The Veteran Affairs (VA) loan was designed to help Veterans, Servicemembers and eligible surviving spouses achieve homeownership. With no down payment requirement, mortgage insurance exceptions and more, this loan is a powerful approach to giving back to those who served. Here’s how the VA loan differs from other programs, and just what makes it one of the most powerful mortgage tools on the market.
Application Requirements
While the VA loan is certainly powerful, it is only available for a select group of home seekers. You may be eligible for a VA loan if you meet the minimum active-duty service requirements (U.S. Department of Veteran Affairs). This means that you were an active service member for at least 90 days, but specific requirements vary based on when you served. If you’re interested in a VA loan, you’ll need to confirm that you meet all requirements and obtain a certificate of eligibility (U.S. Department of Veteran Affairs).
The VA loan also doesn’t require an official minimum credit score or debt-to-income ratio. This is great news for borrowers who may not otherwise qualify for a home loan. Keep in mind, though, that lenders often utilize credit benchmarking. In other words, while the Department of Veteran’s Affairs may not advertise an official minimum score, the lender, or the organization actually financing your loan may have certain expectations when it comes to credit. For example, the average credit score of successful VA loan applicants in 2016 was 707 (NerdWallet, 2020). If you’re applying for a VA loan, you’ll still want to ensure your credit is in tip-top shape.
Property Type
If you’re after a second or third home, you’ll also need to look beyond the VA loan. VA loans are only afforded to those purchasing a primary residence. If you’re planning to purchase a vacation or investment property, explore alternative loan types.
Down Payment
While some buyers may still believe that 20% down is required across the board, many home loan options actually allow for significantly smaller down payments. For example, borrowers can obtain an FHA loan for as little as 3.5% down (Bankrate, 2021). VA loans, on the other hand, can be obtained for 0% down when certain requirements are met (U.S. Department of Veteran Affairs). For example, the home’s price can’t exceed its appraised value. It’s also worth noting that larger down payments can help save money over the life of the loan, but this feature is particularly helpful for Servicemembers who may not have a chunk of change upfront, but would still like to achieve homeownership.
Fees
In lieu of a traditional down payment, VA loan seekers may pay a funding fee, or a one-time payment up to 3.6% of the total loan amount (U.S. Department of Veteran Affairs). The exact fee will be based on loan amount and other factors and can be paid at closing or rolled over into the loan. Not all Veterans are required to pay a funding fee, however. For example, some disabled Veterans are exempt. Check with your home finance professional to determine your standing.
Traditional home seekers can expect to pay their fair share of fees, as well. The total will vary by lender, but most borrowers can expect to pay an origination fee, which functions similarly to the VA loan’s funding fee (NerdWallet, 2021).
Private Mortgage Insurance
Finally, VA mortgage recipients have another advantage when it comes to private mortgage insurance. private mortgage insurance, or PMI, essentially insures the lender in the event of default. Borrowers with conventional loans whose down payment totals less than 20% of the home’s cost must often obtain PMI through a separate company. VA mortgage rates will vary depending on your financial situation and credit score, but payments are typically monthly, with minimal extra cost required at closing. Once you’ve paid down some of your loan or you’ve reached a certain date, you may also be eligible to cancel your PMI.
On the other hand, borrowers with VA mortgage are often exempt from PMI (U.S. Department of Veteran Affairs). The potential monthly savings will depend on your loan amount, loan term and down payment amount, but whatever the total, forgoing PMI is a major advantage to home-seeking Servicemembers.
From relaxed requirements to massive potential savings, the VA loan is truly one of the most powerful mortgage tools on the market. Veterans and Servicemembers can leverage this unique program to find the home of their dreams, just provided it’s not their second property. If you’re interested in pursuing a VA loan, speak with a finance professional to determine your eligibility and next steps.
Published on July 5, 2021
