How Do VA Loans Work and What Are The Advantages?
For veterans and current service members in the armed forces, a Veteran’s Affairs loan offers a number of advantages. These benefits can make it quite a bit easier to purchase a home by removing some of the most significant roadblocks that buyers typically encounter.
So if you are considering buying a home and you can qualify for a VA loan, you should consider taking advantage of the opportunity.
One of the things quite a few buyers ask their real estate agent is how VA mortgages work. The first thing you should understand is that not everyone qualifies to get a VA loan. There must be some kind of association with the borrower with being in the military services.
Quite often the next question from buyers is why should I get a VA mortgage? What they are asking is what are the benefits over a conventional loan.
Before delving into why VA mortgages have some distinct advantages you should know that not everyone qualifies for this type of loan.
Below is a quick recap of who can get a VA mortgage.
Determining Who Can Get A VA Mortgage Loan
Here are the criteria for who is eligible to get VA Mortgage financing to purchase a home. The Veterans Administration offers this kind of mortgage to four different types of veterans under the following circumstances:
- Active duty service men and women – to get a VA loan, you must have served at least 90 days in the military during a time when the country is at war.
- Active duty during peace – in order to get a VA loan you must have served at least 181 days as full-time military personnel during a time the country was at peace.
- National Guard or Reserves service – you must have served at least six years in either the Reserves or the National Guard.
- Surviving spouse – you can also be a surviving spouse of a person that either (a) perished while serving in the line of duty or (b) died due to a disability related to their service.
Significant Benefits of a VA Mortgage
1. More flexible requirements for getting a loan
One of the most significant benefits of going with a VA Loan is the more relaxed financial qualifications. For the vast majority of buyers, getting a loan requires having a credit score of at least 650 to 700. The higher your score, the better the terms of the loan are.
When a buyer has a score lower than this range, most Realtors will encourage the buyer to attempt to boost the credit score—but this can take months and sometimes years to accomplish.
Fortunately, VA loans are less demanding.
In most cases, the required credit score to get a VA loan is approximately 620. The standards for the ratio of debt to income are also more relaxed. These more lenient requirements mean that veterans can often get a loan even when their credit is not ideal.
It is also smart to check your credit score before buying a house, as there often are mistakes that could impact the rate you receive.
Here are some tips on how to get the lowest mortgage interest rate. By following the advice, you could see significant savings over the life of your loan!
2. No requirement for a down payment
Getting a down payment together is one of the most challenging parts of buying a home. It can mean saving tens of thousands of dollars before you can buy, which is not an easy thing to do for most people.
But with a VA loan, you can buy without a down payment. The option of not having a downpayment opens up home buying for many people who would not otherwise be able to buy.
There are caps on what the maximum home purchase can be without a down payment, but they are relatively generous. In much of the country, a buyer with a VA loan can purchase a home valued at $424,100 or less. There are some areas of the U.S. where the maximum VA mortgage loan is even higher, though, if the cost of the average home in the area is much higher than the rest of the country.
Not needing a down payment is a substantial benefit, and for many, it is the most substantial benefit that a VA loan offers. However, the lack of a down payment does not mean that you can purchase a home with no upfront costs.
You still need to pay for the closing costs and probably come up with a deposit for earnest money. The closing costs will be an inevitable expense of buying that you will need to account for.
It should be noted that even though VA loans are recognized as zero down payment loans, most real estate agents and their respective seller clients will probably want earnest money.
Unfortunately, earnest money is the glue that holds a buyer’s feet to the fire when purchasing a home. Seller’s are reluctant to take their home off the market for no money held in escrow. The earnest money protects the seller from a buyer just defaulting on a whim.
Be prepared to offer the seller at least some kind of security when buying a home.
3. Less closing costs
The closing costs that come with buying a house include a variety of fees, but with a VA loan, you are only required to pay some of those costs. The costs for closing with a VA loan include:
- Credit report
- Title insurance
- Origination fee
- Recording fee
Even with the required fees, there are additional protections afforded by the VA—including a cap on the cost for underwriting and originating the loan. With a VA loan, lenders will not be able to charge you more than 1% for these.
4. Not required to pay for mortgage insurance
Coming up with a down payment is tough. Coming up with a 20% down payment is even tougher. That is why most people today who buy homes wind up paying for private mortgage insurance. Lenders demand that buyers pay for this insurance, usually referred to as PMI, if they do not meet the 20% down payment standard.
PMI is not cheap. It costs an average of $200 a month, which adds up to a noticeable expense over the course of the year. And until the buyer hits the 20% mark over the course of paying off the loan, he or she will continue to be required to pay for PMI.
Homeowners cannot get rid of their private mortgage insurance until they have hit less than 80 percent of their original loan amount.
