Are you a veteran worrying about homeownership? Perhaps you’re having trouble obtaining a conventional mortgage.
If so, consider a VA loan.
VA loans come with no down payment, have lower DTIs, and require no mortgage insurance. Overall, veterans who cannot qualify for a standard mortgage can qualify under the VA system.
The VA backs a portion of the loan, increasing your chances of qualification. You can also receive better terms.
This article will discuss VA loan benefits in greater detail. Let’s explore.
How Do VA Loans Work?
The VA doesn’t issue the loans and is not an official lender. Rather, you’ll apply to private lenders, and the VA will guarantee a portion of the loan. The government will typically guarantee up to 25% of the loan.
The VA guarantee gives lenders the confidence to approve your application. For more information on VA mortgages, visit JakeTaylor.com.
The Approval Process
Before approval, you’ll go through two steps: prequalification and preapproval. The prequalification step involves an assessment of your finances (i.e. income and assets) and how much you cannot afford to pay.
After, you’ll receive a pre-approval letter after lenders verify your income. Take this letter to sellers and real estate agents, as it shows you’re a serious buyer with VA backing. This approval letter can also give you an upper hand during negotiations.
However, many sellers and agents are not fond of VA loans, believing the VA will prolong the process. In most cases, the process for VA loans is no longer than standard mortgages. Therefore, find the right agent who can enlighten sellers on the VA’s involvement.
No Down Payment
You can receive a no-down loan as long as the selling price remains below the appraised value. With conventional loans, you could pay as high as 20% of the home price.
High down payments are barriers for many potential homeowners. If you’re buying a $250,000 home, for example, you must put down at least $50,000 for a 20% down payment. The down payment system breaks down as follows:
- Standard Loans: Lenders may require you to pay at least 5%.
- Large Loans: Lenders may require a down percentage of of 15 to 20%.
Down payment assistance programs are available, but they may not be available in your state. With the VA option, you can borrow as much as a lender allows without a down payment.
No Insurance Premiums
Under normal circumstances, you must pay mortgage insurance if you’re making a down payment of less than 20%. Private mortgage insurance (PMI) protects the lender in case you default on the mortgage.
It usually costs anywhere from 0.5% to 1% of the loan balance annually. In addition to the cost, PMI can affect you negatively in the following ways:
- No Deductions: Until 2017, PMI was tax-deductible if the income of a married couple was less than $110,000 a year. Under the Tax Cuts and Jobs Act, families in a two-income household cannot make the deductions.
- No Benefits: PMI doesn’t benefit you or your family members. The lender is the only party who benefits from the insurance. Therefore, you’re paying out of pocket to benefit another party.
- Mandatory in Some Cases: Even if you pay the 20% down payment, some lenders may still require PMI for a designated period.
However, a VA loan comes with no insurance requirements, allowing you to save money annually.
For FHA loans, the FHA requires borrowers to purchase a mortgage insurance premium (MIP). This is a self-insurance type of insurance that protects the lenders as well. With a VA loan, borrowers don’t need to pay MIP either.
Better Interest Rates
VA loans may offer lower interest rates than conventional loans. However, the rate depends on such factors as:
- Your credit
- Your state
- Your income level
To get the best rate possible, you can apply to multiple VA lenders to compare the rates. Lenders may offer lower rates and higher fees. A VA loan funding fee, for instance, can add to your loan balance. The fee may force you to pay additional interest over time.
Loan fees range between 1 and 3% of the loan balance.
Lower Closing Costs
The VA caps the number of closing costs you pay for the loan. This feature isn’t available for any other type of loan. Closing costs usually include the following:
- Document fees
- Underwriting fees
- Processing fees
The fees also depend on your state residence, including the guidelines of the mortgage company. In total, closing costs can range from 2 to 5% of the loan balance. The VA forces sellers or lenders to pay the closing costs.
Relaxed DTI Requirements
DTI is your debt-to-income ratio. A DTI entails your monthly income divided by gross monthly income. Lenders assess DTI to see if the borrower has enough money to pay back the mortgage. A person with a high DTI will have trouble obtaining approval.
Even if you have good credit and a decent income, lenders could deny your application if the DTI is too high. With standard loans, you can have up to 36% DTI. Further, many lenders don’t want to see 28% or more of your income going to repay the loan.
Large lenders may approve the loan if you have more than the 36% threshold, but approval depends on the lender’s standards.
On the other hand, VA lenders prefer to see a DTI ratio of 41% or less. In some cases, borrowers can still receive a loan if their DTI is over 41%. Most lenders are willing to overlook the high DTI since the VA is securing part of the loan.
Is a VA Loan Worth My Time?
A VA loan is worth considering due to the many perks, such as lower interest rates and no down payment. Getting a loan through the VA will also save you money, as you won’t have to deal with insurance or closing costs.
It’s also a great choice if you cannot secure a loan through traditional means. Since the VA is backing a portion of the loan, more lenders will consider your application.
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