Tracking down the home loan that will best suit your needs can be a tricky proposition. There are more options available today than ever; variety is great, but narrowing down the list of potential options can be daunting. Like most people, you probably want to secure a mortgage that will easily fit within your budget, but that will also allow you to move into the home that is right for you and your family. Virtually everyone has a vast array of home loan options to choose from, but if you're a veteran or if you are an active member of the United States military, you have one extra option at your disposal: a VA home loan.
If you have the option of a VA home loan, you should seriously consider taking it. VA loans come with many great perks and benefits that other kinds of mortgages simply do not. For one thing, lenders who offer VA home loans cannot require private mortgage insurance, or PMI. For another, interest rates for VA loans are extremely competitive when compared with many other mortgage products. Finally, relaxed qualification standards make VA loans accessible to many people who otherwise wouldn't qualify for a mortgage - or who would have to pay exorbitant rates to get one.
Although you will more than likely decide that a VA loan is right for you, it is still imperative to sit down and weigh all of the pros and cons of this kind of mortgage. Educating yourself about the various aspects of VA home loans will help you make the best decision for you and your family. Below, you'll find all sorts of in-depth information about VA loans, including their history and the basic steps for acquiring one. By the time you've finished this article, you'll have a much clearer idea about how you'd like to proceed.
A Brief History Of VA Loans
The G.I. Bill of 1944 is where the VA Loan Guaranty Program originated. This sweeping bill made several provisions for returning veterans of World War II. Its ultimate goal was to thank those individuals for their service to their country, and to help them get on with their lives. Considering that their lives were put on hold in many ways due to their military service, the bill was designed to give them a helping hand. The VA Loan Guaranty Program aimed to make housing affordable for returning GIs.
Through the VA Loan Guaranty Program, veterans and active military personnel were able to qualify for home loans through qualified lenders. The U.S. government backed up a certain portion of those loans, guaranteeing them and, essentially, vouching for those who took them out. One of the most important aspects of how the government achieved that was by insuring the property that was being financed on the GIs' behalves. For that reason, there was no need for those who qualified for VA loans to take out private mortgage insurance - a benefit that would add up to significant savings down the line.
VA Home Loans: Top Benefits And Advantages
The G.I. Bill was enormously popular and successful; the many perks and benefits that it afforded to United States military personnel and veterans were the impetus for that popularity. Few parts of the bill were met with more enthusiasm than the VA home loan provisions. Since being introduced, VA home loans have been quite popular and have helped thousands upon thousands of military personnel to get into affordable homes. If you are qualified to take out a VA home loan, you should seriously consider doing so; some of the main reasons include:
- No Down Payment Needed - One of the most attractive things about securing a VA home loan is that you can finance 100% of the purchase price of a home. In other words, down payments are not required. Therefore, you do not need to have a lot of money saved up for a down payment, and can use any money that you have saved to make whatever purchases you need. Nine out of ten people who secure a VA loan take advantage of this benefit and put no money down when buying a home. Without question, this is a major selling point for many people.
- No Private Mortgage Insurance Required - The vast majority of people who take out mortgages have to pay anywhere from $100 to $200 extra per month, on average, in order to pay for mortgage insurance. Mortgage insurance is required for most people who have less than 20% equity in their homes, in order to protect their lenders in the case of default. Since the U.S. government guarantees a portion of every VA loan, private mortgage insurance - or PMI - is not required. This shaves a significant amount of money from the average monthly payment of those who participate in the VA home loan program.
- Relaxed Qualification Standards - Incredibly, the United States government does not have a minimum income requirement for people to qualify for VA loans. In addition, there is no minimum credit score required either. Debt-to-income ratio limits are also very relaxed for VA home loans when compared with most tradition mortgages, which imposes a 36% limit. VA home loans impose a 41% debt-to-income ratio limit. If your credit is quite poor - even if you've recently had a bankruptcy - you can still qualify for a VA mortgage. These relaxed standards have helped thousands of people get into homes.
- Low Interest Rates - Since your credit score isn't taken into consideration when you apply for a VA loan, you are always going to pay a lower interest rate. For traditional mortgages, a person's credit score can have a dramatic - and very negative - impact on the rate that they end up paying. For every 20 points that their credit score dips below 720, traditional borrowers pay a higher rate. Regardless of what your credit score may be, you'll enjoy the same interest rates that someone with impeccable credit would enjoy when you qualify for a VA home loan.
