Since the 1940s, millions of veterans have been able to purchase homes with the help of the U.S. Department of Veterans Affairs programs. If you qualify for a VA loan, you may want to take advantage of this program’s benefits. However, it is important to understand what these programs can and cannot accomplish for you.
Top 10 VA loan benefits
VA loans offer several benefits to borrowers. The whole premise of the program is to create a pathway to homeownership for active or former service members and their families. The loans can go toward purchasing, remodeling, repairing, maintaining or adapting a home for a family's particular needs. Below, learn about more of the advantages of VA loan programs.
1. Lower interest rates
VA loans often have interest rates that are below average in the market. If you qualify, you may receive an interest rate anywhere from 0.5% to 1% lower than regular civilians get.
While that may sound like a modest amount, the difference can save hundreds of dollars a year and many thousands over the course of a 30-year mortgage. With a favorable mortgage rate, you can work toward paying off your mortgage debt earlier — with lower monthly payments along the way.
2. No down payment
One of the most significant perks of a VA loan is that you don’t need to provide a down payment. With a mortgage for $200,000, a borrower who puts 20% down would need to have $40,000 to invest in their new home as a down payment. It can be a challenge for many new homebuyers to stockpile so much cash.
Unlike an FHA loan, you don't need to put any money down for a VA home loan. This often means you can purchase a house more readily than the average buyer, since you don't need to save up as much for a down payment.
VA loans usually require a funding fee, which is around 2.3% of the amount borrowed. For example, with a $200,000 loan, the funding fee will be $4,600. It is possible to reduce that fee if you make a down payment of at least 5%. Some vets, such as those receiving VA payments for a service-related disability, are not required to pay the funding fee.
3. No mortgage insurance
Most conventional loan lenders require that a borrower pay mortgage insurance premiums if they don’t make a 20% down payment.
For example, with a conventional mortgage, insurance on a $200,000 home will likely cost at least $80 a month, or about $1,000 a year. The homeowner usually needs to keep paying premiums until the principal balance of the mortgage falls below 80% of the original home value. A VA borrower is not subject to mortgage insurance.
4. No prepayment penalty
Some lenders charge prepayment penalties when borrowers pay back their loans ahead of schedule. A bank makes money off interest, and prepayment equates to less interest paid over the life of a loan.
With a VA loan, you can pay a little extra each month, make an additional payment each year or otherwise pay off your loan faster with no penalty.
5. Lower credit requirements
Because VA loans are backed by the government, lenders have more confidence accepting borrowers with less-than-excellent credit scores. Those who use the VA loan program are often able to borrow funds even if their credit score is on the lower end of the spectrum.
Credit requirements for VA loans vary by lender. The lender is required to review an applicant’s entire loan profile. As part of this review, the lender will need to see a Certificate of Eligibility from the VA, which states that the borrower meets the standard VA eligibility requirements.
VA loan interest rate can be 0.5% to 1% below average.
6. Leniency with past financial troubles
Lenders institute waiting periods and restrictions after a person files for bankruptcy or goes through a foreclosure. These waiting periods are shorter with a VA loan.
The VA program is designed to help service members, former service members and some surviving spouses of service members purchase homes. Even if you’ve had some financial troubles in the past, the government will still guarantee part of a loan, which encourages private lenders to provide qualifying individuals with favorable terms.
7. Lower closing costs
Closing costs can add up when you’re buying a house. Luckily, If you're using a VA loan to purchase a home, there are certain fees that a lender, agent or brokerage cannot charge you that they would likely charge other borrowers.
For instance, the lender cannot charge the borrower for attorney fees. A lender or brokerage cannot charge a commission or brokerage fee and can’t make itemized charges for things like a lender’s appraisal, trustee’s fees or tax service fees; instead, the lender must cover these as part of a maximum 1% flat charge.
8. Easy to qualify
To qualify for the program, the VA requires that the applicant meets at least one of the following criteria:
- Served 90 consecutive active service days during wartime
- Served 181 days of active service during peacetime
- Served six years in the Selected Reserve or National Guard
- Is the spouse of a service member who died in the line of duty or because of a service-related condition
- Is the spouse of a prisoner of war or a member of the military who went missing in action
9. No loan limit
The VA does not place limits on the amount of a loan. The lender can determine how much they are willing to offer the borrower. On average, most VA loans are for amounts that are just over $200,000. Lenders determine how much they lend to borrowers of VA loans based on the applicant’s credit history, income and assets.
10. Streamlined refinancing
Qualifying individuals can use a VA loan to refinance their homes. A streamline refinance, also called an interest rate reduction refinance loan (IRRRL), can lower your interest rate and monthly payment or change your interest type from adjustable-rate to fixed-rate.
To be eligible for an IRRRL, you need a VA-backed home loan and must be using the new loan to refinance your existing VA loan.
For more, check out our guide to finding the best mortgage refinance companies.
VA loan pros and cons
VA home loans offer many potential advantages to borrowers. If you are a first-time homebuyer, the VA program may save you money and make it possible to buy a home at a time when you could not otherwise afford to purchase one.
VA loans are not without their drawbacks. For instance, borrowers who have already used the program may find that expenses increase if they’re using a VA loan for another home purchase. Also, some lenders and sellers may fear the red tape that can come with a VA loan.
Taking out any mortgage is a significant financial decision. Let’s take a look at the pros and cons of a VA loan:
- Save on interest
- No down payment
- Lower closing costs
- Easier to obtain
- No need for mortgage insurance
- Only applies to a primary residence
- Requires funding fee
- Benefits reduce for second-time borrowers
- Some requirements for property condition apply
- Individual lender requirements
VA home loan benefits FAQ
- What does your credit score have to be to get a VA loan?
- The VA mortgage does not require a specific credit score; each lender has its own requirements. A better credit score may improve your loan terms or interest rate. A credit score of at least 620 will be enough for many lenders.
- Who pays closing costs with a VA loan?
- It depends. You may still have to cover some closing costs, including the VA funding fee. However, the total closing costs are likely to be less than you would pay with a traditional loan. For more information, read about what a VA loan is and how it works next.
- What does “basic entitlement” mean on a VA loan?
- Basic entitlement refers to how much the VA will pay to guarantee your loan. If you have a full entitlement, for example, the VA guarantees it will pay up to 25% of the loan amount if you default on your VA home loan.
- What does it mean if the loan is “assumable”?
- It means that someone can take over an existing loan from the original borrower. The VA or an authorized agent must approve the assumption of a VA loan that was originated on or after March 1, 1988.
Bottom line: Is a VA loan really worth it?
Overall, we think VA home loan benefits can help many active and former service members. If you are a veteran who is also a prospective borrower, the answer will depend on your unique financial situation and objective. For those who qualify, the potential benefits could make it well worth the time and effort.
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