VA Purchase Money Loans
The VA Purchase Loan is the flagship of VA’s loan products. For military servicemembers, among the available mortgage choices, it’s a stellar option.
VA loans are becoming increasingly popular. In fact, according to the Forbes Advisor, in 2020 the number of VA loans nationwide exceeded one million. For my city of San Diego, the 2020 tally recorded 6,867 VA purchase loans, and 22,959 refinances, including cash out refinances and interest rate reductions. (Campisi, Natalie. “VA Loans Break 1 Million in 2020: Here’s Where They’re Most popular [And Why],” Forbes Advisor, online publication, March 19, 2021).
The emerging popularity of VA purchase home loans is overwhelmingly fueled by the notable benefits received by the servicemember, including:
No Down Payment
The VA Home Loan is one of the few mortgages available that requires no down payment. Since one of the greatest barriers to homeownership is down payment, this is a huge benefit to the servicemember. Imagine the path to homeownership as a road with no shoulders, and sitting in the middle of the road is a boulder stretching across all lanes and weighing 100 tons. For most people, that metaphorical boulder represents down payment. The VA loan lifts that bolder so that you can resume your path to home ownership. Please note that the minimum down payment on an FHA loan is 3.5%, and Conventional loans typically require any where from 5% – 20%. Assume you want to buy a $500,000 home in California. Here’s the practical impact in comparison form:
No Loan Limits
Please note that there are no longer any VA loan limits, but rather two VA loan programs – Conforming VA Loans and Jumbo VA Loans. 2021 Conforming VA Loans encompass loan amounts of $548,250 or less and Jumbo VA Loans include loan amounts of $548,251 or more. For 2022 Conforming VA Loans encompass loan amounts of $647,200 or less and Jumbo VA Loans include loan amounts of $647,201 or more. Whether Conforming or Jumbo no, down payment is required, however, the two programs are typically priced differently with the VA Jumbo having a slightly higher interest rate. Although VA is not imposing any loan limits, your ability to borrow will still be limited by the amount of your VA entitlement and other qualifying factors such as credit and debt-to-income ratios.
Relaxed Credit Requirements
The VA loan is simply easier to get. Our website (VALoanFund.com) proclaims that Life Happens! – and for military servicemembers, Life Really Happens!! VA’s credit guidelines are written with that in mind. The VA Purchase Loan provides homeownership opportunity where FHA and Conventional guidelines may say no!
It’s important to note that VA does not make loans, but rather guarantees (backs) the loans made by private lenders to servicemembers. As a condition of backing the loan, VA does NOT impose a minimum credit score requirement, but most private lenders who make VA loans impose a minimum score requirement. Lenders vary when imposing minimum scores, but they’re usually lower than the service member would need for a Conventional loan. VA is also more forgiving when it comes to prior major credit events like Foreclosure, Short Sales and Bankruptcy.
The takeaway is simply this: Perfect credit is not required to obtain a VA loan and the accompanying competitive, low interest rates.
No Monthly Private Mortgage Insurance
Mortgage Insurance is required to indemnify the lender if the borrower fails to meet their obligations. Conventional loans require Private Mortgage Insurance if the borrower is making a down payment of less than 20%. In our previous example of the California servicemember buying a $500,000 home, the Conventional loan would require a $100,000 down payment to avoid monthly mortgage insurance. FHA requires a minimum down payment of 3.5% or $17,500 plus monthly mortgage insurance payments of $341.77 each month (assuming a high cost CA County). Further, the borrower could put 5% on A Conventional loan and the monthly MI payment would be roughly $237.50. See Table 1 above.
Although VA does not impose any type of monthly mortgage insurance, for the first use of your VA entitlement there is a VA Funding Fee of 2.3% collected at closing. For subsequent uses the VA Funding Fee is 3.6%. The Veteran does not have to pay the Funding Fee out of pocket, but can elect to have it included in the loan amount.
Competitive Interest Rates
VA loans have some of the lowest interest rates on the market. In fact, they’re typically .50 to 1.0 less than Conventional rates. In fact, VA had the lowest average 30-year fixed rate on the market for the last six years, according to data from ICE Mortgage Technology. This is significant because lower rates help the veteran save money monthly and reduces accumulated interest over the life of the loan.
Let’s consider an example. Assume you’re refinancing with 30 year term and a loan amount of $400,000. Further assume that the Conventional rate is 3.125% and the VA rate is 2.500% (though it varies from day-to-day, this would be a typical spread between a government rate and a conventional rate). The monthly principal & interest payment on the Conventional Loan would be $1,713.50 and the interest paid over the life of the loan would be $216,860.65. The VA monthly principal and interest payment would be $1,580.48 and the interest paid over the life of the loan would be $168,974.09. As such, the VA monthly payment is $133.02 less than the Conventional payment, and the lifetime interest with the VA loan is $47,886.56 less than with Conventional. See Table 2 below:
Though not universally true, in the vast majority of cases the VA rate is appreciably lower.