- No Prepayment Penalties - Many times, lenders who pay off traditional mortgages ahead of schedule are subject to a fee. These kinds of mortgages are known as prepayment penalty mortgages, or PPMs. A great advantage of a VA home loan is that there is no penalties or fees for paying off the loan ahead of time. For this reason, you can easily pay a bit extra toward the principal of your VA loan each month without the threat of incurring a huge penalty when you do pay it all off. It's just one more way that VA loans save you money.
How Do The Interest Rates For VA Home Loans Compare With Those For Other Mortgage Products?
As noted previously, the interest rates for VA home loans are generally quite a bit lower than for traditional mortgage products. In fact, this is one of their major selling points and is the main reason why so many people are sold on them. For people with poor credit, especially, the low interest rates offered through the VA home loan program are very enticing. After all, those with low credit scores generally enjoy the same competitive interest rates that people with topnotch credit scores enjoy. Whether your credit score is 750 or 600, you're going to pay a lot less interest with a VA loan.
Basically, if you want to get a feel for how much a VA home loan will cost in terms of interest, you should just look at what standard, fixed-rate, 30 year mortgages are going for in terms of interest and shave a little bit off of the total. Since rates fluctuate, there is no point in documenting how much you are going to pay in interest for a VA home loan. Suffice it to say that it is generally a great deal less than you would pay for many other popular mortgage products.
When Is The Best Time To Get A VA Home Loan?
When shopping around for a mortgage, many people wonder if there is a "good time" to apply. For some mortgage products, there is no doubt that key market conditions affect how much they're going to pay. However, there is no tried and true advice for when you should - or shouldn't - apply for a VA home loan. The things that affect the interest rates that are attached to the typical VA home loan are so varied and complex that there is no hard and fast rule to refer to.
If you are considering a VA home loan, contact a number of qualified lenders and ask them what the current rate is. Try to get a feel for whether rates have recently crept up or gone down, and act accordingly. Either way, you're going to be paying a lot less than those who don't qualify for VA loans are going to. Also, without the worry of private mortgage insurance and without having to make a down payment, you're going to be ahead of the game financially anyway. In fact, the relaxed conditions for VA home loans makes any time a good time to get one.
The Disadvantages Of VA Home Loans
You'd be hard pressed to find a whole lot of drawbacks to a VA home loan. Assuming you qualify - i.e., that you are an active member of the United States military, or a veteran - then you will quickly see that the pros of such a loan far outweigh the few cons. Still, in order to make the best and most educated decision possible, you should learn about the drawbacks and disadvantages of VA loans. Knowing exactly what you're getting yourself into is always a good idea. In general, the main drawbacks of a VA loan are:
Loan Limits
Although they vary depending on where you live in the country, there are limits on how large of a VA home loan you can take out. Those who are looking to purchase a very expensive home, for instance, may be discouraged by the loan limits that are imposed by the VA home loan program. If the home that you want to buy exceeds the loan limits set by the VA home loan program, you will have to finance the balance through another mortgage program. This can seriously negate the benefits of using the VA home loan program. Still, the limit in most areas is currently $729,000; for the vast majority of people, that amount is more than enough for what they are looking at.
Hidden Fees
One of the biggest worries that prospective home buyers have is paying hidden fees. When figuring out how much you can afford, you need to make sure that you take every single fee and expense into account. Many mortgage programs and home loan products have hidden fees; on the outset, they aren't very obvious. By the time everything is said and done, though, they can increase a borrower's expenses by a considerable margin.
VA home loans are interesting because they don't include a ton of different hidden fees. Still, there are a few that you need to be aware of in order to get the best idea possible about what you can really afford. These fees include:
- Repairs - When applying for a VA home loan, the VA has its own inspection and assessment done on the property that you'd like to purchase. In order to qualify, the property must fit within the specific criteria as outlined by the VA. Although it's not terribly common, occasionally the VA requires repairs and other work to be performed before it will approve a loan. The seller is not allowed to make the repairs; it is solely the responsibility of the buyer. In this way, you could incur some extra expenses when trying to secure a VA home loan. For the most part, such expenses are minimal.
