VA loan benefits
VA loans offer excellent benefits for those who qualify.
No down payment required
The VA does not require a down payment, but certain lenders may require it for some borrowers using the VA home loan guaranty. The VA home loan guaranty is an agreement that VA will reimburse the lender if there is a foreclosure. This takes the place of a down payment, which is why many lenders do not require one.
In comparison, an FHA loan typically requires a 3.5% minimum down payment. Most conventional loans will require a 5% to 20% minimum. This leaves more money in the home buyer's pocket. However, the monthly payment will be higher since they will be borrowing more money and have less equity in the property.
Competitively low interest rates
Home buyers often get lower interest rates with VA loans. Since the federal government supports these loans, lenders charge competitive rates for eligible veterans and service members. The VA does not set the interest rates -- lenders determine the rate based on a home buyer's specific financial situation. This is why it is important to shop around for the best rate.
Limited closing costs
Closing costs are fees you pay your lender to process your loan. They may include origination fees, home appraisal fees, title search fees, and other charges. VA loans' origination fees are limited to 1% of the total loan amount, while conventional loans typically charge between 0.5% and 1%. VA loans tend to have fewer closing costs, which may be paid by the seller, lender, or any other party. There is also no penalty for paying off the loan early.
As with conventional mortgages, your closing costs with a VA loan will generally fall between 2% and 5% of your loan amount. Your funding fee, meanwhile, will depend on whether this is your first VA loan and whether you're making a down payment. For your first VA loan, you'll pay a 2.15% funding fee if you don't want to make a down payment. For subsequent applications, you're looking at a 3.3% fee. But if you're able to make a down payment of 5% but less than 10%, your funding fee will be 1.5%, whether this is your first VA loan or not. For a down payment of 10% or more, your funding fee will be 1.25% for a first or subsequent application.
The VA will waive the funding fee completely for certain individuals, allowing them to save even more money:
- Veterans receiving VA compensation for a service-connected disability.
- Veterans entitled to receive VA compensation for a service-connected disability, but receiving retirement pay or active service pay.
- Unremarried surviving spouses of veterans who died in active service or from a service-connected disability.
- Service members with a proposed or memorandum rating from VA, prior to loan closing, who are eligible to receive compensation as a result of a pre-discharge claim.
- Service member on active duty who provides, on or before the date of loan closing, evidence of having been awarded the Purple Heart.
No need for private mortgage insurance (PMI)
Unlike conventional loans, VA loans don't impose private mortgage insurance (PMI) -- a premium borrowers must usually pay when their down payment is less than 20%. PMI is a type of insurance that protects the lender if a homeowner is unable to pay their mortgage and defaults. PMI is usually required on conventional loans if you make a down payment of less than 20% of the total mortgage amount.
The Federal Housing Administration (FHA) requires borrowers to self-insure against potential financial loss by paying a mortgage insurance premium (MIP). Not having to pay PMI or a MIP can save money on a monthly mortgage payment for those with a VA loan.
Lifetime benefit
Service members and veterans can use the VA Home Loan guaranty multiple times throughout their lifetime. In addition, there's no loan limit with full entitlement. That means that as long as the buyer can afford the loan, the VA will back loans in all areas of the country, regardless of home price. This can help home buyers struggling to find a home in their desired location due to price constraints.
Assumable
Unlike with conventional mortgages, VA loans can be assumed by a new buyer. This can be an especially big perk if mortgage rates rise, as an assumable low-rate mortgage can make your home far more attractive to buyers.