VA Loan Benefit – Learn from an Expert

Military veterans and active service members play a big role in helping keep our nation safe and secure. One way the government has recognized their sacrifices is by creating a special mortgage program that makes it easier for veterans and active-duty personnel to realize the American dream of homeownership.

Veterans Administration (or VA) loans are backed by the U.S. Department of Veterans Affairs. They offer many potential benefits to vets, active service members, and select military spouses who qualify when compared to conventional mortgages. In this article, we’ll explain these benefits in detail so you can understand how you might benefit from a VA loan.

No Down Payment Required

With VA loans, you don’t have to make a down payment when buying a home. This means you can finance 100% of a home’s purchase price. Many homebuyers and mortgage experts consider this to be the biggest benefit of VA loans because it enables qualifying borrowers to buy a home much sooner than if they had to save enough money for a sizeable down payment. All a homebuyer needs up front is the closing costs and fees.

In comparison, conventional mortgages typically require a down payment of at least 3%, and FHA mortgages typically require a down payment of at least 3.5%. On a $250,000 mortgage, this translates into a $7,500 down payment on a conventional mortgage and an $8,750 down payment on an FHA mortgage.The average VA borrower only has about $9,000 in total assets, so the no-down-payment feature of VA loans is clearly a big benefit for borrowers who qualify.

No Mortgage Insurance Requirements

Another major benefit is that unlike conventional and FHA mortgages, VA Loans don’t require you to purchase mortgage insurance. With conventional loans, this insurance is referred to as private mortgage insurance (PMI) and with FHA loans, it’s referred to as a mortgage insurance premium (MIP). It is estimated that together our Veterans save more than $40 billion in mortgage insurance costs each year.

If conventional borrowers make a down payment of less than 20%, they will usually have to pay for PMI until they’ve built 20% equity in the home. This payment, which often exceeds $100 a month, is added to the monthly mortgage payment. Over time, conventional borrowers can end up paying tens of thousands of dollars in PMI.

FHA borrowers, meanwhile, must pay MIP regardless of how much money they put down on a home. The FHA charges both an upfront mortgage insurance premium of 1.75% (which is folded into the loan financing) anda monthly mortgage insurance premium of up to 0.85% of the loan amount, which is added to the monthly mortgage payment.

The monthly insurance premium alone can add around $170 a month to a mortgage payment depending on the loan size.The monthly FHA premium can be cancelled after 11 years if the borrower makes a down payment of at least 10% or the mortgage’s term is 15 years or less. Otherwise, it remains for the life of the loan — again, potentially adding up to tens of thousands of dollars in additional expense.

Note that there is a mandatory funding fee with VA loans that helps provide long-term funding for the program. However, the fee can be folded into the loan financing — it doesn’t have to be paid at closing. If you have a service-related disability and receive VA disability compensation, or if you are the unmarried surviving spouse of a veteran who died in service, you would be exempt from paying this fee.

More Flexible Approval Guidelines

Due to the VA loan guaranty, lenders often apply less stringent credit requirements to VA borrowers than they do to those applying for some other types of home financing. This means that military veterans and active service members who perhaps haven’t been able to maintain a high credit score may still qualify for a home mortgage.

The minimum credit score needed to qualify for a VA mortgage is 580. Lenders often want to see a higher credit score than this for borrowers applying for a conventional mortgage, especially if borrowers want to receive the lowest interest rate.

Additionally, lenders usually allow VA borrowers to possess higher debt-to-income (DTI) ratios. This ratio compares a borrower’s existing debt to his or her income to help lenders determine their ability to repay the mortgage loan. The maximum DTI needed to qualify for a conventional mortgage is now 50%. Even so, lenders may allow DTIs as high as 55% for VA loans, depending on the credit score and other factors.

Also, you may be able to secure a VA loan sooner than other types of mortgages after experiencing serious financial difficulties. In certain situation, borrowers may be approved for a VA loan within two years of a home foreclosure or short sale and within one year of filing for Chapter 13 bankruptcy.

More VA Loan Benefits

Here are a few more potential benefits of VA loans for military veterans, active service members, and select military spouses who qualify:

1. Limitations on buyer closing costs— The VA places limits on what borrowers can be charged in fees and closing costs. Borrowers can ask the seller to pay all loan-related closing costs as well as up to 4% of the home’s purchase price in concessions for such items as prepaid taxes and insurance.

2. Lower average interest rates— The VA guaranty lowers a lender’s risk when making VA loans, which enables lenders to charge lower interest rates. The interest rate on a VA loan is typically 0.5 to 1.0 percentage points lower than the rate on a conventional mortgage.

3. No loan prepayment penalties— Some mortgages assess penalties if borrowers want to pay off a mortgage early in order to save on interest charges. VA loans do not charge any prepayment penalties.

4. Flexible refinancing options— Borrowers can refinance an existing VA loan into another VA loan using the VA’s Interest Rate Reduction Refinancing Loan program (IRRRL). They can also refinance into a non-VA loan if they choose.

5. Foreclosure avoidance advocacy— VA staff members are devoted to working on behalf of homeowners experiencing financial difficulties, helping them find alternatives to home foreclosure. These efforts have helped more than half-a-million veterans stay in their homes and avoid foreclosure since the housing and financial crisis.

Also, borrowers can apply for additional VA loans as many times as they want throughout their lifetime — it’s not a one-time benefit. They don’t have to pay back one VA loan before applying for another one, which means borrowers can have more than one VA loan at a time based on their individual entitlement provided by the VA.

Tremendous Opportunity for Veterans

VA loans could represent a tremendous opportunity for military veterans and active service members to realize the American dream of owning their own home. Plan to sit down with a lending specialist and review the benefits of VA loans and the qualification criteria so you can make the right choice. 

About the Author: Dr. Steven Kaufman, is an accomplished investor, entrepreneur, and philanthropist. He isthe founder and Chief Acceleration Officer of ZeusLending.com, an online provider of real estate financing products including traditional and non-traditional mortgages, hard money and bridge loans, and real estate crowdfunding investment opportunities.  Steven has been interviewed by local and national news organizations like FOX, ABC, CBS, CNN, and Bloomberg on the financial markets, and he is a contributing author at Entrepreneur.com.  Business School, and earned his PhD in psychology, with a thesis on organizational leadership, corporate psychology, and team/group trust, from The Chicago School.