A VA (Veterans Affairs) loan is a powerful tool that has helped millions of military veterans throughout the country buy their very own home.
If you’re looking to finance a home with a VA loan, it’s best to understand how it works and how you can maximize its benefits for you.
These are some of the most important things you should know.
What are VA loans?
VA loans are home loans available to military veterans and service members, as well as qualified military spouses. The loans are provided by private lenders but are guaranteed by the US Department of Veterans Affairs.
The VA home loan program was created in 1944, and has since helped more than 25 million beneficiaries in purchasing or refinancing a home. Because the loans are fully guaranteed by the federal government, private lenders, including banks, credit unions, and mortgage lenders, are able to offer them to qualified borrowers with highly favorable terms compared to conventional loans.
The features of a typical VA home loan include:
No down payment
Unlike conventional loans where buyers need to pay anywhere from 5% to 20% of the home price upfront, a VA loan gives you the rare opportunity to buy a home without any down payment
No mortgage insurance
Lenders typically require borrowers who make less than a 20% down payment to pay private mortgage insurance (PMI) for conventional loans and mortgage insurance premium (MIP) for an FHA loan. VA loan beneficiaries do not have to pay any mortgage insurance.
Requires a funding fee
While a VA loan does not require mortgage insurance, it comes with a funding fee that varies according to your status. If you’re a first time VA borrower, the fee is typically 2.3% of the home’s purchase price. If you’re a repeat borrower, the fee is 3.6%. You may qualify for an exemption based on the determination of the VA.
Highly competitive rates
VA loans often come with lower interest rates compared to conventional or FHA loans. As of March 4, 2021, for example, the average rate for a 30 year VA mortgage was 3%. In comparison, the average rate for a conventional mortgage is 3.18%, and 3.09% for an FHA loan.
As VA loans are offered by private lenders, you have the flexibility to look for a loan that best matches your needs and preferences. You can shop around and compare interest rates and other terms as you would for a conventional loan. You can opt for a fixed or adjustable rate mortgage, a 15-year or 30-year loan, and other terms that you think are favorable for you.
Easier to qualify
In a conventional mortgage, lenders will look at your credit scores, down payment, and other financial information in reviewing your loan application. You may also be subject to stricter underwriting guidelines. A VA loan has more flexible guidelines, allowing for better terms that you may not get in a conventional loan. Even with a history of bankruptcy, you may still qualify for a VA loan.
Lower closing costs
The Veterans Affairs has put a limit to the closing costs that may be charged to borrowers, so VA loans often come with lower closing costs than conventional loans
Assumable and reusable
If you decide to sell the property in the future, you can transfer your VA loan to a buyer who is also eligible for a VA. You can also have more than one outstanding VA loan, or use the loan again in the future.
What type of property can you buy with a VA loan?
A VA loan can only be used to buy your primary residence, or the home where you intend to live. It can be any type of property, including a single-family home, a condo, or a townhouse, provided that it will serve as your main residence. The loan cannot be used to buy a vacation home or investment property.
You can buy a farm or agricultural property with a VA loan, as long as it includes a house that will serve as your primary residence. You can also purchase a duplex or a multifamily property if one of the units will serve as your home.
What are the VA loan limits?
As of January, 2020, VA loans are available in most parts of the US without any limit. The maximum loan amount you can obtain will depend on the lender’s evaluation of your financial situation.
Much like a conventional loan, the lender will look at the following when determining your mortgage limit:
- Your credit score
- Your income
- Your debt to income ratio
- Any down payment
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