One thing we do well as Americans is to help those who served finance the American Dream. Unfortunately, there is a lack of education and understanding about the VA Mortgage Program among real estate professionals and veterans alike.
Here are seven of the biggest benefits of VA mortgages:
Benefit 1: Zero Down Payment
Qualified veterans can buy a home with no money for a down payment. It’s almost impossible to overstate just how incredible this benefit is in this day and age. (In comparison, the minimum down payment amount on a FHA loan is 3.5 percent, and for conventional financing, it’s 5 percent. On a $300,000 purchase, a military borrower would need to come up with $10,500 in cash for the FHA-backed mortgage and $15.000 for the conventional loan.)
The amazing feature 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 right now, 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. In terms of your credit score, VA financing is typically 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 680. 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 are usually lower than a conventional borrower might obtain.
Benefit 3: No Private Mortgage Insurance or Monthly Mortgage Insurance Premiums
Homebuyers who pursue a conventional 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). Those who borrow via FHA will pay mortgage insurance regardless of their down payment.
This is an additional monthly fee that is added to your monthly mortgage payment. The cost will vary by the loan amount and other factors, but it’s not uncommon to pay $200-400 per month for PMI/MMIP.
VA home loans come with a VA Funding Fee, which is a fee the VA applies to all purchase and refinance loans. This fee is added to the loan amount’ and therefore, is paid over the life of the loan and does not require any cash at closing. (FYI- Borrowers with a service-connected disability are exempt from paying this fee.)
Benefit 4: Flexible Income To Debt 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 and/or credit card, auto and student loan payments. 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 between 36% and 45% percent. The VA standard is 41 percent. But it’s possible to go even higher on a VA loan (up to 55 percent!), depending on the overall strength of the file.
Benefit 5: Closing Cost Restrictions
All mortgages come 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 negotiate with a seller for the seller to pay all of their closing costs.
Benefit 6: Once Earned, It’s 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.
An often overlooked opportunity exists for veterans who financed their purchase via a conventional loan with PMI or an FHA loan, as they may be able to save hundreds of dollars monthly by refinancing into a new VA loan.
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, call me.
Benefit 7: Rehabilitating After A Foreclosure or Bankruptcy
Veterans who have 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). It’s more a question of how much VA loan entitlement the borrower has remaining, as some of the entitlement 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. (For conventional and FHA loans, guidelines typically call for a three or four year restriction.) 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.
In the end, cheaper costs, reduced (and often no) cash requirements, and relaxed credit standards when added to the low rates available today should have all, who are eligible, running to explore a VA loan for purchase or a refinance.