- Closing Costs - There are certain fees and expenses that the seller cannot pay when a VA home loan is being used to purchase a house. For instance, courier fees and document recording costs are generally the responsibility of the buyer. Although they aren't usually terribly expensive, they should still be taken into consideration when calculating how much you can afford to spend. Also, miscellaneous VA loan fees are going to be your responsibility, as is the cost of termite inspections - if they are required.
- Funding Fees - Down payments are not required for VA home loans. However, if you make a down payment of at least 5% of the purchase price, you can avoid funding fees. Funding fees are required by law for VA home loans. For those who make no down payment whatsoever, the funding fee is going to be around 2.15%. It should be noted, though, that this fee is rolled into the overall loan and isn't due upfront. In certain cases, funding fees may be waived. Veterans who are receiving VA compensation for service-related disabilities, for instance, may not have to pay these fees. However, you should plan on paying them and should include them in your calculations when planning to purchase a home through the VA home loan program.
How To Qualify For A VA Home Loan
As the name implies, the VA home loan program is reserved for veterans and active members of the United States military. In order to qualify, then, you or your spouse must have either served at least two years of active duty for the United States military, or must currently be enlisted. The entire scope of the U.S. military is included in the program, which means that members of the U.S. Army, Navy, Marine Corps, Air Force or Coast Guard are all eligible for this program.
There is no way to even be considered for a VA home loan if you haven't actively served in the U.S. military. Even if you have served, if it was for less than two years then you are not going to qualify. During periods of war, active personnel must have served for at least 90 days to qualify. Also, if you are no longer enlisted, your discharge can be for any reason other than dishonorable in order to qualify. As long as all of these criteria are met, you should have no problem securing a VA home loan.
Steps To Acquiring A VA Home Loan
Acquiring a VA home loan involves a relatively straightforward, simple process. Before going ahead with it, though, you should familiarize yourself with what you're going to be expected to do. Below, the basic steps for acquiring a VA home loan are outlined for your convenience. Although everyone's experience is going to vary slightly, you can expect yours to go in roughly the following order:
- Qualify - First, you need to make sure that you are actually qualified to receive a VA home loan. Look over the eligibility requirements as outlined in the previous section. If you are still unsure about whether or not you qualify, you should contact the Veteran Affairs Eligibility Center to see what they have to say. Covering this base is important if you want to proceed with obtaining a VA home loan.
- Apply For A COE - Next, you're going to need to apply for a COE, or Certificate of Eligibility. You will need this certificate when you approach a VA-approved lender for a home loan.
- Submit Your Paperwork - To get your COE, you need to submit VA Form 26-1880 - Request For A COE For Home Loan Benefits - along with documentation that proves your military involvement to your local VA Eligibility Center. Although the VA Eligibility Center may be able to confirm your background themselves, it is always best to come prepared with as much documentation as you can get your hands on.
- Find A Lender - Not all lenders offer VA home loans. You should check around to see what your available options are. Lenders must be approved by the U.S. government, so double check that the one you're interested in working with does participate. Otherwise, you will end up wasting a lot of time.
- See If Your Lender Uses The ACE System - The ACE system streamlines the COE application process and allows you to quickly and easily find out whether or not you are qualified for a VA home loan. Check with the lenders that you are looking at to see if any of them offer this service. Please note that the ACE system does not work in every single instance; however, having it as an available option is a great way to shorten the overall process of applying and qualifying for a VA home loan.
- Find A Home - With your pre-approval in hand, you can finally go house hunting. Remember that the U.S. government is going to have to inspect the house that you choose and that you may have to pay for any repairs that it finds necessary. Otherwise, you should be a proud homeowner in no time flat!
The Bottom Line On VA Home Loans
With their low interest rates, relaxed qualification standards, no down payment requirements and private mortgage insurance needed, VA home loans are exceptional deals for the people who are qualified to receive them. If you or your spouse is a veteran of any branch of the United States military - or if either you are actively serving right now - then you should find out whether or not you qualify. If so, a VA home loan is more than likely going to offer you the most competitive benefits out of any other mortgage product that's currently available.
The advantages of VA home loans cannot be overemphasized. For borrowers with poor credit or very little spare cash, there's no other mortgage product out there that comes close to offering the affordable options that VA mortgages do. Weight your options carefully, but be sure to give a lot of consideration to VA home loans.
