by Chris Birk
The VA home loan program is more important today than ever before and is one of the most powerful loan options on the market for active military and veterans. It’s increasingly difficult for many military borrowers to build the credit and assets necessary to move forward with conventional home financing.
The VA loan program’s advantages over other loan types are a big reason why VA loan volume has continually grown over the last five years. Here are the main benefits of VA loans:
VA financing comes with significant financial benefits for those who’ve served our country, and the requirements to secure them are often looser than what veterans would need for a conventional or even FHA loan.
For a lot of active military and veterans, the VA home loan program is their only real path to homeownership. The increasing popularity has stemmed from the main benefits of VA loans. Let’s take a deeper look at the eight biggest benefits of VA mortgages:
1: No Down Payment
The VA loan program offers veterans and service members incredible benefits, from no $0 down to no PMI and more.
Qualified veterans can obtain a VA loan without making any down payment. Compared to conventional and FHA loans, this translates into significant monthly savings.
The minimum down payment amount on a FHA loan is 3.5 percent; for conventional financing, it’s often 5 percent. On a $250,000 mortgage, a military borrower would need to come up with $8,700 in cash for an FHA loan and $12,500 for the conventional loan.
Those are significant, often insurmountable sums for the average military borrower. In fact, the average VA borrower has just under $9,000 in total assets.
The amazing benefit of being able to purchase with $0 down helps veterans and active military members get a slice of the American Dream without having to spend years scraping and saving for a sizable down payment. That means those who serve our country can get into homes in the present, not years down the road.
2: No Mortgage Insurance
Unlike conventional and FHA loans, a VA loan doesn’t require monthly mortgage insurance. FHA loans come with both upfront and annual mortgage insurance charges. On a $250,000 mortgage, FHA’s annual mortgage insurance can add about $170 per month to your mortgage insurance.
For comparison, veterans who secured a VA loan last year will save more than $40 billion in private mortgage insurance costs over the life of their loans, according to VA estimates.
Conventional borrowers who can’t put down 20 percent typically have to pay for private mortgage insurance.
This is an additional monthly fee that’s tacked on to your monthly mortgage payment until you build 20 percent equity. The cost will vary by loan amount and other factors, but it’s not uncommon to pay more than $100 per month for PMI.
3: Competitive Interest Rates
Since the VA guarantees a portion of every VA loan, financial institutions can offer lower interest rates to VA borrowers that are typically 0.5 to 1 percent lower than conventional interest rates. Rates are based on the inherit risk assumed by the lender to finance the loan. The VA’s guarantee provides lenders with a sense of security that allows them to charge competitively lower rates.
On a 30-year $250,000 loan, the difference between paying a 4 percent and 4.75 percent rate can mean approximately $40,000 in savings over the life of the loan.
4: Relaxed Credit Requirements
Since the Department of Veterans Affairs only oversees the loan program and does not issue loans, the agency does not set or enforce credit score minimums. However, most VA lenders use credit score benchmarks to judge a borrower’s risk of default and typically look for a credit score of at least 620.
For a conventional loan, veterans will often need to meet a higher benchmark. The average conventional buyer had a FICO score about 50 points higher than the average VA buyer in 2016.
Veterans don’t need anything near perfect credit to secure home financing at competitive interest rates despite the relaxed credit score requirements. VA loans are also more forgiving when it comes to bouncing back after a bankruptcy, foreclosure or short sale.
5: Closing Cost Limits
All mortgages come with fees and closing costs. But the VA actually limits what veterans can be charged when it comes to these expenses. Some costs and fees must be covered by other parties in the transaction. These safeguards help make homeownership affordable for qualified homebuyers.
VA borrowers can also ask a seller to pay all of their loan-related closing costs and up to 4 percent in concessions, which can cover things like prepaid taxes and insurance, paying off collections and judgments and more. There’s no guarantee the seller will agree to that request, but veterans can certainly ask during the negotiation process.
6: Lifetime Benefit
One of the most common misconceptions about the VA mortgage program is that it’s a one-time benefit. In fact, those who’ve earned it can use this program over and over again throughout their life. And unlike what you may have heard, you don’t necessarily have to pay back your VA loan in full to get another one. A case in point is a veteran who defaults on a VA loan (see Benefit 8 below).
It’s even possible to have more than one VA loan at the same time. So please don’t let anyone tell you that using your home loan benefit decades ago means you’re no longer eligible. Or that because you have a VA mortgage at your current duty station means you can’t purchase again with a VA loan when you PCS across the country. If you have any questions about your VA loan entitlement or what might be possible, contact a Veterans United loan specialist at 855-524-7279.
7: No Pre-payment Penalties
Many people realize how much money they can save by paying off their loan early, but are often forced to pay prepayment penalties if they wish to do so. Prepayment penalties were created to protect lenders and investors from the financial loss of losing years and years of interest payments on issued loans.
Fortunately for VA borrowers, you can pay off your VA loan early with no fear of getting hit with any prepayment penalty.
8: Foreclosure Avoidance
VA loan have been the safest loan on the market for most of the last eight years. That’s pretty remarkable considering that about 8 in 10 homebuyers don’t put any money down. The VA mortgage program has emerged as a safe harbor for several reasons, including the VA’s residual income guidelines. The VA itself has also done a tremendous job advocating for veterans in jeopardy and working to ensure they stay in their homes. Those efforts have helped more than 500,000 veterans avoid foreclosure since the housing crisis.
The VA guaranty program isn’t just about getting veterans into homes. It’s also focused on helping veterans keep them.