What is a VA loan? All you need to know

When a person reaches that point in their life where they want to buy a house, they will realize that paying for it in cash can be very difficult. Of course, the degree of difficulty varies depending on many factors, including the type of employment. For example, usually Buying a home is often much more difficult for veterans or serving military.

Does it sound familiar to you? Fortunately, if you are a veteran and want to buy your dream home, you have an option that is different from the rest. We are talking about a mortgage specially designed for you: the VA loan (guaranteed by veterans affairs).

let’s take a closer look what is a VA loan and how does it work so you can evaluate if this is the best alternative to enter the real estate market.

What is a VA loan?

What is a VA loan?

The VA loan is a type of mortgage financing that, although it is issued by private lenders, is backed by the United States Department of Veterans Affairs. Thanks to this well-established system, United States veterans, active duty service members, and their spouses or widowers can afford to purchase a home or home of their own.

VA loans are an initiative that emerged as part of the 1944 GI bill, but since their appearance, they have become increasingly popular, especially in recent years. Let’s give you some data to give you an idea: in the first quarter of 2019, 8% of home purchases in the country were made through a VA loan. The attraction of this type of financing? That it is quite easy to qualify and does not require a down payment.

How does a VA loan work?

VA home loans are one of two unconventional (or government) loans available today. Per se, they do not work exactly like the classic mortgages granted by banks. Why? Because, as we said before, they are guaranteed by the government.

What does it mean that they are loans guaranteed by the government? Well, in case you default, the government agrees to repay the lender a part of the loan. The same will happen if you are facing foreclosure.

Since the banks take much less risk by having the government as a kind of guarantor – something that does not happen with a conventional mortgage loan – lVA loan eligibility requirements are relatively easy to meet. In 2018 alone, the VA guaranteed 610,513 purchase and refinance loans.

What are the requirements to obtain a VA loan?

If you are thinking of buying a home and want to apply for this loan, you must meet the specific requirements that the VA imposes on military personnel. Generally, you will be eligible if you fall into any of these three categories:

  • You are an active duty member or honorably discharged veteran who served 90 consecutive days of wartime service or 181 days of peacetime service.
  • You have served more than six years in the National Guard or Selected Reserve.
  • You are the spouse of an Army or Navy service member who died in the line of duty.

To enter the application process, you would need a Certificate of Eligibility (COE). This will show mortgage lenders that you qualify for a VA loan. Where to apply for a COE? You can order your certificate online by visiting the official VA website, by mail, or through your lender.

What are the benefits of VA loans?

Here are some of the key features and benefits of a VA loan:

1. It is not necessary to pay a down payment on a house

VA loans are one of the few down payment mortgage loans available in the country today. In 2018, nearly 50% of homes purchased with a VA loan were purchased without a down payment.

2. There are no maximum amounts

The amount of the VA loan has no maximum limits, but there is a limit to the responsibility assumed by the government. In 2019, the VA guaranteed a maximum of 25% (up to $121,087) of a home loan amount, which corresponds to a maximum loan of $484,350.60. Anything over that amount was not guaranteed by the VA. Sound dangerous? It can become so if you have no way to pay.

3. PMI is not required

You will not have to purchase Private Mortgage Insurance (PMI). Since the loans are backed by the government, you can kiss PMI goodbye. The PMI can vary between 0.5% and 2.25% of your loan. This means that -for example- if you asked for a mortgage loan of $200,000 with a PMI rate of 1%, you would have to pay an additional $166 in monthly payments on your mortgage, making it more onerous.

4. There is no minimum credit score

However, you should keep in mind that lenders often look for borrowers with a credit score of 620 or higher. This does not seem strange to us because it is a common practice in traditional banking, but we think that the ideal credit score should be zero. Why? Because this would mean that the applicant does not report debts. Fortunately, if your credit score changes down the road, it won’t affect the APR because it’s fixed.

5. Assistance against foreclosure

The VA always offers assistance to borrowers facing possible foreclosure. Loan technicians who work at the agency can negotiate with lenders on behalf of borrowers who are having trouble paying their mortgage. Thus, you could avoid losing the house.

