If you are a military veteran or are currently serving active-duty, there is an incredible mortgage program available to you through the Department of Veterans Affairs – the VA loan. VA loans are made through regular lenders but backed by the Department of Veteran Affairs, reducing the risk to the lenders themselves. VA mortgages can offer a wealth of benefits to those who qualify.
Lower Interest Rates
VA mortgage loans were designed to give veterans a leg-up in the home buying process as a way to thank them for their service. One of the loan’s perks is that the interest rate on VA loans is typically lower than most other mortgage loans. In the past several years, Ellie Mae has documented a 0.25% spread between VA loans and conventional mortgages.
No Down Payment
Unlike most other home loans, VA mortgages do not require a down payment. Conventional loans can require anywhere from 3% to 20% of the purchase price as a down payment. The VA no-down payment clause is a huge benefit that saves you from having to come up with thousands of dollars at the outset of the loan. The exception to this rule is when the appraised value of the home is lower than the purchase price you have agreed to pay. This can sometimes happen in hot real estate markets where there are multiple bids on most properties. In this case you would have to come up with the difference between the two amounts.
Relaxed Credit Standards
While conventional loans have minimum credit standards needed to qualify, VA loans do not have a minimum credit score, nor do they have a minimum debt-to-income ratio like other loans. Lenders take a more holistic approach when considering a VA mortgage applications. They will review the entire loan profile, including your FICO score, your total debt load and your ability to repay the loan. If you happen to be a veteran whose credit score needs improvement, a VA loan could be the answer for you.
For conventional loans with down payments of less than 20%, private mortgage insurance is required, increasing the annual mortgage cost significantly. PMI can cost the borrower as much as 2.25% of the purchase price. This insurance protects the lender against losses if the borrower defaults. VA loans do not require borrowers to carry PMI, saving them hundreds or even thousands of dollars.
If these benefits have swayed you to look into a VA loan, here are few other things you need to know. VA loans are available to those who are active duty military personnel who have served for a minimum period or veterans who ended their military careers with anything but “dishonorable discharge. Sometimes Reservists and National Guard members can qualify as well as surviving spouses of deceased veterans.
Also VA loans do require a funding fee. This is the VA’s form of insurance to protect them against losses from borrower foreclosures. This fee can be anywhere from 1.25% to 3.3% of the total mortgage loan amount. Factors like the size of your down payment if any, the amount of time you served, in which branch of the military you served, and whether you have already taken out a VA loan will all determine how much of a funding fee you will be charged. Often this fee can be rolled into the loan, increasing the monthly mortgage payment but allowing you to hold on to your cash at the beginning of the loan.