If you're a military veteran, active-duty service member, or the surviving spouse of a veteran, you may be eligible for one of the best-kept secrets in the real estate market: VA loans.
These loans have a lot of benefits, such as requiring no money down, no private mortgage insurance (PMI), and better rates than you might otherwise be able to get with a conventional loan. Learn more about the benefits of a VA loan and how they work.
- VA loans require no money down, no PMI, and offer better rates than conventional loans.
- VA loans charge an up-front VA funding fee, which can tack up to 3.6% onto your loan.
- VA loans can be reused multiple times, even after foreclosure on a previous VA loan.
What Is a VA Loan?
The VA loan was created in 1944 to reward veterans returning from World War II for their service, by making it easier for them to get into a home with an affordable mortgage. The U.S. Department of Veterans Affairs (VA) doesn’t loan money; mortgages are provided by private lenders. However, VA guarantees a portion of the loan that it will cover if you default, also called entitlement. This may prompt lenders to offer more favorable terms for veterans.
It remains one of the most popular mortgage programs today. In the third fiscal quarter of 2021, for example, over 335,000 VA loans were granted for new home purchases. There's a reason for the program’s popularity, and it has to do with some smokin' VA home loan benefits.
VA Loan Benefits
VA loans are a great way to save money on a mortgage because of some unique cost-saving tricks. Here are the main VA loan benefits:
No Down Payment
For most people, the biggest benefit of the VA loan is that you don't need to put any money down. It's one of the few remaining programs that still allows this. Since saving up for a down payment is often a barrier to homeownership for many people, this can be a huge help.
Still, if you're able to afford it, it's a good idea to put as much money down as you can. There are even a few situations where a down payment may be required with a VA loan. This usually happens if the home appraises for less than your offer (a situation called an "appraisal gap," which is common in bidding wars where multiple buyers compete for the same property). It can also happen if you don't have full entitlement, such as if you've defaulted on a previous VA loan or have an unpaid VA loan on another property.
Normally, if you put less than 20% down with a conventional loan, you'll have to pay for private mortgage insurance (PMI). This protects the lender in case you default, and it can tack a hefty amount onto your monthly mortgage payment.
With VA loans, there's no monthly PMI payment, even if you put zero down. This eliminates a huge cost and makes your monthly payments more affordable right from the start.
Flexible Credit Requirement
The VA doesn't have a minimum credit requirement to get a VA loan. Theoretically, anyone with any credit can get one. In reality, however, individual lenders have their own credit requirements that you'll need to meet to qualify for a VA loan.
VA loan requirements are usually easier to meet than those for a traditional mortgage. Most lenders require a credit score of 620 to qualify. That's a lot lower than the 753 average credit score for traditional mortgage holders in 2020. It's also easier to buy another home sooner with a VA loan if you've run into credit problems in the past, such as a foreclosure (even if it happened on a VA loan). You'll need to wait just two years before you can use your VA loan benefits again.
One unique benefit of a VA loan is that when you sell your house, you can transfer the mortgage to the buyer. After they buy the home and the mortgage is transferred, you’ll be released from the loan, and the buyer will continue to make the payments.
Having this ability to transfer the mortgage can be a great selling point if you locked in a low rate in the beginning of your loan and rates have gone up since then. In addition, it saves the buyer the hassle of having to get an entirely new loan and may save them a significant amount of money on closing costs. Before you can transfer your mortgage, though, the buyer will need to undergo a review of their finances and credit just like you did when you took out the original loan.
Limits on Closing Costs
If you get a VA loan, the seller will be required to pay certain closing costs, including the commission for the buyer's and seller's agent and a termite report. It's optional for the seller to pay other fees too, such as the VA funding fee for your loan or the appraisal fee.
If you are able to negotiate to have the seller pay these optional fees, they won't be able to pay more than 4% of the loan amount.
However, this does have a downside in a hot market. Because the seller is required to pay certain closing costs if you're using a VA loan, your offer may end up at a disadvantage to others that don't have this requirement.
You can use your VA loan benefit over and over again, for the rest of your life. Even if you've defaulted on a VA loan in the past, or your Certificate of Eligibility (COE) says "$0 basic entitlement," you may still be able to get a VA loan. You may also be able to have two VA loans at one time or get a jumbo VA loan if you're buying a home above the FHFA conforming loan limits in your area.
It all depends on how much VA loan entitlement you have remaining in two different buckets: basic entitlement and bonus (or second-tier) entitlement. Typically, the basic VA entitlement is 25% for loans up to $144,000, or $36,000 (however, the amount awarded is based on a variety of factors, and may be higher). Bonus entitlement covers loans above $144,000 (up to the FHFA conforming loan limit of $548,250, for most areas, and up to $822,375 in high-cost areas), making it possible for eligible active duty service members, veterans, and surviving spouses to purchase higher-priced homes.
VA loans have a higher up-front cost with the VA funding fee, which can add up to 3.6% to the loan amount. However, they do have a big advantage over the long term: VA loan rates are usually lower, by 0.36% on average for 2021. That might not seem like a big difference, but it could save you tens of thousands of dollars over the duration of the mortgage.
There are even special VA loan refinance programs (Interest Rate Reduction Refinance Loan, or IRRRL) that allow you to stay with the VA loan program and refinance to get a better rate.
Frequently Asked Questions (FAQs)
What do you need to prove you’re eligible for a VA loan?
If you're a veteran, you'll need a copy of your DD-214. If you're an active-duty service member, you'll need a statement of service detailing your personal information and service details.
What are the service requirements for a VA loan?
The service requirements vary depending on when you served, when you separated from service, and whether you were discharged with a service-connected disability. In general, for active-duty service members and veterans, the service requirements vary from 90 days to 24 continuous months. For National Guard and Reserve members, it's a minimum of 90 days of active duty service.