Since World War II, the VA home loan has helped millions of service members, veterans, and military families achieve the dream of homeownership. Despite its advantages, many veterans aren’t utilizing this benefit, either because they’re unaware that it exists or because they believe some of the common misconceptions.
If you’re eligible for the VA loan, it’s definitely worth exploring because the program offers a handful of benefits not typically found in other mortgage products.
No down payment
One of the most valuable aspects of the VA home loan is that qualified buyers can purchase a home with no money down. Conventional and FHA loans typically require a down North Carolina title loan laws payment of at least 3% and 3.5%, respectively. On a $200,000 mortgage, that’s $6,000 for a conventional loan and $7,000 for FHA—significant sums of cash for any buyer. Skipping the down payment is a huge advantage for military borrowers, enabling them to get into a home sooner and without draining their savings.
No monthly mortgage insurance
Conventional loans and other government loan options typically require monthly mortgage insurance when a down payment is less than 20%. The mortgage insurance rate depends on several factors, but Freddie Mac says borrowers on conventional loans can expect to pay approximately between $30 and $70 per month for every $100,000 borrowed.
VA borrows are exempt from monthly mortgage insurance, regardless of the down payment amount, which is a significant savings. However, borrowers are responsible for a one-time VA funding fee, which is considered a type of mortgage insurance. Wayne Lacy, branch manager for Cherry Creek Mortgage, says while the fee is due at closing, it’s typically financed into the loan.
“The funding fee helps keep the program going and offsets lender losses due to defaults,” he said. “The fee amount varies depending on the type of VA loan, your military category, whether or not there’s a down payment, and if you’ve used a VA loan in the past.”
According to the VA website, the funding fee can range from 1.4% to 3.6% of the final sales price. However, some borrowers are exempt from paying the fee, including veterans who receive compensation for service-connected disabilities.
Competitive rates and more lenient requirements
The Department of Veterans Affairs (VA) does not fund mortgages, but instead backs a portion of each loan against default. This backing, or guaranty, is what allows private lenders to offer VA borrowers lower interest rates.
As an example, according to mortgage data provider Ellie Mae, for 30-year fixed-rate loans closing in November 2020, VA loans had an average rate of 2.72%, compared with 2.99% on a conventional mortgage for the same term.
Since mortgage lenders assume less risk on VA loans, they also tend to be more flexible with credit scores and debt-to-income ratios, and more forgiving with major credit events, like bankruptcy or foreclosure.
Lacy does say that because the word “guaranty” pops up a lot when discussing VA loans, some buyers assume this means there are no strings attached and approval is automatic.
“Guaranty refers to the amount of loan backed by the government,” he said. “This doesn’t mean a buyer is guaranteed a VA loan. Every borrower still needs to meet the lender’s qualifying criteria.”
Are there any disadvantages?
Every loan program has its pros and cons, and just like any mortgage option, the VA loan won’t be the right choice for every service member or veteran. But Lacy says some of the most talked about drawbacks of VA loans are actually misconceptions.
“The most common concern is that a VA loan takes longer to close, but that’s really not the case,” he said. “While the VA backs the loan, everything is driven by the lender…nothing needs to be ‘approved’ through the VA. In my experience with these loans, the underwriting process is often easier and more transparent, and the closing timeline is similar to any other mortgage product.”
Another misconception relates to the VA appraisal process. While every appraisal helps determine a property’s value, the VA goes a step further, ensuring that a home also meets the VA’s minimum property standards. In general, any visible health or safety concern will be an issue on a VA appraisal report. However, these problems would likely be a worrisome for any buyer. If the home is in good condition, there really shouldn’t be cause for concern.
Lacy says the problem with these assumptions is that sellers are wary of accepting a VA loan offers because they believe it can lead to a more difficult transaction.
“It’s unfortunate because the VA loan is a competitive, flexible option that has made homeownership possible for many military borrowers,” he said. “I really think there needs to be more education in the industry so that, as professionals, we can effectively communicate the benefits of the program to our clients and help dispel the myths.”
How do I find out if I qualify?
The VA home loan program is available for veterans, active-duty service members, and select Reservists and National Guard members. Spouses of military members who died while on active duty or as a result of a service-connected disability may also be eligible.
One of the first steps in the VA loan process is to obtain a Certificate of Eligibility, which confirms for your lender that you qualify for the home loan benefit. You can apply for the certificate through the Department of Veterans Affairs website, and most experienced lenders can also help determine eligibility and secure the certificate.