The VA loan program offers veterans and service members incredible benefits, from no $0 down to no PMI and more.
Nearing its 70th anniversary, the VA home loan program is more important today than ever before. It’s increasingly difficult for many military borrowers to build the credit and assets necessary to move forward with conventional home financing. That’s a big reason why VA loan volume has skyrocketed more than 300 percent over the last five years alone.
VA home financing comes with some significant financial benefits for those who’ve served our country, and the requirements to secure them are often looser than what veterans would need for a conventional or even FHA mortgage. For a lot of active military and veterans, the VA home loan program is the only real path to homeownership in the here and now.
Let’s take a look at some of the biggest benefits of VA mortgages and dig deeper into why this program has become such a lifeline for military homebuyers:
Benefit 1: No Down Payment
Qualified veterans don’t need to make a down payment to purchase a home. It’s almost difficult to overstate just how incredible this benefit is in the current real estate market. The minimum down payment amount on a FHA loan is 3.5 percent; for conventional financing, it’s 5 percent. On a $150,000 purchase, a military borrower would need to come up with $5,250 in cash for the FHA-backed mortgage and $7,500 for the conventional loan. Those aren’t insignificant sums for the average military borrower. In fact, for the sake of context, the typical VA borrower has just under $7,000 in total assets.
The amazing benefit of being able to purchase with $0 down helps veterans and active military members get a slice of the American Dream without having to spend years scraping and saving for a sizable down payment. That means those who serve our country can get into homes in the present, not years down the road.
Benefit 2: Relaxed Credit Requirements
As many prospective homebuyers know, lenders have tightened their credit requirements over the last five years. But the kind of score you’ll need to secure VA financing is typically well below what you would need for a conventional mortgage. Right now, VA lenders are generally looking for a credit score of at least 620. For a conventional loan, veterans would need more like a 740. Beyond that, a 620 score is considered a “Fair” credit score on the FICO range, which is two tiers below “Excellent.” Veterans don’t need anything near perfect credit to secure home financing. Despite the relaxed credit score requirements, VA borrowers can get interest rates that rival anything a conventional borrower might obtain.
Benefit 3: No Private Mortgage Insurance
Homebuyers who pursue a conventional or FHA loan will have to pay a form of mortgage insurance unless they can put down a sufficient amount of money, typically 20 percent of the purchase price. This is an additional monthly fee that’s tacked on to your monthly mortgage payment. The cost will vary by the loan amount and other factors, but it’s not uncommon to pay $100 or more per month for PMI. The VA estimates its borrowers saved about $19 billion in mortgage insurance costs in 2012 alone.
FHA loans come with both an up-front mortgage insurance premium and an annual cost that borrowers will pay for the life of the loan. VA borrowers don’t have to pay private mortgage insurance, which saves veterans money each month. VA home loans do come with what’s known as the VA Funding Fee, which is a fee the VA applies to all purchase and refinance loans. Borrowers with a service-connected disability are exempt from paying this fee.
VA loans feature more flexible and forgiving credit and debt-to-income requirements than conventional and FHA financing.
Benefit 4: Flexible DTI Ratios
No matter the loan program, you’ll need to have a healthy balance between your monthly income and your monthly revolving debts, such as a mortgage payment or a student loan payment. Lenders will divide the two and calculate your debt-to-income (DTI) ratio, looking for the figure to come in below a certain threshold. For conventional and FHA loans, that ratio is typically around 36 percent. The VA standard is 41 percent. But it’s possible to go even higher on a VA loan — up to 55 percent and more — depending on the lender and your ability to hit additional requirements. This benefit gives veterans more financial breathing room and can make it easier to qualify for the loan amount you desire.
Benefit 5: Closing Cost Limits
All mortgages comes with fees and closing costs. But the VA actually limits what veterans can be charged when it comes to these expenses. Some costs and fees must be covered by other parties in the transaction. These safeguards help make homeownership affordable for qualified homebuyers.
VA borrowers can also ask a seller to pay all of their closing costs, which can add up depending on the loan amount. There’s no guarantee the seller will agree to that request, but veterans can certainly ask during the negotiation process.
Benefit 6: Fighting Off Foreclosure
No loan program has had a lower foreclosure rate than VA loans over the last five years. That’s pretty remarkable considering that about 9 in 10 homebuyers don’t put any money down. The VA mortgage program has emerged as a safe harbor for several reasons, including the VA’s residual income requirement, which was mentioned earlier. The VA itself has also done a tremendous job advocating for veterans in jeopardy and working to ensure they stay in their homes.
The VA guaranty program isn’t just about getting veterans into homes. It’s also focused on helping veterans keep them.
The VA mortgage program is a hard-earned benefit. It’s also a lifelong one that you can use over and over again.
Benefit 7: Once Earned, It’s Yours for Life
One of the most common misconceptions about the VA mortgage program is that it’s a one-time benefit. In fact, those who’ve earned it can use this program over and over again throughout their life. And unlike what you may have heard, you don’t necessarily have to pay back your VA loan in full to get another one. A case in point is a veteran who defaults on a VA loan (see Benefit 8 below).
It’s even possible to have two VA loans at the same time. So please don’t let anyone tell you that using your home loan benefit decades ago means you’re no longer eligible. Or that because you have a VA mortgage at your current duty station means you can’t purchase again with a VA loan when you PCS across the country. If you have any questions about your VA loan entitlement or what might be possible, contact a Veterans United loan specialist at 888-212-1958.
Benefit 8: Rebound From Foreclosure or Bankruptcy
Veterans who’ve experienced a foreclosure or bankruptcy don’t automatically lose their shot at a VA home loan, even if they defaulted on a VA-backed mortgage. In those cases it’s more a question of how much VA loan entitlement the borrower has remaining, since at least some will remain tied up in that foreclosed property.
It’s generally a two-year wait after a foreclosure or a bankruptcy discharge to pursue a VA home loan. Prospective buyers will often encounter a longer “seasoning period,” as they’re called, on conventional and FHA loans, which can mean more renting or other less-than-ideal housing situations. Some service members and veterans who declare Chapter 13 bankruptcy may be able to qualify for a VA home loan just one year after their filing.
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