How To Choose the Right VA Home Loan
When a service member transitions to civilian life, it’s often a good time to explore purchasing a home. Some veterans are already homeowners looking to move to a new home or remodel their existing home. Either way, a VA home loan is a great alternative to traditional home financing.
6 Ways a VA Home Loan Is Better Than a Conventional Loan
- Easier to qualify
- No Mortgage Insurance
- Save on Closing Costs
- $0 Down Payment
- Lower Interest Rates
- Lifetime Availability
Despite their name, VA loans are not actually extended and serviced by the Department of Veterans Affairs. At one time they were, and in select cases some still are, but predominantly they are offered by third-party financial institutions like a bank or mortgage lender. The reason these types of loans are called VA loans is because the VA backs the loan, promising to repay up to 50% of it back in the event of a default, up to $45,000.
Easier to Qualify
VA loans are easier to qualify for because the VA backs a portion of the loan. The main reason why a bank or lender would deny a loan is when the applicant presents a credit risk. However, in the case of a VA loan, the government is promising to repay a portion of the loan if the borrower defaults, which significantly reduces the credit risk.
This means that the lender can loosen their requirements in terms of minimum credit score, income, employment history, and whatever other factors they might have. However, keep in mind that banks and lenders are still allowed to create lending requirements.
What about past bankruptcy or foreclosure?
Lenders cannot deny VA borrowers for having a bankruptcy or foreclosure if it occurred over two years ago. This isn’t the case with an ordinary borrower. However, if the foreclosure was on a property funded by a VA loan, the borrower may need to settle their debt with the VA before obtaining a new mortgage.
No Mortgage Insurance Required
If a borrower puts down less than 20% on their home purchase, they will often be required to obtain PMI or private mortgage insurance. This insurance will help the bank get compensated if the borrower defaults, but the responsibility for paying the premiums falls on the homeowner.
A VA loan borrower still must pay a one-time VA funding fee. This fee is typically 2.3% of the total amount borrowed, and 3.6% for borrowers who have taken out a VA loan before. Disabled veterans can sometimes have the fee waived in its entirety, while others can reduce the VA funding fee by putting down more than 5%.
Save on Closing Costs
In a normal home sale, closing costs include things like loan origination fees, appraisal fees, title search fees, title insurance, taxes, and deed recording (to name a few). Although closing costs vary from state to state, they typically run about 2-5% of the loan amount.
While a VA loan borrower will still have to pay some closing costs, as part of the agreement the VA has with lenders, the lenders must limit the amount they can charge VA borrowers in terms of closing costs to no more than 4% of the loan total. This is good news for Veteran homeowners because they can put some of that savings towards moving, furniture, or even a few monthly mortgage payments.
$0 Down Payment
A VA loan does not require a down payment, which is a pretty amazing feature in and of itself. You really can finance up to 100% of the home with a VA loan. However, it is important to keep in mind that making a down payment of at least 5% can reduce your VA funding fee.
The more money you can put down on your home, the lower your monthly payment will be, which is a serious consideration, especially for veterans on a fixed income. Even so, there are many veterans who, just getting out of their service, may not be in the position to have saved up a significant amount of cash for a traditional 20%+ down payment.
Lower Interest Rates
The interest rates for a VA loan are typically lower than traditional conventional loans. Some estimates suggest that rates are usually 0.25% lower. Since the VA is backing the loans and reducing the credit risk, the lender can also lower the rate of the mortgage they’re extending.
It’s still important to keep in mind the difference between variable loans and fixed loans. Variable loans have rates that fluctuate with the market, while fixed rates do not change. The type of loan you get depends on the market at the time, your projected future earnings, and other factors you should discuss with a lender who has your best interests at heart.
Lifetime Availability and Assumability
You can transfer your VA to a future homebuyer, which makes it easier to sell your home in the future. Of course, the homebuyer you’re transferring it to must also be eligible. VA loans are also always available to veterans, whether they are first-time homebuyers or looking to refinance an existing property.
As long as you have met the eligibility requirements vis-a-vis your service and obtained a Certificate of Eligibility (COE) from the VA, five, ten, fifteen, or more than twenty years can go by and you can still get a VA loan.
What Are the Different Types of VA Home Loans?
There are several different types of VA home loans. Choosing the right loan depends on your specific situation and goals.
Purchase Loan
The VA Purchase Loan is the standard VA loan you can use to purchase a primary residence. This primary residence could be a single-family home, condo, or multi-unit property of up to four units, one of which serves as your primary residence.
To qualify for the VA purchase loan, you must have a COE (Certificate of Eligibility) which shows that you retired or were honorably discharged from service. You must also meet the lending requirements of the lender you are working with.
While every lending firm has unique requirements, there is no national minimum credit score set by the VA that these lenders must follow. This, along with the fact that the VA is backing the loan, makes these purchase loans much easier to obtain for veterans.
Native American Direct Loan (NADL)
If you are a Native American or you are married to a Native American, you can get a VA loan to buy a home on a reservation or federal trust land. You can also use a NADL to remodel an existing property or even build a new home.
Remember that a VA mortgage is offered by a third-party VA mortgage lender. If you have VA loan eligibility for an NADL, that is a very specific type of loan type, and not every loan officer will be able to help qualified veterans obtain it. There is a good chance that if you fall into the category of eligible veterans for this loan option, you are looking at buying, building, or renovating a home on a federal land trust.
It’s a good idea to seek out a mortgage loan officer with a local bank, credit union, or branch of a larger bank since they will be familiar with the federal trust land and likely have more experience putting this type of loan option together.
Interest Rate Reduction Refinance Loan (IRRRL)
If you already have a VA loan but would like to refinance and lower your monthly payment, an IRRRL could help. To qualify, the first loan must be a VA loan, and you have to prove you are residing in the home. Or, if you already have a second mortgage, the lienholder of that second mortgage must agree to treat the IRRRL as your primary mortgage.
The VA IRRRL carries a greater degree of flexibility for eligible veterans who may have already moved out of the home they initially financed with a VA mortgage loan. If you are a veteran in this position, you can retain your first home as a rental or vacation home, as long as you resided there for one year. For eligible veterans, an IRRRL can provide some options for restructuring your overall debts to ease the burden of your finances.
Cash-Out Refinance Loan
If you have some equity in your home, then you can take some of that equity out in the form of cash by getting a cash-out refinance loan. These types of loans are typically used for larger expenses like school tuition, paying off other debts (like credit cards), or remodeling.
Remember that VA guaranteed loans have several advantages over a conventional loan, including interest rates and qualifying factors. This means that the VA cash-out refi is an attractive option to something like a HELOC (home equity line of credit).
The VA cash-out refinance option does not require that your home initially have been financed with a VA mortgage loan. In fact, the type of loan used does not matter at all, because this type of loan is based on the amount of actual homeownership you have in your property, allowing you to borrow against that ownership.
The cash-out refi is great for older Veterans who have paid off their home and would like a lump sum of money to use in retirement, travel, cover medical expenses, or gift to their grandchildren for college tuition.
Benefits of a VA Home Loan
A VA home loan can provide veterans with several home loan benefits compared to a traditional conventional mortgage. Remember that VA home loans are not offered by the VA, but the department guarantees the loans provided by third-party financial institutions like banks, credit unions, and mortgage lenders.
Not all VA loans are the same, and lenders are still allowed to have their own requirements and terms, up to a certain point. For instance, lenders are not able to have closing costs exceed 4% of the loan total. This means that you will still need to shop around for the best loan. Now that you are armed with a better understanding of VA home loans, you can reach out to qualified lenders who can walk you through your options.