Since its inception more than seven decades ago, the Department of Veterans Affairs (VA) home loan has helped millions of borrowers get the home of their dreams. It’s available for qualified borrowers planning to purchase, build, or refinance properties. Contrary to its name, this loan program can benefit veterans, active service members, or a surviving spouse of a veteran. Compared to traditional home mortgage loans, VA loans can save you thousands in fees.
In this article, you’ll find out how a VA home loan works and why it makes home acquisition less challenging compared to traditional home lending.
How Does A VA Loan Work?
The United States Department of Veterans Affairs runs the program. As a VA-backed loan, the agency prescribes the qualifications and establishes the mortgage terms. However, financing the mortgage loan are private lenders such a Security America Mortgage and other similar entities in a respective area.
Unlike regular loans, however, eligible borrowers can access total financing of the home they want. They can use the loan amount in purchasing or building a new home, improving or fixing property, and refinancing a mortgage, especially if they think they can save a lot from VA loan’s lower rates.
Like Federal Housing Administration (FHA) loans, the government insures VA loans through the Government National Mortgage Association (GNMA) or Ginnie Mae.
Who Qualifies For A VA Loan?
Veterans and military personnel on active duty can benefit from VA loans. The minimum eligibility requirement for active members is 90 continuous days or more of active duty. Qualifications for out-of-service veterans vary based on the period of service.
Similar to applying for a personal loan, the first step in availing of this mortgage loan is to check if you qualify. Check the website for further information as documentary requirements differ from whether you’re a veteran or active personnel.
Types Of VA Loans
Eligible borrowers are one step closer to owning their new or refurbished home through the following home financing programs:
- Purchase Loan. This can be used for buying, building, or renovating a home.
- Native American Direct Loan (NADL). This is open for veterans and members of Native American descent or their spouses and with a property located on federal trust land.
- Interest Rate Reduction Refinance Loan (IRRRL). This is for borrowers with active VA loans but looking to reduce their monthly mortgage payments.
- Cash-Out Refinance Loan. This can replace your existing non-VA loan with a new one backed by the agency.
Unbeatable Benefits Of VA Loans
If you qualify for any of the VA financing programs mentioned earlier, you stand to benefit from the following:
1. VA Loans Have Zero Down Payment
The no down payment rule is one of the most known advantages of getting a VA-backed home loan. Most veterans qualify for this benefit, whereas regular loans typically require a down payment of up to 20% of the total home value.
Other conventional and government-backed loans such as one from Federal Housing Administration (FHA) generally ask buyers to place a 3.5-5% down payment. Taking a USD$300,000 housing loan means paying USD$15,000 for regular loan takeout and USD$10,500 for an FHA loan.
Getting a VA loan means you don’t have to wait to save up for a down payment, which could take years. As such, eligible borrowers will have enough funds to furnish their new home and transfer to the house of their dreams as soon as possible.
2. VA Loans Have Less Stringent Credit Requirements
Besides proof of income, traditional lenders typically check on a borrower’s credit history and score before issuing an approval or rejecting the application. While a perfect 850 credit score is ideal for lenders, getting a 760 score can already provide you with excellent access to several loan products with no problem.
Like other mortgage types, VA loans require proof of income documentation and a review of a borrower’s credit score. Unlike general loans, though, the VA financing program has generally lower credit score and debt-to-income (DTI) ratio acceptability requirements. Thanks to government loan guarantees, borrowers don’t need an impeccable credit score to access these VA financing services.
3. VA Loans Are Exempted From Private Mortgage Insurance
Unlike other home loan financing products, a VA loan doesn’t come with private mortgage insurance (PMI), which means it helps reduce a sizeable amount from your monthly amortization fees. Not to be confused with a homeowner’s insurance, a PMI is an insurance policy to protect the lender if a borrower defaults on a loan. Mortgage buyers who put up less than 20% of the down payment often have to pay PMI.
PMI amounts can range anywhere from USD$30-70 per month for every USD$100,000, according to the Federal Home Mortgage Corporation, or Freddie Mac. This add-on cost will exist for the entire span of the loan.
4. VA Loans Can Save You On Closing Costs
Regular home loans require buyers to pay closing costs to cover the costs involved in all stages of the home buying process. These could include application, appraisal, lawyer, courier, credit report, and home inspection fees, among other costs.
Depending on the loan type, location, and property type, closing costs can range anywhere from two to five percent of the total home cost. While a VA loan imposes a funding fee, it limits what qualified borrowers have to pay upon the closure of the transaction. For instance, borrowers can ask sellers to pay all their mortgage-related closing fees and up to 4% percent of the purchase price for concessions such as prepaid taxes and insurance.
5. VA Loans Are Free From Prepayment Penalties
Most lenders charge a prepayment penalty for borrowers who choose to pay all or a massive chunk of the loan earlier than anticipated because these financial institutions can earn more from interest charges over time. Mortgage penalties often apply to refinancing and paying off more than 20% of the loan balance for the year.
Conversely, a VA home loan doesn’t charge prepayment penalties for members who choose to sell their home to an interested buyer or refinance an existing loan into another loan type such as the Interest Rate Reduction Refinance Loan (IRRRL) program.
Getting a VA loan enables military members and veterans to access loans that otherwise wouldn’t qualify them. Additionally, this government-backed financing program significantly reduces the costs and hassles of applying for a mortgage.
If you’re ready to get started, secure an eligibility certificate from the VA before shopping around for the best deals from mortgage companies, banks, and other lending institutions.