9 VA Loan Benefits

What is a VA loan?

A VA loan is a mortgage guaranteed by the U.S. Department of Veteran Affairs and is considered a government-backed loan. These loans are available for veterans, active-duty service members and surviving spouses of U.S. military members. Unlike conventional loans, they are available to purchase your primary residence only, not secondary or investment properties.

» MORE: What is a VA Loan

Benefits of a VA loan

There are many benefits to a VA loan, ranging from competitive interest rates to limited closing costs. Take a look at the top nine benefits below.

1. Lower interest rates

VA loans frequently offer interest rates below the market average. Even an interest rate that’s 0.2% lower than another type of loan can result in significant savings, amounting to hundreds of dollars annually and thousands over the span of a 30-year mortgage. With a favorable mortgage rate, you can make progress paying off your mortgage debt sooner, all while enjoying more manageable monthly payments.

"Even a small difference in interest rates can have a significant financial impact,” said Joshua Martin, owner of Atticus Home Buyers in Milwaukee, Wisconsin. “It can mean lower monthly payments and more money saved over time. This advantage can free up funds for other expenses or allow borrowers to pay off their mortgage sooner."

2. No down payment

Unlike traditional loans that demand a 3% down payment or more (20% if you want to avoid PMI), VA loans offer significant relief by eliminating the need for any upfront payment. This is particularly valuable for first-time homebuyers, who may find it challenging to accumulate such a substantial sum.

Instead of a traditional down payment, VA loan recipients are required to pay a one-time VA funding fee. This fee serves to cover the operational costs of the VA home loan program. The amount varies based on:

• The type of loan
• The total loan amount
• Whether it's your first use of a VA loan or a subsequent one

While VA loans don't require a down payment, making one can have its advantages. If you choose to make a down payment of at least 5%, you can reduce the VA funding fee.

3. No mortgage insurance

Many conventional mortgages mandate that borrowers pay premiums for PMI if they are unable to provide a down payment of at least 20%. However, VA loans offer a notable advantage by eliminating the need for PMI, resulting in monthly savings.

For example, consider a $200,000 home purchased with a conventional mortgage. PMI premiums can range from 0.22% to 2.25% of your mortgage, so your PMI could cost anywhere between $440 and $4,500 annually (or $37 to $375 per month). These premiums continue until the mortgage's principal balance drops below 80% of the initial home value.

In contrast, VA borrowers are exempt from the burden of PMI.

4. No prepayment penalty

Some lenders charge a prepayment penalty if you pay off your loan early. This is because banks make money from the interest on loans, so early repayment means less interest income for them.

However, VA loans do not have prepayment penalties. This means that you are free to make extra payments or increase your monthly payments to pay off your VA loan early without having to pay a fee.

5. Lower credit requirements

VA loans are backed by the government, which gives lenders more confidence in borrowers with lower credit scores. As a result, VA borrowers can often qualify for loans even if their credit score is not perfect.

Credit requirements for VA loans vary by lender, but all lenders are required to review a borrower's entire loan profile, including their Certificate of Eligibility (COE).

» MORE: VA loan requirements

6. Leniency with past financial troubles

VA loans offer shorter waiting periods and restrictions for borrowers who have experienced bankruptcy or foreclosure. This is because the government guarantees part of the loan, reducing the risk for lenders.

7. Exemption from certain closing costs

Closing costs can add up quickly, but VA loan borrowers are lucky. The VA has rules in place to protect borrowers from being charged certain fees that lenders, agents and brokers might charge other borrowers.

For example, VA loan borrowers cannot be charged for attorney fees, lender commissions or brokerage fees, or itemized charges for things like lender appraisals, trustee fees or tax service fees. Instead, the lender must cover these costs as part of a maximum 1% flat fee.

8. No loan limit for those with full entitlement

VA loan entitlement gives you the ability to borrow money to buy a home without making a down payment. If you have full entitlement, there is no limit on how much you can borrow.

You can obtain full entitlement if you have never used your VA loan benefit before, or if you have paid off a previous VA loan in full and sold the property. You can also restore your entitlement after a foreclosure or compromise claim if you repay the loan in full.

» MORE: VA loan limits

9. Streamlined refinancing

Streamlined refinancing is a great way for qualified individuals to lower their interest rates and monthly payments, or to change their interest type from adjustable-rate to fixed-rate.

To be eligible for a streamlined refinance, you must have a VA-backed home loan and be using the new loan to refinance your existing VA loan. This type of refinance is faster and easier than a traditional refinance because it does not require a home appraisal or credit check.

Several ConsumerAffairs reviewers speak highly of the refinancing process with VA loan lenders. James from Arkansas said: “It's the easiest and best and fastest refinance I've ever done. … I loved the online refinance forms and online signatures. It was a great experience.”

» MORE: How to refinance a VA Loan

Alternatives to VA loans

If you don’t qualify for a VA loan, there are other options — even mortgage options that have flexible credit score requirements like a VA mortgage. Research what will work best for you based on your financial situation and the type of home you’re looking to purchase. Here are some alternatives to a VA loan:

• Conventional loan: While conventional mortgage loans have stricter credit requirements, you can qualify by putting as little as 3% down.
• FHA loan: Designed for low- to moderate-income borrowers, FHA loans require lower minimum credit scores and down payments as low as 3.5%. These loans are also backed by the government, making them less risky for lenders.
• USDA loan: Specifically for rural homebuyers, USDA loans are backed by the U.S. Department of Agriculture. They offer zero down payment options for those who meet certain income criteria and are purchasing in designated rural areas.
• Jumbo loans: For properties that exceed the conventional loan limits set by Fannie Mae and Freddie Mac, jumbo loans are necessary. These loans typically require higher credit scores and down payments but are essential for financing luxury properties or homes in high-cost areas.
• Renovation loans: If you're looking to purchase a fixer-upper, renovation loans combine the cost of the home purchase with funds for renovations into a single loan. This can be a great way to finance both the purchase and the improvement of a home with one loan.
• Home equity loans: Though not a primary mortgage option for buying a home, home equity loans allow homeowners to borrow against the equity in their existing home. This can be a useful alternative for obtaining funds for various purposes, including buying additional property.

» COMPARE: Types of mortgage loans

FAQ

Bottom line

A VA loan can be a great option for veterans and service members who are looking to buy a home. It offers a number of benefits, including the ability to put no money down, competitive interest rates and limited closing costs.

However, it's important to weigh the pros and cons of a VA loan before deciding if it's right for you. You should also compare it to other types of loans, such as conventional and FHA loans, to see which one offers the best terms for your individual needs.