The VA Home Loan program is without a doubt the best mortgage on the planet. Setting aside for a moment that this is a benefit afforded to those who have served our country in the military, there are other benefits that set this loan program apart from all others.
- The VA loan does not require a down payment. The Veterans Administration guarantees the loan up to 100% of the purchase price of the home, provided that the appraisal supports that price. We’ll talk more about the down payment in a moment, so stay tuned.
- The interest rates are lower than for conventional loans. Today’s 30-year fixed rate VA loan is about .25% lower in rate than for an equivalent conventional loan. [Click here to get an instant rate quote now]
- Qualifying for the loan is easier. VA loan guidelines allow a borrower to qualify with a higher debt-to-income ratio than for a conventional loan. This means that a veteran buyer who would only qualify for a $325,000 home with a 3% down payment and a conventional loan could buy a $400,000 home with no down payment at all. The credit score requirements are far more lenient for VA loans, too—as low as 580, where a conventional loan requires a 620 score to qualify.
- There is no mortgage insurance on a VA loan. For the buyer getting a 97% conventional loan, that would mean a monthly payment of nearly $200 per month for a $325,000 home. The VA actually guarantees the mortgage, eliminating the need for costly mortgage insurance.
There is the matter of the VA Funding Fee, however. This is a fee that is added to the loan as part of the guarantee. It is not an out-of-pocket cost, however. If a veteran buyer is getting a $400,000 loan, he or she will have a 2.15% funding fee added to the loan for the first use of the program. That means that the actual loan amount would be $408,600.
The funding fee changes for subsequent uses of the VA loan: using it a second time, the funding fee goes up to 3.3%—that means $13,200 added to the base $400,000 loan. It’s still a good deal—just a more expensive deal.
There is a helpful loophole, though: if you make a down payment of at least 5%, the funding fee drops to just 1.5%. That can save a great deal of money for a veteran using the program for the second or third time. For that same $400,000 purchase, making a down payment of just $20,000 would drop the funding fee to $6,000 from $13,200. That’s a reduction of $7,200.
The VA loan does have its limitations. The maximum loan amount is $417,000 (although it is higher in certain higher-cost areas). A buyer can still finance a more expensive property with a loan that exceeds the county loan limit. VA will guarantee a loan of the base amount plus 75% of the excess.
If the purchase price is $500,000 and the county limit is $417,000, the buyer would pay 25% of the $83,000 difference between $500,000 and $417,000—$20,750. The VA would guarantee a loan of $479,250. But it would make economic sense to make a larger down payment—$25,000 instead of the required $20,750. That would reduce the funding fee to 1.5%, saving nearly $7,000.
One last thing bears mentioning. For our veterans who have any sort of service-connected disability and for which they receive compensation from the VA—even as little as a 10% disability—the VA funding fee is waived entirely.
To all our veterans, wherever and whenever they served, we owe our respect and gratitude.