A Closer Look at VA Loans (and why they are the best option for veterans)

The demand for VA loans is heating up. Created before the end of World War II, VA loans are benefitting millions of veterans, service members and their families achieve their dream of homeownership. VA loan volume has soared since the recession, driven largely part of the historically low rates and increasingly tougher loan requirements. The VA loan provides financial benefits to make home buying possible for veterans who may not otherwise qualify.

Check out the biggest, most unbeatable benefits of these cherished home loans:

Who’s eligible?

Most members of the military, veterans and National Guard members are eligible to apply for a VA loan. Here is a list of those who are eligible for this home-buying benefit:

  • Veterans
  • Active-duty members
  • Reserve members
  • National Guard
  • Some surviving spouses

In addition to these eligibility factors, you must have decent credit, a sufficient income and a valid Certificate of Eligibility (COE). The COE will verify that you are qualified and outline your benefits level.

Benefits

No Down Payment

This is the program’s signature benefit. Qualified VA borrowers can purchase a home up to $417,000 without a down payment.

For conventional and FHA loans, buyers typically are required to put down a minimum of 5 percent. On a $200,000 mortgage, that’s a $10,000 down payment for conventional and a $7,000 down payment for FHA.

Based on certain circumstances, it can take service members and veterans years to save up a decent down payment. The ability to purchase with no down payment means homebuyers don’t have to scrape and save for years to pursue a home of their own.

No PMI (private mortgage insurance)

As if coming up with a down payment isn’t challenging enough for conventional and FHA buyers, they’re also required to have mortgage insurance unless they can put a sizeable amount of 20 percent of the purchase price down. On that same $200,000 mortgage example, that’s a whopping $40,000 in cash.

FHA loans carry an upfront mortgage premium and annual mortgage insurance, which lasts now for the life of the loan. Conventional buyers will pay a monthly amount until they’ve built up a good amount of equity, which can take years.

There is no mortgage insurance with a VA loan. This has saved veterans an estimated $19 billion over the life of their loans.

VA loans do come with mandatory funding fee that goes directly to the Department of Veterans Affairs. Borrowers with a service disability are exempt from paying this fee, which helps keep the program for future generations.

Flexible credit requirements

VA loans were first created to boost access to homeownership for those who serve our country, and the government urges lenders to take a more comprehensive look at buyer’s credit and financial history.

Most VA lenders are looking for homebuyers with a credit score of at least 620. The 620 benchmark is in the “fair” credit score range, which is a tier below “good” and two below “excellent.”

In addition to the flexible credit, would-be buyers can also bounce back faster in the event of a bankruptcy or foreclosure. Veterans can obtain a loan just a year removed from filing a Chapter 13 bankruptcy and two years following a Chapter 7 foreclosure.

Forgiving debt-to-income ratios

VA lenders typically won’t want to see you spend more than 41 percent of your gross monthly income on major debts, such as mortgage payments or student loans. This is a higher allowable (DTI) ration than other loan options.

It is possible to have a higher DTI and still obtain a VA loan. Depending on the lender, the may go up to 55 percent or more depending on credit score and ability to hit income requirements. This flexibility makes it easier for veteran buyers to maximize their purchasing power.

Competitive interest rates

Interest rates on home loans are based on risk assumed by the lender to finance the home. Because the Department of Veteran Affairs backs each VA loan, financial institutions carry less risk and can offer interest rates that are 0.5 to 1 percent lower than other loan option interest rates.

Pair the low interest rate with the ability to have no down payment and no PMI and the savings will begin to add up quickly.

Closing costs

Avoiding closing costs is almost impossible, regardless of the mortgage product. The Department of Veteran Affairs limits what fees and costs veterans will pay at the time of closing. Non-allowable fees that VA buyers will not pay include termite inspections, broker fees and lender document processing.

Homebuyers can ask the seller to pay their loan-related closing costs and up to 4 percent of the purchase prices for prepaid taxes, insurances, collections and judgments.

How do I apply?

Veterans, active-duty members and military families can follow these steps to get a VA loan:

  1. Check the VA website to make sure you qualify for the VA program. The website will give you a detailed list of eligibility requirements.
  2. Find a participating lender.
  3. Retrieve a Certificate of Eligibility from the VA to prove you are eligible or have your lender request on your behalf.
  4. Apply for the VA loan and your lender will work with you to complete the steps needing to get into your home.

Quick tips

  • Be sure to check your credit BEFORE going through the process. Your lender will use this information to consider your eligibility, so you will want to put your best foot forward.
  • With historically low interest rates, it makes sense to consider all options. For those service members that think the will be in a home for a short amount of time might want to consider an adjustable-rate mortgage to keep their payments low. For those planning to make this a lifelong home and can afford a slightly higher monthly payment, take a look at a 15-year fixed rate loan. This will help you pay off the loan faster and save money on total interest paid.
  • Be sure to get pre-qualified on your loan so you will know your price range. This will save you time and stress in the beginning stages of the home search. It will also provide you with credibility when dealing with sellers that are aware you are already pre-qualified.

VA loans will not be the right fit for every military homebuyer. But these flexible government-backed loans will continue to make a difference for millions of veterans and military families that want to achieve their dream of homeownership.