November 9, 2016, by Melissa McAllister – The Department of Veterans Affairs can point to an impressive statistic that speaks to the honor they show to this country’s servicemembers: Of the 22 million Veterans in the United States, 21 million have a VA mortgage.
While the financial benefits of a VA loan are significant, many Veterans do not fully understand how these benefits might apply to their individual situation. Take a minute to learn these facts about the program, and you’ll empower yourself with handy financial knowledge.
Down Payment, Mortgage Insurance? No Thanks!
Perhaps the greatest aspect of VA loans is the lack of requirement for a down payment and mortgage insurance. Most home loan programs, such as FHA and conventional loans, require at least 3.5% to five percent down. On a $250,000 house, that means you must put $12,500 down. If you buy with a VA loan, you can buy immediately, rather than years of saving for a down payment.
VA loans also allow you to avoid pricey mortgage insurance costs. At five percent down, private mortgage insurance (PMI) costs $150 per month on a $250,000 home, according to PMI provider MGIC. Under a VA loan, this same buyer could afford a home worth $30,000 more with the same monthly payment amount, simply by eliminating private mortgage insurance. Not only do VA loans save you money upfront, they also significantly increase your buying power.
Buy, Refinance or Cash-Out
VA home loans can also be used to refinance your existing mortgage, whether it’s a VA loan or not. In fact, the refinance process is very simple and does not require an appraisal, or even paystubs, W2s, or statements from the bank. Through something called a VA streamline refinance, or Interest Rate Reduction Refinance Loan (IRRRL), homeowners can access lower rates quickly and cheaply.
A VA cash-out loan is also available to eligible borrowers and can be used to turn your home’s equity into cash. By taking out a larger loan than what you currently owe, the difference is then issued to you at closing. The cash-out loan amount can equal up to 100% of your home’s value. You’re then free to use the proceeds how you wish. You can even refinance into a lower rate and take cash out at the same time, accomplishing multiple financial goals all at once.
Eligible homeowners who pay mortgage insurance, or are otherwise dealing with an undesirable loan, should consider refinancing with a VA loan. It can eliminate PMI, get you into a fixed-rate loan, or just reduce your monthly payment amounts.
Use Your Benefit Again and Again
A VA mortgage benefit is not one ride only. You can use it as many times as you want. Let’s say you purchased a home with a VA loan. But now, your family has outgrown the home and you need more square feet. When you sell the home and pay off the VA loan completely, you can re-use your benefit to buy another home. Your VA loan entitlement is restored in full.
That is not the only way to reuse your VA loan benefit, though. Veterans and Servicepeople can receive a one-time restoration when they pay off the VA loan but keep the home. For instance, if you purchased the home years ago and have paid off the loan, you’re eligible for restoration. It also applies if you have refinanced the VA loan with a non-VA mortgage. In these examples, you can keep the home, and enjoy the benefits of VA home buying another time.
Credit Leniency and Bankruptcy Bounce Back
Most loan programs have minimum credit score guidelines, and treat a past bankruptcy or foreclosure as major barriers to qualifying – the VA loan program does not. VA guidelines do not state a minimum credit score, giving lenders the leniency to approve someone with lower scores. Furthermore, VA considers credit as repaired when you have established two years of clean credit following a bankruptcy or foreclosure. The only exception to this is a foreclosure involving VA home loan. In this case, you may be required to pay back the amount owed in order to re-establish eligibility. However, for most buyers with credit problems in their past, VA home loans are the best tool to buying a home.
Spouses May Be Eligible
Un-remarried husbands and wives of a Veteran who died while in service, or from a service-connected disability, can buy a home with a VA loan. Spouses of a serviceperson missing in action or a prisoner of war are also eligible. While there is no way to repay the life of a fallen hero, this benefit can help families to move forward after tragedy.
There Is No Expiration Date
Once you become eligible for VA loan status, it never goes away. Many who served decades ago often wonder whether they can still buy a home today if they never used their benefit. If you can establish eligibility, the answer is yes. Eligibility is based on the length of time served, and the period in which you served. For example, a Veteran of the Vietnam War with at least 90 days in service is likely eligible. In order to check eligibility status, you must first obtain your DD Form 214. Using this document, you can then request your VA Certificate of Eligibility directly from the VA’s eBenefits website. Or, a VA-approved lender can request your VA Certificate of Eligibility for you. Even if you served long ago, you may be eligible for a VA home loan. It is worth your while to check.
Rates for VA Loans Are Lower
Ellie Mae, a mortgage software company whose software handles 3.7 million loan applications annually, says that VA mortgage rates are routinely 0.25% lower than conventional loans. The difference of 0.25% can amount to thousands of dollars saved over the life of the loan. The reason why rates are typically lower is because the VA backs these mortgages, making them a lower risk for lenders. Another factor softening risk to lenders is that foreclosure rates for VA loans are the lowest of any loan type. Less risk for lenders means lower rates and more affordable payments for those who choose a VA mortgage.
VA Covers Condo Purchases
VA loan home buyers are not limited to single-family homes but are instead able to buy many different property types. From manufactured homes to homes with four units, VA covers most properties, including condominiums, which are often overlooked by VA buyers. Condos make great starter homes. In addition to lower prices, condos are often the only affordable choice in some U.S. cities. To see the VA’s list of approved condominiums, you can search using their tool.
Local Lenders Can Serve Up VA Loans
Even though it’s called a VA home loan, the Department of Veterans Affairs does not issue nor approve the loan. Private banks, credit unions, and mortgage companies do that instead. The Department of Veterans Affairs simply provides insurance to these lenders, through something called the VA guaranty. This assures the lender will be repaid if the borrower can no longer make payments. Because the government through the VA insures these mortgages, lenders can supply loans with better terms. This means that borrowers can work with local lenders, making the process more convenient.
VA Funding Fee Waivers
Usually, the VA issues a funding fee when you buy a home with a VA loan. The proceeds from the funding fee go directly to the VA and help cover losses on the few loans that default. Typically, between .5% and 3.3% of the loan amount, the funding fee amount is dependent on the nature of the borrower’s service, whether the borrower has used a VA loan before, and if there is a down payment. Some borrowers are exempt from the VA Funding Fee, such as Veterans who are receiving compensation for a service-related disability.
About the Author: Melissa McAllister is a writer and marketing professional for The Mortgage Reports, an online resource for today’s home buyer and homeowner. The Mortgage Reports makes the difficult process of buying or refinancing a home easy to understand through digestible, practical advice.