, you can refinance it through another VA loan program. The Interest Rate Reduction Refinance Loan (IRRRL, pronounced “Earl”) is a VA program designed to help homeowners lower their monthly payment amount.
7. VA Loans Can Be Assumed
To assume a mortgage means to take over a current homeowner’s mortgage and make the monthly payments. A VA loan can be assumed, depending on approval from the VA and your lender.
If you purchase a home through mortgage assumption, you will take over the existing mortgage and benefit from payments already made, including gaining the existing home equity.
8. Reduced Credit Requirements
There are no credit score minimum requirements to obtain a VA loan. This is because the VA doesn’t actually issue the loans. They are issued through specific private lenders.
Most private lenders do, however, look at credit scores when considering mortgage eligibility and generally require a minimum 620 credit score to meet minimum requirements.
9. You Can Use A VA Loan Program Again And Again
Unlike some programs that are a “once-and-done” program, eligible borrowers can use the VA loan programs over and over again, at different stages in their lives. And you don’t always have to pay back your initial VA loan, to be eligible for another one.
In certain situations, it is also possible to have multiple VA loans simultaneously. This can be especially relevant if you receive PCS orders or would like to move following retirement or discharge.
10. Foreclosure Avoidance Advocacy
Unique to VA loans programs, the Department of Veterans Affairs can advocate for homeowners in jeopardy of foreclosure. The VA employs loan technicians. These individuals work on behalf of borrowers having difficulty making mortgage payments to negotiate with lenders and find alternative arrangements.
The VA loan isn’t solely about getting home buyers into their homes. It’s also about keeping them in their homes.
Do you have more questions about why to use a VA loan? Are you interested in learning whether it’s the best choice for you?
Reach out to the VA loan specialists at River City Mortgage today. We’re ready to help you find your way home.
Image by Kevin Phillips from Pixabay