The VA loan is arguably one of the best incentives tied to military service. Despite being an incredible home-purchasing tool, many of those eligible to utilize it are not aware of all of its benefits and how they work. The VA loan could make the path to home ownership far more accessible, even in cases where a potential buyer doesn’t have ideal credit or can meet the down payment requirements.
What Is a VA Loan?
The VA loan was made available in 1944 by the US government to make home buying more accessible to service members, and is easily one of the most unique loans currently available. Large down payments and stringent credit requirements often posed a powerful barrier to entry into the housing market for military personnel and veterans. The VA loan lowers some of the hurdles attached to the process.
VA loans are guaranteed by the U.S. Department of Veteran’s Affairs. When a loan is “guaranteed”, it means a third party assumes the debt obligation for the lender. Meaning, if the borrower defaults on a VA loan, the Department of Veteran’s Affairs takes on the debt. This lowers the risk for mortgage lenders giving a loan to an individual without ideal credit or a large down payment.
What Are the Benefits of a VA Loan Compared to a Conventional Loan?
VA loans carry multiple advantages for homebuyers that conventional loans lack. The special allowances help prospective buyers save money (particularly upfront) and obtain their mortgage loan easier. The following are the primary advantages of using a VA loan over a conventional loan.
0% Down Payment
One of the most intimidating factors of the home buying process is coming up with a sizable down payment. VA loans are among few options that allow you to make a 0% down payment – no strings attached. However, it does not remove all closing costs, which should still be budgeted for when preparing to purchase a home. Your mortgage lender can help determine what closing costs you will still owe and options for financing them.
No Private Mortgage Insurance (PMI) Required
When buyers apply for a conventional loan and are unable to make a large enough down payment, they will generally be required to purchase Private Mortgage Insurance. This insurance protects the lender in the event that the borrower defaults. When using a VA loan, the borrower is free to utilize the 0% down payment perk without having to obtain PMI. Not having to pay PMI on top of a monthly mortgage payment can save a substantial amount of money over time.
Easier Qualification and Competitive Rates
Borrowers that could be rejected for a conventional loan due to insufficient down payment or credit may be able to obtain a VA loan. The security of a federally-backed loan means mortgage applications are overall more likely to be approved as the lender incurs less risk. While not a guarantee, the lowered risk for lenders also means borrowers using a VA loan are often able to get more competitive mortgage rates than if they had applied for a conventional loan.
Should You Give a Down Payment With a VA Loan?
The majority of those who obtain a VA loan opt to utilize the zero percent down option and save money upfront – but are there benefits to having a down payment anyway? If you have the ability to provide a down payment, it is at least worth considering. Any amount of down payment lowers the total amount of your loan, meaning you could have lower monthly payments or pay off your mortgage earlier.
Other than those who meet certain exemption requirements, most VA loan recipients will have to pay a funding fee of 2.3% for first time buyers or 3.6% for subsequent loans. Having a down payment of at least 5% reduces this fee, with further reductions on down payments of 10% or more. A loan officer can assist you with weighing whether or not making a down payment with your VA loan is best for your overall financial situation.
How to Apply for a VA Loan
Preapproval for your loan should always be the first step when you decide you are ready to purchase a home. A trusted mortgage lender like Vellum can guide you through the mortgage loan application process and give you a full picture of your financing options. If you are a service member, former service member, or surviving spouse who is eligible for a VA loan, start your application today with one of our loan officers.
Have questions on utilizing or applying for your VA loan? Contact us and one of our mortgage experts will get in touch with you!