13 Benefits of a VA Loan
Created before the close of World War II, the VA home loan benefit has helped millions of veterans, service members and military families achieve the dream of homeownership. Today, in many ways, it's more important than ever.
VA loan volume has soared in the wake of the Great Recession, driven in large part by historically low rates and increasingly tougher lending requirements. The VA program provides significant financial benefits that make homebuying possible for score of veterans who might not otherwise qualify.
1. No Down Payment
Saving money and building credit can be difficult for service members who are constantly on the move. With the VA Loan, qualified borrowers can finance 100 percent of the home's value without putting down a dime. Take a look at the chart below to see how much you can save through the no-money-down benefit of the VA Loan.
VA Loan Savings at Closing
|Loan Amount||0% Down||5% Down||10% Down||20% Down|
2. No Private Mortgage Insurance
Many conventional lenders require borrowers to pay private monthly mortgage insurance unless they're able to put down at least 20 percent, which is a tough task for many veterans. Private mortgage insurance (PMI) is an insurance that protects lenders in case of a borrower default.
With a VA Loan, however, there is no PMI. This is because the federal government backs all VA Loans and assumes the risk on behalf of the borrower that is typically covered by the PMI.
This VA Loan advantage allows you to build more and more equity in your house, effectively saving you thousands of dollars over the life of your mortgage.
PMI Savings per Month
|Loan Amount||Monthly Savings|
3. Competitive Interest Rates
Interest rates on home loans are based on risk assumed by the bank to finance the loan. Because the VA backs each VA Loan with a guaranty, financial institutions carry less risk and can offer interest rates that are typically 0.5 to 1 percent lower than conventional interest rates.
Pair that lower interest rate with the ability to purchase a home with no money down and no private mortgage insurance and the savings start adding up significantly.
Lower Interest = More Savings
|Savings from a 0.5% reduction in interest||$14,760||$24,480||$34,200||$43,920|
|Savings from a 1% reduction in interest||$28,800||$48,240||$67,320||$86,400|
4. Basic Allowance for Housing
Basic Allowance for Housing (BAH) is a significant benefit for qualified active military members. Lenders can count your Basic Allowance for Housing as effective income, which means you can use BAH to pay some or all of your monthly mortgage costs.
BAH varies based on your pay grade, your geographic location and your number of dependents.
5. No Pre-Payment Penalty
With many different types of loans, paying off a home loan before it matures results in a pre-payment penalty. This is because lenders miss out on additional opportunities to collect interest payments. The pre-payment penalty is a way for financial institutions to recoup some of that money.
The VA Loan allows borrowers to pay off their home loan at any point without having to worry about a pre-payment penalty. With the absence of a pre-payment penalty, borrowers are free to consider future home purchases and refinancing options.
6. Zero Down VA Home Loans
VA mortgages require no money down in most cases. Zero down for a home loan is a huge advantage, especially for lower-ranking junior enlisted personnel.
There are some situations where a down payment IS required; your FICO scores and credit history may affect whether a lender is willing to offer you a no-money-down loan (lender credit standards will apply).
There are also situations where money up front is required because the asking price of the home is higher than the appraised value. In such cases, the borrower is required to pay the difference in cash.
7. No VA Loan Funding Fee For Certain Qualifying Service Members
Borrowers who receive or are eligible to receive VA compensation for service-connected disabilities may be eligible for an exemption from the funding fee.
Imagine a no-money-down VA loan with no down payment OR funding fee. Many service members qualify for the exemption because of their status as VA-rated disabled veterans but many of these may be waiting for a final determination from the VA when they apply for a VA mortgage.
If your VA rating is not yet official when it’s time to pay the funding fee, you may be required to pay the fee at the appropriate time and apply for a refund (they are not automatic) when the VA disability rating has been officially established.
As of January 1, 2020, Purple Heart recipients who are on active duty are also eligible for a VA loan funding fee waiver as long as they submit proof of the award prior to loan closing time.
Advantages For Borrowers Who Choose To Make A Down Payment On A VA Mortgage
If you apply for a VA loan and decide to make a down payment, and if you are required to pay the VA loan funding fee, a down payment can reduce the amount of that fee based on the percentage of money down.
