This is a guest post from Adam Gibson who is a writer at Accrued Interest, a finance blog. Check out Accrued Interest for the latest on the bond market, treasuries, mortgages and other financial news.
Now that you’ve found the home you want to buy, it’s time to weigh your financing options. Conventional loans are available at your local bank, sure, but the credit crunch makes it tougher to get a mortgage you can afford.
Then there’s a VA loan. Qualified veterans and active-duty personnel have the privilege of a 66-year-old home loan program. Besides being easier to qualify for, a VA loan features a multitude of financial benefits unprecedented in a conventional mortgage. As interest rates flirt with record lows, conventional mortgages look appealing. However, it takes a superb credit score of about 740 and untainted financial history to lock in those rates.
Even if you could land those rates, expect to pay up to 20 percent down. With a VA loan, you may qualify for no money down, allowing you to finance a home valued up to $417,000 without paying a dime. In more-expensive housing markets, the loan limit exceeds $417,000. Additionally, VA loan borrowers often get lower interest rates because the VA insures up to 25 percent of each loan. This insurance against default reduces the risk assumed by the VA mortgage lenders, thus making them more likely to issue lower interest rates.
Low VA mortgage rates are only one of several reasons why VA loan benefits dwarf those of conventional options.
Up front, conventional loan borrowers often drop thousands on big down payments plus appraisal fees, origination, and closing costs. If these borrowers roll these fees into monthly payments, their interest rate balloons because the lender assumes more risk. When borrowers use VA loans, the seller can end up paying up to 6 percent of closing and concessions costs. The VA funding fee, which is already miniscule, can be separated into monthly payments without inflating the interest rate.
With the lower interest rates, VA loan borrowers tend to have smaller monthly payments than conventional loan borrowers. Borrowers who serve on active duty have interest rate caps. No private mortgage insurance (PMI) reduces monthly costs even further. Unless they put down at least 15 percent, conventional loan borrowers pay a PMI, adding significantly to monthly payments.
Prospective homebuyers don’t need a flawless financial history to get a VA loan. A foreclosure or personal bankruptcy does not automatically make you ineligible for the program, neither does imperfect credit. Though it’s always a good idea to work on your credit score, VA lenders often look for scores no lower than 620. With either a VA or conventional loan, the higher the credit score, the more favorable your loan will be. On the whole, the conventional financing market gives the best loans to borrowers with immaculate credit history.
Conventional loans occasionally include prepayment penalty clauses. Some prime lenders don’t bother with these penalties or decrease the interest rate if borrowers accept the clause. Subprime lenders aren’t as kind and more often write in prepayment penalty clauses. VA loans have no prepayment penalties, therefore allowing borrowers to pay in advance all they want.
Not every veteran and service member is eligible for the VA home loan program. Veterans must be honorably discharged. Other than that, those who may qualify break down into three groups: military members who served on active duty during peace time, or 90 days during war time, members of the National Guard or Reserves who served for six years, or spouses of service members killed in the line of duty.
Given the plethora of advantages that come with VA loans, it’s a no-brainer for qualified borrowers. If you’re unsure of what type of mortgage best suits you, contact a VA mortgage lender for advice.
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