Department of Veterans Affairs home loans — VA loans, for short — can save veterans and their families significant dollars over the life of a mortgage.
Created in 1944, the VA Loan Guaranty program was designed to honor the sacrifice made by those who served our country. It provides guaranteed loans to qualified veterans, active-duty service members and some surviving spouses.
Over the last several decades, this loan program has given over 18 million veterans the opportunity to buy a house — including many who might not have been able to afford one without it.
These loans provide major financial benefits, including the ability to purchase a home with no money down. In today’s real estate market, that’s a highly prized commodity. As incredible as the loan is, it’s an opportunity many veterans and military personnel do not even realize is available to them. In this post, we will outline everything you need to know about the financial advantages of applying for a VA loan. There are quite a few!
Financial Benefits of a VA Loan
1. No Down Payment
Perhaps the most financially appealing aspect of a VA home loan is the fact that it requires a whopping down payment amount of zero dollars. While other types of home loans may offer some waivers on down payments in extreme circumstances, the VA loan program is the only one that offers unrestricted access to total home financing.
The ability to buy without a down payment means that veterans can come to the table with less liquidity and cash on hand than most other buyers.
In 2022, VA borrowers in most parts of the country can purchase a home worth up to $647,200 without putting down a single dollar, even without their full loan entitlement. In 2020, loan limits were removed for service members and veterans with their full loan entitlement, so you may be able to borrow even more without a down payment.
The purchasing power of VA home loans is all but unmatched in the marketplace.
2. No PMI
Private mortgage insurance is a monthly cost that conventional borrowers have to pay unless they put down at least 20% of the total loan as a down payment. PMI is designed to safeguard lenders in case buyers default on their home loans
The beauty of a VA loan is that there is no monthly private mortgage insurance. Period. The Department of Veterans Affairs’ guarantee of your mortgage renders the PMI unnecessary.
Thanks to this feature, veterans can funnel those hundreds, and eventually thousands, of dollars into home improvements or other purchases.
3. Sellers Pay Closing Costs
Even if a down payment is eliminated from the process, traditional home buyers are still left to foot the bill for closing costs. That isn’t necessarily so with a VA loan.
Veterans can avoid paying most, if not all, of the closing costs associated with a loan.
The VA allows sellers to pay up to 6% of closing costs and concessions. That means veterans don’t need a pile of cash on hand to cover those final costs associated with their loan.
When you add this cost to the others you are avoiding with a VA loan, you begin to see just how monumental the savings can be.
4. Great Rates
VA loan rates are frequently lower than their conventional counterparts. While single-digit changes between interest rates might seem insignificant at a glance, a slight difference in rates can make a big difference over the life of a 30-year mortgage.
For example, on a $300,000, 30-year fixed-rate mortgage at 5.0% interest, the monthly payment will be $1,610 without taxes, insurance and other costs. At a rate of 5.5 percent, the monthly payment jumps to $1,703. Over the life of the loan, that extra $93 per month adds nearly $34,000 to the cost of the loan.
In addition to being lower than conventional interest rates to begin with, VA loan rates can be fixed — which means you don’t have to worry about the rate increasing over the life of your mortgage.
You can check out our list of the top 10 VA loan companies here.
5. No Prepayment Penalty
It’s a lesser-known feature of VA loans, but there is no penalty for prepaying your VA loan. That means you can put extra money each month toward paying down your principal, which will shave years and thousands of dollars off your mortgage.
While not all conventional lenders charge a penalty for early repayment, many popular providers do, which could cost you an unnecessary and steep fee.
6. Flexible Refinancing
When you refinance a VA loan, you have two main options, the first of which is the Interest Rate Reduction Refinance Loan (IRRL), typically referred to as a Streamline Refinance.
With the IRRL, you can refinance your loan with major savings by lowering your interest rates.
If your main goal is not savings but equity, you can opt for a cash-out refinance, in which you get to tap into said equity and borrow from it
People often assume that a VA loan is a one-time offer to veterans and military personnel. If you have served the appropriate amount of time in the military — whether you are active duty or were honorably discharged — you may take out multiple VA loans over the course of your life.
Your certificate of eligibility will include an entitlement code, which states how much you can borrow without a down payment. There is a basic entitlement level, but also a second bonus tier — the maximum you can take out.
You do not automatically lose your entitlement after your first home purchase. Even if you’ve defaulted on a VA loan, you might still be able to qualify for one in the future, depending on the size of the loan and your location.
In some cases, you can have multiple VA loans at once.
8. Low Credit and Debt-to-Income Expectations
When a lender grants your request for a loan, they are taking a risk. As such, they will check your credit score and your debt-to-income ratio to assess your likelihood of repaying the amount you’ve borrowed.
Because your loan is backed by the VA, though, the requirements are far less strenuous. In other words, you do not have to have the same excellent credit to obtain a VA loan as you would for a conventional home loan.
VA lenders will take a holistic look at your DTI ration and your credit score rather than setting a concrete standard minimum or maximum requirement.
9. Affordable Appraisal
While you may not think of a required appraisal of the home you’re looking to buy as a benefit, you should.
For only $300 to $500, you’ll get a professional opinion on the safety, structure and stability of your prospective house. Whichever way the inspection goes, you’ll get some peace of mind knowing you won’t be moving into an unsafe home. You’ll also get a fair market value estimate, assessing what your home is actually worth, which is a good starting point for price negotiations.
10. VA Guarantee
The greatest benefits of the VA loan program, perhaps, is its core mission. Unlike some other programs whose driving motivation is profit, the VA is dedicated to helping veterans and military personnel get the homes of their dreams and stay in them.
That’s why they guarantee around one-fourth of the mortgage in case of default. While few VA loan recipients default on their payments and face foreclosure, it is comforting to know that you have the VA’s support in that worst-case scenario.
Those are just a handful of the big-time financial benefits of VA loans. These powerful lending tools have helped more than 18 million veterans become homeowners in the last seven decades. All these unique benefits, in the end, add up to savings and security not often found elsewhere.
Equal Housing Opportunity. The Department of Veterans Affairs affirmatively administers the VA Home Loan Program by assuring that all Veterans are given an equal opportunity to buy homes with VA assistance. Federal law requires all VA Home Loan Program participants — builders, brokers and lenders offering housing for sale with VA financing — must comply with Fair Housing Laws and may not discriminate based on the race, color, religion, sex, handicap, familial status, or national origin of the Veteran.