Service members and veterans who want to buy a home have access to a unique benefit: a VA loan. It is the only widely available mortgage loan that requires no down payment and has no minimum credit rating. Hundreds of thousands of qualified borrowers use these loans each year to purchase a place they can call their own. We’ll walk you through how VA loans work to help you decide if you should consider one as well.

How VA Loans Work

The government does not issue VA loans, but it partners with private lenders so that military personnel and their families can access this special benefit. The US Department of Veterans Affairs guarantees a percentage of every VA home loan so borrowers don’t have to make a down payment or pay for private mortgage insurance (PMI).

You can only use a VA loan if you buy a house that you will be living in most of the time. You cannot use it to buy a vacation home or investment property. However, you can use it to build a house, renovate a house, or make a house more accessible if you have service-related disabilities. You can also use your VA loan benefits more than once in your life.

VA Loan Vs. Conventional loan

With rare exceptions, you will not be eligible for a conventional mortgage with a credit score of less than 620, regardless of the lender. But you may be able to get a VA loan with a lower score. You also don’t have to make a down payment, and you don’t have to pay PMI, an extra that borrowers with small down payments using conventional loans normally pay every month for years.

While you are looking for this type of mortgage, you will probably read that VA loans have lower interest rates than conventional loans. This isn’t necessarily true, so you’ll want to compare all of your options. Look at the annual percentage rate instead of the interest rate to understand the true cost of the loan.

A conventional 30-year mortgage is now slightly cheaper than a 30-year VA mortgage, on average. But specific lenders, especially those catering to veterans and active duty personnel, may offer lower interest rates than conventional loans. In most cases, VA loans require a one-time VA financing fee on closing, which you won’t experience with a conventional home loan. However, if you cannot put 20% down payment on a conventional loan, a VA loan may be a better deal.

VA loan eligibility conditions

In general, you will be eligible for a VA home loan if you served in the Army, Navy, Air Force, Marine Corps, or Coast Guard after September 15, 1940. You must have served for at least 181 consecutive days in peacetime or at least 90 days, some of which occurred in wartime. If you’ve been dismissed without honor or haven’t served long enough, you may not be able to get a VA loan.

Members of the National Guard and Reservists are eligible if they are mobilized for active duty for at least 90 days or terminated due to a service-related disability. They also qualify after six years of honorable service.

You will need a eligibility certificate to participate in the VA loan program. You can apply for your COE online or by mail, or your VA lender can get it for you.

Surviving spouses can also sometimes get VA loans if their husband or wife died while in service or due to a service-related disability, became a POW, or went missing in action.

In addition to meeting the requirements for military service, you will also need to meet financial requirements. You will need to show that you will be able to pay your mortgage, but bankruptcy that was discharged two years or more ago will not disqualify you.

How to Apply for a VA Loan

The VA itself does not issue loans, so you will need to apply to a bank, credit union, or mortgage lender. Not all lenders offer VA loans, but many do. Some even specialize in VA loans.

You don’t have to work with a VA loan specialist, and they won’t necessarily give you a better loan than another lender who offers VA mortgages. A specialized lender can offer you a simpler experience because of their expertise. That said, you shouldn’t be paying a higher or higher interest rate. closing costs to work with a VA loan specialist.

Understanding VA Loan Closing Costs

The closing costs to finalize your loan can total thousands of dollars and can be a barrier to home ownership for buyers without significant savings, but VA loans allow sellers to pay up to 4% of the price. purchase as a contribution to the buyer’s closing costs. In contrast, conventional loans allow sellers to pay up to 3% when the buyer’s down payment is less than 10%, and up to 6% when the buyer’s down payment is 10-25%. .

If that’s not an option, consider shifting the costs into your loan. Funding your closing costs is more expensive, but it can make you a homeowner sooner.

All mortgages have closing costs, including VA mortgages. But you’ll pay additional closing costs with a VA home loan that other loans don’t charge: the VA financing fee.

