Because of the bravery and sacrifices of veterans and active military, the rest of the country’s civilians can live the American dream in safety. As one tangible way to say "thank you for your service," current and former members of the military have access to Veterans Affairs home loans. These unique mortgage options allow veterans and those still serving to own a piece of the American dream by potentially qualifying for homes they might have thought were out of reach.
Veterans, active-duty service personnel, and select Reservists or National Guard members are among those who can quality for VA loans. Wondering what some of the benefits of a VA loan might be? Here are five to consider.
1. No down payment
This is one of the most valuable and touted benefits—and for good reason. Saving enough for a down payment can be the biggest obstacle to buying a home. But a VA loan eliminates that roadblock.
“Most of the buyers I work with don’t have extra resources available, so the fact that they can purchase a home with zero down makes the transaction feasible,” says Benny Dinsmore, a Realtor® with Coldwell Banker in Frisco, TX.
In most parts of the country, qualified buyers can purchase up to $424,100 before factoring in the cost of a down payment. In pricier areas, borrowers can go beyond that threshold.
But beware: The “no money down” aspect of a VA loan shouldn’t be confused with “no money out of pocket,” a common misconception, notes Michael Garcia, broker and owner of TQS Realty in Palm Beach, FL.
A VA loan still requires closing costs and the earnest money deposit (a negotiated amount of money that the buyer puts in escrow to essentially "hold" the house).
“However, that money will often come back at the closing, when the title company will write a check back to the veteran on the spot for the total amount that was put into escrow,” Garcia says.
2. More lenient loan requirements
The required credit score for a VA loan can be lower than for a conventional loan—around 620 for a VA loan compared with a range of 650 to 700 for most conventional loans.
In addition, the required debt-to-income ratio for VA loans is often more flexible than for conventional mortgages.
“It allows someone with less-than-perfect credit and some debt to still be able to qualify for a loan,” Dinsmore says.
3. No mortgage insurance
Most conventional buyers have to pay private mortgage insurance if they put less than 20% down. FHA loans come with their own forms of mortgage insurance. But a VA loan waives that insurance requirement.
And trust us—this one's important.
"This can be a big savings in monthly payments, since PMI typically runs around $200 a month," says Realtor® with Russell Real Estate Services in Cleveland.
Even though there's no mortgage insurance, there is a "funding fee"—an upfront cost applied to every purchase loan or refinance. The proceeds help the VA cover losses on the few loans that go into default. But borrowers can roll it into their monthly payment, or pay it all at once. Plus, it's tax-deductible. And veterans with a service-connected disability don’t have to pay the funding fee at all.
4. Limited closing costs
Legally, veterans are allowed to pay for certain closing costs, which include the following:
But there are some fees that veterans are not allowed to pay. And the VA allows lenders to charge no more than 1% to cover the costs of originating and underwriting the loan.
So for example, if the purchase price is $280,000, the veteran might offer $300,000 and ask for 3% back to cover the closing costs.
“In this way the veteran is essentially financing their closing costs into the loan, meaning less out of pocket at the start,” Dinsmore explains.
5. Extra assistance with appraisals
When a home that a veteran is considering purchasing is having trouble reaching the purchase price during the appraisal process, buyers and lenders can ask the VA appraiser to consider adjusting the valuation before making a final determination.
Appraisers notify lenders in the event the appraised value is likely to come in low, giving buyers and real estate agents 48 hours to supply additional information that the appraiser might not be aware of to help justify the home’s value.
"Typically I assemble an itemized list of upgrades and improvements that the seller has performed on the home in the past three years that the appraiser didn’t know about, and therefore didn’t include in the home value," Lukavich says.
This process "gives the agents an opportunity to assist the appraiser in making sure they have the whole picture of the home and gives the local agent an opening to help an appraiser be educated on specific local values,” she adds.
It's just another benefit of VA loans aimed at helping our service men and women buy the home of their dreams.
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