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.
Here’s a look at six of the biggest benefits of these long-cherished home loans:
No Down Payment
This is far and away the program’s signature benefit. Qualified VA Loan borrowers can purchase up to a county’s conforming loan limit without a down payment. Those limits can change every year and are higher in more expensive areas.
For conventional and FHA loans, buyers are typically looking at minimum down payment requirements of 5 percent and 3.5 percent, respectively. On a $200,000 mortgage, that’s a $10,000 down payment for conventional and a $7,000 down payment for FHA.
It can take service members and veterans years to save that kind of cash. The ability to purchase with no down payment means military homebuyers don’t have to scrape and stockpile for years and years to pursue a home of their own.
No Private Mortgage Insurance
Coming up with a down payment is tough enough for conventional and FHA buyers. But they’re also on the hook for mortgage insurance unless they can put down a sizable amount — typically 20 percent of the purchase price. On that same $200,000 mortgage, you’re talking a whopping $40,000 in cash.
FHA loans carry both an upfront mortgage insurance premium and annual mortgage insurance, the latter of which now lasts for the life of the loan. Conventional buyers will pay this monthly cost until they’ve built up suitable equity, which can take years.
There is no mortgage insurance with VA loans.
VA loans do come with a mandatory funding fee that goes directly to the Department of Veterans Affairs. Borrowers with a service-connected disability are exempt from paying this fee, which helps keep the program going for future generations.
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.
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.
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.
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.
For answers to all your question to getting qualified for your home purchase, speak to our lender partner.