Are you considering using a VA loan for your upcoming home purchase?
They have a variety of enticing benefits for borrowers such as 100% financing and limited closing costs. However, there are items to be aware of, too, like the specific eligibility requirements.
If you think you would benefit from a VA loan, start by exploring your rate options. Representatives are available around the clock to assist you.
Here's a closer look at the benefits of VA loans, who qualifies and when they can be a good fit.
What is a VA loan?
A VA loan is a home loan offered by private lenders and backed by the U.S. Department of Veterans Affairs (VA). The VA created the loan program in 1944 to help servicemembers, veterans, and surviving spouses get mortgages with favorable terms. Today, it's still going strong, offering qualifying borrowers unique perks like no down payments, no PMI requirements, and limited closing costs.
Who can qualify for a VA loan?
First and foremost, to qualify for VA loans, you have to be a service member, veteran, or surviving spouse. Service members are those who have served in the U.S. armed forces (Army, Coast Guard, Air Force, Navy and Marine Corps), the Commissioned Corps of the Public Health Services, or Commissioned Corps of the National Oceanic Atmospheric Administration.
Additionally, to qualify, you must:
Meet the minimum active-duty service requirements.Have an "other than dishonorable" discharge. Have entitlement available. Buy a home you intend to live in as your primary residence.Meet your lender's credit and income requirements.
Pros of VA loans
Now that you know the basics of VA loans, what are the pros? Here's a look at the key advantages you should know.
No down payments
One of the most significant benefits of VA loans is that they offer 100% financing — meaning no down payment is required. Compare this to traditional mortgage programs today, which require at least 3% down. While it doesn't sound like too big of a percentage, 3% on a $350,000 is $10,500 out-of-pocket. Removing that requirement can make it much easier to afford a home.
Limited closing costs
In an effort to ensure VA loans remain affordable for veterans and other qualified borrowers, the VA limits borrower fees. For example, lenders can only charge a 1% flat origination fee. Further, while borrowers can pay the fee for a VA appraiser and the VA compliance inspector, they aren't allowed to pay for reconsideration appraisals requested by the lender or seller. These and various other limits help to keep closing costs down for borrowers.
No private mortgage insurance requirements
Another big perk to VA loans is no private mortgage insurance (PMI). In most cases, when a borrower puts down less than 20% on a home purchase, they're required to get PMI. The PMI helps to protect the lender if the borrower defaults on the loan.
Unfortunately, it adds a significant cost for borrowers upfront and over time. For example, the mortgage insurance on FHA loans will cost 1.75% of your loan amount upfront, and then 0.45% to 1.05% of the loan amount per year. On a $350,000 FHA loan, that means $6,125 upfront and an average of $2,625 per year ($218.75 per month). No PMI means big savings.
No home loan limit
Eligible borrowers with full entitlement won't have a home loan limit set by the VA. As a result, the amount will only be limited by the lender you choose and how much house they decide you can afford.
Competitive interest rates
VA loans also tend to have very competitive interest rates. The VA-backing helps to reduce the risk in lending for lenders, enabling them to offer lower rates.
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Other factors to consider
While VA loans are advantageous in a lot of ways, there are other factors to consider.
VA loans are designed to help U.S. service members and Veterans. Being so, you won't qualify for the loans if you haven't served, or aren't the surviving spouse of someone who served. Additionally, you must meet a variety of other requirements pertaining to your service.
VA loans won't work for all home purchases as the VA has minimum property requirements (MPRs) in place and only offers loans for primary residences. So, if you are trying to buy a second home or an investment property, a VA loan won't work.
VA funding fee
Lastly, while VA loans have fewer costs than many other types of mortgages, they do require borrowers to pay the VA funding fee. It will currently cost you 2.15% of the loan amount if you're a military veteran taking out your first VA loan and putting 0% down. The fee can vary from 1.25% up to 3.3%, depending on the type of veteran you are, your down payment amount and if you've taken out a VA loan before. The good news is that you can opt to finance the fee into your loan if you don't want to pay for it upfront.
Is a VA loan right for you?
If you're a qualifying service member, veteran, or surviving spouse, VA loans offer an attractive home loan option. They can save you on the upfront and long-term costs of buying a home. You'll have to meet all of the eligibility requirements and need to buy a home you plan to occupy as your primary residence. Further, the home you buy will need to be in good shape.
But, if you meet the eligibility criteria, VA loan benefits are very attractive and can save you money both upfront when closing and over the life of the loan.
If you think this is something you may be interested in, it's easy to find out more.