These rules do not apply to those who get VA loans. When you buy a home with a VA loan, you get to skip the PMI requirement altogether. It can be quite a relief to realize that you will not need to spend years paying hundreds of extra dollars every money for private mortgage insurance. Paying this fee doesn’t serve any benefit. You are throwing money out the window.
However, there is a different kind of fee that applies to VA loans that you should be aware of. It is known as a “funding fee,” a particular type of charge that helps to cover the costs of running the VA loan program. Every time you get a purchase loan or refinances a VA loan, you will need to pay the funding fee.
It can be paid up front, or it can be rolled into the loan and included in the monthly payment. The funding fee is also tax deductible, which can be helpful come tax time.
If you are a veteran with a disability connected to your service, though, you do not have to pay the funding fee.
Another benefit of having a VA loan is what’s called the interest rate reduction refinance loan which makes it super easy to get a new loan with better terms.
5. Help with the appraisal process
VA appraisers are more flexible than the typical appraiser, and will often work with buyers, sellers and agents to ensure that the final valuation is accurate. This can be extremely helpful in situations where the home is not reaching the price needed for purchase initially.
Without an appraisal value that meets the appropriate value required by the lender, you cannot get the loan. The fact that the appraiser will consider additional information after the initial appraisal helps to streamline the purchasing process for everyone involved.
In a VA loan appraisal, the appraiser will notify the lender that the value of the appraisal is probably going to come in too low. When this happens, the lender can inform the buyer and agents of the issue and give them an opportunity – typically 48 hours – to submit more information about the home to increase the appraisal value.
There may be improvements, renovations, and upgrades made in recent years that the appraiser is not aware of. If the agent is prepared with all the information the appraiser may need, he or she can communicate that information in the 48 hour grace period so that the appraiser can make adjustments.
In other words, disputing a low home appraisal might not be as difficult to win when compared to conventional financing.
When you find the home of your dreams, it can be extremely frustrated to discover that the appraisal does not deliver the value needed for you to get your loan. This can happen in any home purchase, but as a VA loan recipient, you have extra tools at your disposal to remedy the situation.
If things go right, you can still wind up living in the home you want and get the loan that you need.
The Importance of Working with an Agent Experienced in VA Loans
Buying a home with a VA loan can be a great experience, one that offers numerous advantages. But there are some challenges that come with the process as well. A skilled agent can help you overcome these challenges.
If you think you are going to be able to get a VA loan, it is a good idea to find a real estate agent that understands how these loans work before you get serious about house hunting.
A VA loan does offer a lot of benefits to you as a buyer, but it also presents some hurdles for sellers that they may or may not be willing to go through.
An experienced buyer’s agent who knows the ins and outs of a VA loan will know how to work through issues that sellers or their agents may have with this type of financing.
There are lots of real estate agents that are interested in helping former and current service members on the road to home ownership – you just need to find them!
When you find the house you are interested in purchasing it would be wise to have, your agent speak to the listing agent about this type of loan.
Some agents, unfortunately, have negative opinions due to the no down payment option. Secondarily, VA loans often take longer to get a final mortgage commitment.
In strong seller’s markets where multiple offers and bidding wars are typical, you may find that have zero down payment really puts you at a disadvantage against other buyers. You’ll just have to put your strongest offer on the table and hope for the best.
Pros and Cons of a VA Loan
You have already learned all the major advantages and benefits to a VA loan. So what are the downsides?
With most things there are pros and cons, and VA loans are no different. The biggest disadvantage of VA loans is also the biggest benefit! How can that be?
Many sellers will look at VA loans negatively because they are no downpayment loans. There is a negative conotation for many people when it comes to a lakc of a downpayment, fair or not.
Other Additional Helpful Mortgage and Home Buying Articles
- VA mortgage facts to know via Luke Skar.
- What is a VA mortgage certificate of eligibility via Anita Clark.
- More things to know about VA mortgages via Kyle Hiscock.
Use the above VA mortgage resources to learn all you can about this unique type of loan program.
About the Author: The above Real Estate information on what are the benefits of a VA loan was provided by Bill Gassett, a Nationally recognized leader in his field. Bill can be reached via email at [email protected] or by phone at 508-625-0191. Bill has helped people move in and out of many Metrowest towns for the last 31+ Years.
Are you thinking of selling your home? I have a passion for Real Estate and love to share my marketing expertise!
I service Real Estate sales in the following Metrowest MA towns: Ashland, Bellingham, Douglas, Framingham, Franklin, Grafton, Holliston, Hopkinton, Hopedale, Medway, Mendon, Milford, Millbury, Millville, Northborough, Northbridge, Shrewsbury, Southborough, Sutton, Wayland, Westborough, Whitinsville, Worcester, Upton and Uxbridge MA.