If you are a veteran of the United States Military or are a surviving spouse seeking a home loan, you have several options to explore. One of these options is a Veterans Affairs (VA) loan, a mortgage guaranteed by the United States Department Of Veterans Affairs.
Let’s investigate these concepts and examine some of the pros and cons of a VA loan over a conventional or Federal Housing Administration (FHA) loan.
What Is A VA Mortgage Loan?
During World War II, the American Legion lobbied the United States government to ensure that returning veterans had a viable support system available to them, so that after returning to civilian life, they would have a better chance of carrying on.
In 1944, the United States government passed what is typically known as the GI Bill. The bill had many benefits for veterans, to help them in their future role as civilians:
- First, and most importantly, the VA Loan Program
- College tuition reimbursement
- Healthcare benefits
- Vocational Training
- Preferential treatment when applying for other federal jobs
Only current and former members of the United States Military and their spouses may be eligible for VA loans.
What Advantages Does A VA Loan Offer?
There are quite a few advantages to obtaining a VA loan. Let’s look at why a VA loan is an excellent choice for veterans.
A fantastic benefit of a VA loan is the significant reduction of mortgage origination fees. The origination fees cap at 1% of the loan amount if you utilize the VA loan program.
Additionally, there are many other fees that lenders are not allowed to charge when granting a VA loan so that veterans can have many of these up-front fees reduced or eliminated entirely.
No PMI (Private Mortgage Insurance)
Many lenders offering conventional and FHA loans will require borrowers to pay fees related to mortgage insurance in case they default on their loan. You can avoid these fees and monthly payments altogether by choosing a VA loan since there are no requirements to pay mortgage insurance fees.
Low Or No Down Payment
Conventional mortgages require a buyer to have down payments that may be significant to qualify for the lender’s guidelines. With the VA loan program, it is possible to be eligible for zero percent down!
Lower Interest Rates
Lower interest rates are another great benefit of a VA loan. A veteran applying for a VA loan can expect an interest rate about half a percentage point lower than the going rate. That can add up to substantial savings over the life of a thirty-year loan.
What Are The Downsides Of A VA loan?
Less Home Equity To Start
Because a VA loan offers the option of zero down payment, you may start your mortgage without equity in the home. Equity is the amount of money you would have if you sold the house and paid off the current mortgage. While this lack of equity in itself is not a problem, it can become one if you need to sell the home or refinance the loan within the first few years of purchase.
For example, if you need to sell the home soon after purchase and the value of the house has decreased, you may not have received enough money from the sale to cover the total loan amount due to the lender, and once again, this would have to come out of your pocket. On top of that as the seller, you will typically have closing costs that you’ll need to take care of.
VA Loans And Primary Residences
Suppose you are looking to buy an investment property or a rental property in addition to your primary residence. In that case, a VA loan is not the right choice for you, as it is only available for borrowers intending to use the home as their primary residence.
VA Funding Fee
Once you’ve been approved for a VA loan, you’ll be required to pay a one-time funding fee to the Department of Veteran Affairs. This funding fee helps cover the cost of the VA loan program and ensures that it remains sustainable for future Veterans. But the great thing about the VA funding fee is that the cost can be directly financed into your loan, meaning you won’t have to pay this upfront. Plus, as a result of the funding fee, you won’t have to pay any private mortgage insurance (PMI) on the loan, which saves you money in the long run.
If you feel a VA loan is the right choice for you, feel free to ask about VA loans for first-time home buyers, or if you have questions about other mortgage programs, feel free to reach out to OVM Financial and speak with a loan officer today!