There are several advantages to choosing a VA Home Loan over a more traditional mortgage loan. VA loan rates tend to be lower. Loan qualification requirements are less stringent, for example. Your credit need not be perfect, and your income can be a little lower than other lenders require. You won't need as much money upfront with a VA loan. There are also a couple of advantages that come after the initial loan.
VA Home Loan Eligibility
Previous Bankruptcy or Foreclosures:
If you have had to declare bankruptcy or had your home foreclosed on, you will not be eligible for a typical home loan for at least seven years. With a VA loan, under certain conditions, you could qualify in as little as two years.
Debt-to-Income Ratio (DTI):
Lenders require that the amount of debt compared to a borrower's income be at a certain ratio. FHA and other conventional loans require that a borrower's DTI be 38%, but a VA home loan in the USA requires only a 41% DTI. If, for example, your monthly debt payments, including the mortgage payment, will total $1500, you need a gross income of about $4000 for traditional loans and only $3700 for a VA loan. In addition to requiring a lower DTI, a VA Lender may approve a borrower despite a DTI higher than 41% when the borrower can prove they have a residual monthly income. In other words, if your expenses are lower than average and you regularly have extra money at the end of the month, you could still qualify.
A VA home loan in the USA loan requires no down payment. Other loans require a deposit equivalent to between 3.5% and 5% of the loan amount. For a $200,000 loan, that’s between $7000 and $10,000. While you will need to come up with some ready money for settlement expenses, you will need to save up less with a VA loan.
Private Loan Insurance (PMI):
When a borrower puts down a deposit of less than 20%, they must take out private loan insurance with most loans. Private mortgage insurance costs can range between .58% of the loan amount and as high as 1.86%. For a $100,000 loan, that amounts to between $48 and $155 every month. The PMI payment will no longer be required once the borrower has paid off 20% of the loan amount. The good news is that VA loans do not require PMI at all.
After the Loan
In addition to the easier qualification requirements, VA loans offer some advantages after you get the loan. There are no early payoff penalties, and there are several refinancing options.
Early Payoff Penalties:
Believe it or not, paying some mortgage loans off early comes with early payoff penalties. VA has no such penalties. If you inherit some money and want to pay off your mortgage, your VA lender does not charge anything extra, and you will save any remaining interest on the loan.
There are a couple of refinancing possibilities with Veteran Home Loans that allow borrowers to lower their monthly mortgage payments and/or take out some equity for home improvements or other unexpected expenses. The Interest Rate Reduction Refinance Loan (IRRRL), also called Streamline refinancing, comes into play if loan rates go down. Taking advantage of lower interest rates can lower your monthly payment. The Cash-Out Refinance Loan can provide needed cash a Vet might need to pay down higher-interest debt.
The many advantages of a VA home loan, from lower VA loan rates to no down payment requirements, save thousands of dollars for Veterans and their families. In some cases, a VA loan can be the only way for someone to buy their first home.