Veterans Affairs home loans are a popular choice with military home buyers. Not just for Veterans, these loans are also available for service members and surviving spouses.
VA home loans are available through private lenders like banks and mortgage companies. The VA offers guarantees to the lender, so the bank is then able to offer better terms than with an FHA or conventional loan.
They are a unique opportunity for military home buyers when it comes to mortgages and are definitely worth researching to see if they might be the best option for you.
The Advantages of a VA Mortgage Loan
For veterans, service members, and surviving spouses, there are many benefits to considering a Veterans Affairs mortgage. These loans offer unique benefits, especially for those without a lot of money for closing costs or a down payment. People with less than perfect credit scores will find the VA home loan option to give them a boost up.
No Down Payment Required
The greatest benefit to a VA loan is that eligible homeowners aren’t required to have a down payment. Yes, a zero down home loan. This is a rare opportunity. With a FHA or a conventional loan you can expect a range of 3% to 20% for a down payment. While many people view this as the greatest benefit to a VA loan, and it certainly is convenient, others will still put down as much as they can afford to so they can own their home sooner and pay less in interest over the years. Still, for many, this is an exceptional advantage.
There Is No Need for Private Mortgage Insurance
A VA Loan doesn’t require private mortgage insurance (PMI). For conventional home buyers, private mortgage insurance is required unless they have a down payment of twenty percent or more. If a borrowed was unable to cover their mortgage, their PMI would pay the lender to cover the loss. Borrowers with private mortgage insurance have to pay a monthly premium as part of their mortgage payment every month. With VA loans, the VA guarantee takes the place of private mortgage insurance, so borrowers are not required to get PMI.
There Are Opportunities for Savings
A VA home loan will usually have the lowest average interest rate available. These mortgages also typically offer lower monthly payments. Of course, as with any loan, to get the most favorable terms, you’ll need to have a good credit history and enough steady income.
Closing costs are much less with a VA loan because they are limited to 1% of the total loan amount. With a conventional mortgage this number would be 3%. This can be thousands of dollars in savings.
No Prepayment Penalty
If you’d like to pay off your VA loan early, you won’t have to pay a prepayment penalty. Many home mortgage options have prepayment penalties. This means that if you want to finish paying off your mortgage early, you’ll end up paying a fee. While you may end up not needing this benefit, things may change and this may be a perk for you. Paying off your mortgage early (without a prepayment penalty) can save you money in interest.
The Foreclosure Advocacy Program Is On Your Side
If you ever have trouble paying your mortgage in the future, the VA loan program has foreclosure avoidance advocacy. Staff at the VA will advocate for homeowners with the lender to attempt to find other options.
A Higher Debt to Income Ratio
Veterans Affairs home loans tend to have more flexible mortgage guidelines. One of the main ways this comes into play is by allowing a higher debt to income ratio (DTI). With conventional loans the DTI is typically 36%, while with a VA loan it is 41%.
They are also more lenient about things like previous foreclosures or bankruptcies.
They Are Assumable Loans
VA loans are assumable. This means that another borrower could take over your mortgage payment. The new buyer would have to qualify for a VA loan and seek lender approval.
This can be an advantage when you go to sell your home because it can mean more interest in your property. If interest rates have risen by the time you go to sell your home–which is entirely possible–then this can be an incentive for buyers who will be able to assume the interest rate of your loan.
The Disadvantages of a VA Mortgage Loan
The list of advantages for a VA home loan is much longer than the list of disadvantages. There are many perks to this kind of mortgage product. Still, that doesn’t lessen the importance of taking the downsides into careful consideration as something you should think about before committing to a mortgage.
There’s a Negative Perception With Home Sellers
The biggest con to Veteran Affair mortgages is that they have a negative reputation with many home sellers. The VA requires its own appraisal. Sellers often believe that this will mean the selling process will take longer and that there will be possibilities of getting a lower offer than they should. They worry about possible hurdles that more paperwork and procedure will add to getting their home sold quickly and for the best price.
These concerns are largely based on the way VA loans used to work. These days there is an automated underwriting processes that has changed things. Still, the perception can mean that when you are competing for a house, the seller may choose to go with another offer that doesn’t involve a VA loan because of this perception.
The VA Funding Fee
There is a VA funding fee you need to take into consideration. This fee is paid directly to the VA. The first time the borrowed uses the VA benefit, the fee is 2.15% of the loan. If the borrower has used their VA benefit before then the fee is 3.3%. This funding fee goes to the VA to help offset their costs so they can keep offering loans to future buyers. It also helps them in case the loan goes into default.
Because VA loans are 100% funded, this fee can be paid upfront or it can be part of the loan itself. Some people will be exempt from this fee, including anyone currently receiving VA disability compensation.
The Loan Must Be Used for a Primary Residence
Veterans Affairs loans can only be used for a primary residence. Meaning you need to live there. This means that you can’t use a VA mortgage loan to buy an income property.
How to Decide Whether A VA Home Loan Is Right For You
For many of the borrowers eligible for a VA home mortgage, this will be the best option available. Not having to pay a down payment can be a huge advantage, plus the benefit of lower closing costs, interest rates, and monthly payments. However, there are always exceptions. One example is an older borrowed, who may have other programs they can take advantage of offering even lower rates.
If you still aren’t sure what kind of home loan might be best for you, you can ask someone in real estate for recommendations for a mortgage professional you can trust to consult with on what your best options are.