VA financing fees are unique to this type of loan

VA borrowers don’t have to pay a PMI, but they do have to pay a finance charge. However, the VA financing fees tends to be much cheaper than PMI because you only pay it once, not year after year like with a regular loan.

Why charge the military a financing fee to get a mortgage? The Department of Veterans Affairs, which guarantees VA loans to make them easier for the military to obtain, is part of the federal government, which means that the VA loan guarantee is funded, in part, by taxpayers.

Through the VA financing fee, borrowers also contribute to the VA loan guarantees. You are contributing to a program that benefits you and your military colleagues because it helps keep the federal government’s VA loan guarantee financially viable. You can pay the fees in cash at closing or you can finance them as part of your mortgage.

With a few exceptions, all borrowers must pay VA financing fees. The VA will waive the fee in limited circumstances, including for veterans with a service-related disability or active duty members who have been awarded a Purple Heart.

For other VA borrowers, the finance charge depends on your down payment. The table below shows the financing fees you can expect to pay in 2020 for a purchase or construction loan as a veteran, active duty member, or member of the National Guard or Reserve, and how they compare to the PMI payment on a conventional loan.

VA Financing Fee vs. Conventional Lending PMI

In less than three years, a borrower who puts 0% on a VA loan will come out ahead by paying a VA financing fee over the PMI payment on a conventional mortgage. If you put 3% on a conventional loan, it will take you about eight years to reach the 20% equity you will need to ask your lender to cancel the PMI. If your home is appreciating, you may be able to cancel the PMI sooner.

VA loans do not require a PMI

About half of mortgage borrowers take out loans that require them to pay for mortgage default insurance. With a conventional mortgage, borrowers typically have to pay for private mortgage insurance every month when they pay less than 20%. With a VA loan, you’ll never pay PMI it doesn’t matter how much you put down, even if you don’t pay anything.

The savings can be substantial, especially if you have poor credit. With a mortgage of $ 200,000, you could save almost $ 4,000 per year.

What Are VA Loan Fees?

The VA will usually guarantee 25% of your loan amount if you don’t make a down payment. This is called your VA loan entitlement. In most parts of the country, your fee is $ 113,275, which means you can borrow up to $ 453,100 without a down payment. If you want to borrow more than $ 453,100, you will need to make a down payment.

If you have never used a VA loan before, you will receive what is called a “full entitlement”. An entitlement to a VA loan is the maximum loan amount that the Veterans Administration will pay your lender if you do not pay off your mortgage. This guarantee reduces the risk for the lender to approve a loan for a borrower who may have no down payment and a lower than average credit rating.

Your fee may be higher in high cost areas such as California and Hawaii. You may have less than full entitlement if you already have a VA home loan or if you went into foreclosure on a previous VA loan. Not having a full right limits the amount you can borrow without a down payment.

VA loan limits

As of January 1, 2020, the VA does not place a limit on the amount you can borrow with a VA loan. But there is a limit, based on your VA entitlement, to how much you can borrow without making a down payment.

The loan amount depends on how much you can afford to pay, not just your entitlement. Your lender will determine how much you can afford by looking at your income and debt, just as they would if you applied for any other type of mortgage. If you have the financial capacity, you may be able to get a VA jumbo loan to buy a high cost property.

Benefits of the VA loan

• No deposit required
• No PMI
• No minimum credit score requirement
• No maximum loan amount
• It’s easy to refinance if interest rates fall
• VA Loan Modification Can Help If You Are Late

Disadvantages of VA Loans

• No down payment can mean higher interest payments
• VA finance charges are an additional cost
• Financing finance charges means you’ll pay more interest
• Lenders always have their own credit score requirements
• You could end up owing more than the home’s value with $ 0 down
• If this happens, it could be difficult to sell your home

Final result

If you’ve served your country with honor, a VA loan can be a great financial tool to help you buy a home. The unique benefits of the loan can help you buy a home that you might not otherwise be able to buy. But you will always have to look for the best price and make sure that you can pay the monthly installments comfortably.