The Department of Veteran’s Affairs created the Servicemen’s Readjustment Act in 1944, often referred to as the G.I. Bill. This entitlement-packed legislation helped those returning from World War II with buying a home to financing farmland and other benefits. If you’re VA eligible or know someone who might be, here are the eight reasons to use a VA loan to buy a home.
Down Payment Option
Easily the greatest benefit of the VA mortgage is the lack of a down payment required for an approval. The VA knew that returning servicemen would have to take months and even years to save up enough money for a down payment on a home as well as understanding how home ownership helps an economy move forward. This no down payment feature is the best of all benefits and nearly all VA home loans are used with zero down payment from the veteran.
Interest Rates
Even though there is no down payment from the borrower the interest rates aren’t adjusted upward. VA interest rates are just as competitive with loan programs underwritten to Fannie Mae and Freddie Mac guidelines. In fact, they’re much lower when compared to conventional loans with 5.00 percent down. For example, a 30 year interest rate with 5.00 percent down on a $200,000 loan might be around 4.00 percent while a similar VA rate about one-half percent lower. To get a conventional rate down to 3.50 percent might require a 20 percent down payment or a credit score of 740 or above.
Private Mortgage Insurance
Unlike FHA, Fannie Mae or Freddie Mac loans with down payments less than 20 percent, VA loans require no monthly mortgage insurance premium which will increase the monthly payment and can seriously impact qualifying. Using the same example as above, on a 30 year, 5.00 percent down $200,000 mortgage, the private mortgage insurance premium can add another $165 to the monthly payment.
Ease of Refinancing
The VA loan program offers a special refinance program to its borrowers called the Interest Rate Reduction Refinance Loan, or the IRRRL. Lenders and consumers alike sometimes refer to this program as the VA Streamline.
It’s so called due to the reduced amount of documentation required as well as a relaxed approval process. As long as the borrower is lowering the interest rate on a refinance and not pulling out any cash during the transaction, the loan can be approved with no documentation of income, assets or even a credit score.
More Than Once
The veteran can use the home loan entitlement more than once. The veteran can use a VA home loan to buy a house with no money down, sell the home and buy another home with no money down as long as the previous VA loan was paid off during the sale.
Assumability
VA home loans may be assumed by someone else who wishes to buy your home. There is an assumption fee the new borrower must pay and the VA must approve the transfer but it’s an attractive feature, especially in today’s current interest rate environment.
Why? If you finance a purchase today and your rate is 3.75 percent and five years from now interest rates are 6.00 percent, don’t you think a buyer might want to assume your mortgage? Don’t you think that there’s added value in offering a loan assumption with such a low rate? Of course there is, as long as the new buyer is approved, your VA loan can be assumed.
Loan Choices
The VA loan program requires nothing down, no monthly mortgage insurance and can be used more than once. VA loans are also offered in both fixed and adjustable rate loans as well as loan hybrids in 3/1, 5/1, 7/1 and 10/1 offerings.
Limited Closing Costs
Finally, the VA limits the types of closing costs that the veteran is allowed to pay. Standard lender fees such as loan underwriting and loan processing are prohibited as are escrow or attorney charges. The seller can pay them or the lender can but the borrower cannot pay those fees whatsoever. As well, the VA allows borrowers to finance their closing costs into their loan including the VA funding fee.