You can qualify for a lower VA loan funding fee by paying 5% or 10% down. If you are not required to make a down payment but choose to, this can help lower the overall cost of your loan over time.
No VA Loan Limits
Starting in 2020, the VA removed the VA loan limit for VA-backed mortgages, which potentially gives VA borrowers more buying power including the ability to apply for a so-called Jumbo Loan which exceeds the Fannie/Freddie conforming limit for that housing market.
According to the VA official site, those with full VA loan entitlement, “may now obtain no-down payment VA-guaranteed home loans in all areas of the country, regardless of housing prices”.
8. VA Loans Are Flexible
The VA is very flexible! The VA permits veterans to buy various properties via an array of financing choices. For instance, veterans possess the choice to purchase a conventional home, condo, manufactured home, to construct a new house or to improve an existing house with features that are energy efficient.
Veterans purchasing a house which requires energy-efficient improvements might raise the quantity of the Veterans mortgage loan by a max of $6,000 if a veteran expects to save cash on utilities by putting in energy-efficient improvements like cooling and heating systems, solar energy insulation or systems, weather-proofing, according to the VA.
This is a program known as the VA Energy Efficient Mortgage (EEM) program. This add-on program is made in conjunction with a VA purchase loan to add energy improvements such as solar panels.
Borrowers are required to acknowledge how the EEM package will increase mortgage payments, and in certain transactions if the amount of the payments increases above a certain percentage due to a number of add-ons to the loan, your lender may be required to re-qualify you for the loan. Discuss this concern with your lender if you think this may apply to your transaction.
BAH (Basic Allowance Housing) Can Count as Income
If you’re a qualified active duty member, lenders can count your BAH as income. This allows active duty members to qualify for higher loan amounts plus pay the monthly mortgage costs. Potential VA loan applicants should know that while BAH counts as income, the Post 9/11 GI Bill housing stipend does NOT count as income as it has a fixed expiration and is not likely to continue.
9. Refinancing Options Available
The VA permits Interest Rate Reduction Refinancing Loans! These are like traditional streamlined refinancing loans obtainable via additional federal housing programs and traditional lenders. Interest Rate Reduction Refinancing Loans are made to assist veteran home buyers in refinancing existing mortgages to gain a lower interest, as well as generate a lower month-to-month mortgage payment.
The VA version of a streamline refinance is for existing VA mortgages only, but VA applicants also have the ability to apply to refinance a non-VA mortgage using a cash-out or no-cash out refi loan option.
10. Looser Credit Requirements
Credit score requirements have started to thaw, but that hasn't made life significantly easier for many military buyers. The credit benchmarks set by both conventional and FHA lenders can still be tough to hit.
Most VA lenders are looking for a credit score of at least 620. Borrowers will often need to meet a higher threshold for conventional mortgages, especially if they’re hoping to get a great interest rate.
The 620 benchmark is in FICO's "Fair" credit score range, which is a tier below "Good" and two below "Excellent." Contrary to misconception, VA buyers don't need anything near perfect credit to secure financing.
11. Forgiving DTI Ratios
VA lenders generally want to see you spend no more than 41 percent of your gross monthly income on major debts, such as a mortgage payment or student loans.
But it's possible to have an even higher DTI ratio and still obtain a VA home loan. Some lenders may go up to 55 percent or more depending on your credit score and ability to hit additional income benchmarks.
That additional flexibility can make it easier for buyers to truly maximize their purchasing power.
12. Curbing Closing Costs
Closing costs are inescapable, regardless of the mortgage product. The VA actually limits what fees and costs veterans can pay at the time of closing.
Homebuyers can ask sellers to pay all of their loan-related closing costs and up to 4 percent of the purchase price for things like prepaid taxes and insurance, collections and judgments.
13. Foreclosure and Bankruptcy
These financial setbacks don't automatically put an end to your VA loan chances. It's possible to secure a VA home loan just two years removed from a foreclosure, short sale or bankruptcy. In some cases, veterans who file for Chapter 13 bankruptcy protection can be eligible just a year removed from the filing date.
Homebuyers seeking conventional or FHA financing can find the waiting periods significantly longer.
Even veterans who lose a VA-backed mortgage to foreclosure can still be eligible for another.