VA Has Lower Closing Costs
There are fees associated with every type of mortgage, including escrow fees, title, appraisal, recording fees, etc. But VA limits the amount a Veteran can be charged for certain expenses. In fact, certain fees cannot be charged at all, and if they’re a part of the transaction, must be absorbed by someone else. The goal is to keep homeownership within reach of our veterans.
Of course, Veterans can ask the seller to pay part or all of their closing cost, up to a maximum of 4%. Such a concession, if granted by the seller, can also be used to pay homeowner’s insurance, a home warranty, etc. It’s solely at the discretion of the seller and is often dictated by the marketplace. In a seller’s market, where demand is high and supply is sparse, it’s more difficult to extract concessions from the seller and the Veteran will have to pay more of their own closing costs.
The VA Benefit Is Ongoing & Reusable
The VA loan isn’t a single use benefit, but an ongoing program the veteran can use repeatedly over their lifetime. Assume the veteran gets married and uses their VA Certificate of Eligibility to buy a home with their spouse. Twelve years later they’ve got three kids and have outgrown the home. They can sell the home and payoff their current VA loan, and VA will fully restore their Certificate of Eligibility. The Veteran can then buy a larger home, again with no down payment.
There is also the freedom to refinance with a VA loan and cash out up to 100% of the home’s remaining equity, or obtain a reduced documentation VA IRRRL to improve the rate and term, thereby lowering the Veteran’s payment.
Even after the veteran’s death their spouse can obtain a VA Guaranteed loan under certain circumstances, namely:
- If the husband or wife died on duty from a duty-related injury.
- When the veteran dies of any cause, if they lived with a duty-related condition for a period designated by VA, and is eligible for compensation at the time of death.
- If the Veteran is a Prisoner of War or Missing in Action
There Are No Prepayment Penalties
When lenders make a loan costs are incurred, and of course there is a profit expectation in the form of interest collection. If a borrower obtains a loan and pays off the full balance within a few months, the ability to recoup costs or enjoy any degree of profit is lessened or quashed. For that reason some lenders charge a fee, called a Prepayment Penalty, when loans are paid off prior to a predetermined date set forth in the borrower’s promissory note. The penalties can be substantial (for example, six months of interest). VA Loans do not require Prepayment Penalties.
VA Covers Your Back (Default Mitigation From Day 1)
VA assesses the Veteran’s ability to service their debt and live comfortably by taking a panoramic view at the outset. VA underwriting guidelines require its approved lenders to consider the veteran’s residual income (what’s left after paying all their monthly bills) when evaluating loan applications. The objective is to make sure the Veteran isn’t stretched too thin. It’s one thing to get our veteran’s into a home, but it’s equally important to make sure they can keep it.
In addition, if you encounter a difficult financial period once your loan is closed, VA offers free counseling services. You can speak with a VA Loan Technician (877-827-2702) who’ll help you navigate the troubled waters. In fact, if you exceed 61 days past due, VA will assign a VA Technician to help you! PLEASE NOTE: Your VA Technician is not a collector and does not represent the lender. They are there to offer assistance, give advice, and advocate for Veterans in jeopardy. Of course there are a number of options available to help pull your head above water.
In sum, VA has the infrastructure in place to help the Veteran if it’s needed, and safeguards are in place from day one. The goal is to keep the veteran in the home they’ve earned.
The VA Property Appraisal – A Safeguard So You Don’t Overpay
An additional benefit and safeguard is the VA property appraisal. VA requires an appraisal to establish the home’s value, and ensure it meets VA’s minimum property requirements. More specifically, to assure the Veteran is purchasing a shelter that’s in generally good condition and provides a healthy, safe environment. Establishing the home’s value is equally important because neither VA, the lender, or the veteran wants the Veteran to pay more than the home is worth. The home’s worth is also known as it’s Fair Market Value’s Fair Market Value (established by comparing the subject’s price to similar homes of the same size, location, age, condition and features).
IMPORTANT NOTE: The VA Appraiser’s review of the property’s condition is NOT, and DOES NOT, substitute for a home inspection, but makes sure certain things are acceptable, such as a permanent operable source of heating, safe mechanical systems (e.g., no uncovered electrical outlets or exposed wiring), sanitary water supply, adequate sewage disposal, a roof with remaining useful life, workmanlike construction, no chipping paint, structurally sound, termite free, etc.