6. There is no penalty for early payments

This means that you will not be fined if you pay your loan before the agreed time.

7. You can apply for these loans more than once

It is not necessary to buy a home for the first time to obtain the VA loan. As long as you repay the VA loan each time you apply, you can use this benefit over and over again.

8. Your history weighs less

Bankruptcy and foreclosure won’t hurt your chances. If you have filed for bankruptcy or experienced foreclosure, you may still qualify for a VA loan. You will only have to wait two years from the date of bankruptcy or foreclosure.

What are the disadvantages of a VA loan?

VA loan sounds great so far, right? But if you dig a little deeper, you will find some disadvantages, just like in any other type of loan available in the market:

1. An initial “zero” leaves you vulnerable

Remember that just a small change in the real estate market is enough for your VA loan to become a underwater mortgage, that is, that you owe more on your house than its full market value. What can you do in a case like this? 1) Keep the property until the market recovers or 2) suffer a financial loss if you need to get out of it immediately.

2. You will have to pay a financing fee for the VA loan

And this ranges between 1.25% and 3.3% of the amount. Let’s see it in an example: a loan of $300,000 will require a payment that can range from $3,750 to $9,900. The commission is usually included in the loan and this will increase your monthly payment. Therefore, it will add interest during the term of the financing. In addition, you may also need to carefully calculate the opening fees that the lender will charge.

3. Low VA loan interest rate is misleading

While VA loan interest rates on 30-year mortgages are the same or lower than conventional loans; neither of the two financial instruments benefits you. Why? Because both will end up costing you more than necessary, this in terms of interest. think that a 15 year home loan It’s much better, since you won’t have to pay as much.

4. It is only for main residence or for refinancing

A VA loan is only good to buy or build a primary residence or to refinance an existing loan. So you can forget about buying an investment property or a vacation home with this option. (This isn’t necessarily all bad. Remember that buying an investment property or vacation home with no down payment and 100% financing is usually a bad decision because it will unnecessarily raise your debts.)

5. You will not be able to buy anything

Only certain properties are eligible for VA loans. Vacant or cooperative land, for example, does not qualify.

Is it worth applying for a VA loan? Comparison with a traditional mortgage

If you compare a VA loan to a conventional mortgage, you’ll see that despite the benefits, sometimes it’s better to go with the latter option. Depending on the one you choose, you will have a better interest rate – around 3.6% – and you will not have to pay for PMI either. If you study this option, you will see that with this modality, you will save thousands of dollars in interest.

Let’s see what would happen if you decided to save 20% of the home value down (for a $200,000 house) and opted for a conventional mortgage at fixed rate for a term of 15 years. Next, let’s compare the numbers obtained with a VA loan of the same term and interest rate:

Description VA Loan

(15 years at 4%)

Fixed rate mortgage

(15 years at 4%)

housing cost $200,000 $200,000
Loan Initial $0 $40,000
Financing Commission $4,300 $0
Total loan amount $204,300 $160,000
Total interest (15 years) $67,713 $48,156
Total amount to pay $272,013 $208,156

With a conventional mortgage loan at a fixed rate of 4% for a period of 15 years, the total interest paid will be $48,156, that is, almost $20,000 less than what you would pay in the supposed case of choosing the VA loan.

When you take into account the amount of the loan, the financing fee and the total interest to be paid, the total cost of the VA loan comes to $272,013. So, you would have to pay more over the course of 15 years, this compared to a classic mortgage. Think of all the things you could do with that money you would save.

Our conclusion? VA loans may be a good option for veterans due to their low eligibility threshold, but this does not mean that they are the cheapest alternative for your pocket. Remember that, by not having to pay an initial, the total amount of the loan will be much higher and to this you must also add the lender’s commission, which will generate interest throughout the term of the mortgage.

To be possible, opt for a 3-4% fixed interest mortgage loan, pay 20% of the initial and choose for a short term. 15 years is more than enough to pay off your house in full.

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