The Department of Veteran’s Affairs provides benefits for those who qualify for the program and one of the more popular is the VA mortgage loan. VA loans are the ideal option for those wanting to come to the closing table with as little cash as possible. The most obvious benefit is the lack of a down payment. VA loans don’t need a down payment at all. Buyers can certainly make a down payment in association with a VA loan should they so choose but having a down payment opens up other financing options beyond the VA home loan program. But for those who are eligible while also wanting a zero down program, this one is hard to beat. Here are five things you should know about VA loans.
We mentioned the lack of a down payment but VA loans aren’t reserved just for veterans. Others can qualify as well. Who are they? Active duty personnel can qualify as long as six months, or more than 180 days of service is logged. This can mean career service members but it also applies to those with just six months serving. National Guard and Armed Forces Reserve members with at least six years of service can also qualify. Unremarried, surviving spouses of those who have served may also claim eligibility.
Most low down loan programs do require a form of mortgage insurance. There are two types of mortgage insurance, an initial upfront premium that can be and usually is rolled into the final loan amount and an annual premium paid in monthly installments. But with a VA loan, there is only one type of mortgage insurance that is also rolled into the loan amount. This premium is referred to as the Funding Fee and is indeed an insurance policy. Should the loan ever go into default, which is rare for VA loans, the lender is compensated at 25% of the loss. But there is no additional monthly premium for mortgage insurance, just the initial funding fee. This keeps the overall monthly payment lower allowing for the borrowers to qualify for a bigger loan amount should they choose.
New this year is the elimination of VA loan limits. Historically, VA loans mimicked conventional loan limits and each year when the new conventional limits set for Fannie Mae and Freddie Mac, VA loan limits followed in kind. However, loan limits have been eliminated. This obviously means a VA loan can be issued greater than prevailing conventional limits. Individual lenders set their own limits for VA loans but most still follow the conforming guidelines.
Qualified buyers also have another bonus in the form of reduced closing costs. This is another way borrowers can lower their ‘cash to close’ requirements. Borrowers are restricted from paying certain types of closing costs. Allowable closing costs include an origination fee, appraisal, credit, title insurance and title-related charges and recording fees. Everything else must be paid for by others including the sellers in the form of a seller’s credit at the closing table as well as the individual lender who can provide a closing cost credit with an adjustment to the interest rate. You can I together can work this out to your benefit.
Finally, VA loans offer an advantage as it relates to refinancing an existing VA loan. This advantage is officially named the Interest Rate Reduction Refinance Loan, or IRRRL, but the industry typically refers to this program as a ‘streamline’ refinance. A streamline refinance is so-named due to the lack of documentation needed in order to close the loan when compared to what was needed at the initial closing. What types of documents are no longer needed? There is no need for an appraisal. No income documentation which means no paycheck stubs, W2s for income tax returns. Credit requirements are relaxed as well.
As you can see, the VA home loan program is packed with advantages that other programs don’t have. And one last caveat? Interest rates for VA loans are typically lower compared to FHA and conventional loan programs. When you combine lower rates, reduced closing costs and no down payment, if you’re eligible for the program, this might very well be your very best choice.