Military personnel past and present are eligible for a VA mortgage, helping them get a foot on the property ladder. But what exactly is a VA mortgage and how do they work? In this guide, we’ll find out, while looking at some of the pros and cons as well.
How Does a VA Mortgage Work?
A VA loan is a type of mortgage loan backed by the U.S. Department of Veterans Affairs (VA) and issued through private lenders. VA loans are available to veterans and active military personnel, as well as their surviving spouses, and it aims to make buying a home easier. VA also offers a direct loan as part of the Native American Direct Loan (NADL) program, if you are a retired Native American veteran, or if you’re a veteran married to a Native American.
When you apply for a VA loan and prove that you’re eligible, you will receive a Certificate of Eligibility (COE). Based on this, as well as other criteria such as credit score, income and assets, lenders will decide whether your loan will be approved or not.
The Advantages of VA Mortgages
No Down Payment
VA loans do not require a down payment when buying a home, which makes them similar to USDA loans. The 0% down payment on VA loans is a huge benefit for veterans or active military looking to make a home purchase. Of course, making a down payment does have its benefits, such as lowering your VA funding fees or reducing your overall monthly mortgage payments, but not having it as a requirement is always a plus.
No PMI Required
You read that right: VA loans do not require private mortgage insurance, unlike other government-backed loans. This is another major perk for buyers qualifying for a VA loan, and it significantly reduces the costs of buying a home.
Limited Closing Costs
The origination fee a lender can charge on a VA loan is capped at 1% of the loan amount. These fees are set in place by the lender for processing the loan application. On top of that, and it’s worth mentioning that the VA also prohibits attorney fees, and in most states, VA buyers must have their sellers cover the termite inspection fee.
No Prepayment Penalties
Speaking of fees prohibited by Veterans Affairs, you can also pay off your VA loan early, without any prepayment penalties charged by the lender.
The Disadvantages of VA Mortgages
No PMI and 0% down payment come at a cost: one of the requirements of a VA loan is paying a funding fee. Essentially, this fee allows the Veterans Affairs loan program to continue running for future generations. Funding fees are usually 2.3% of the loan amount, however, if you make a down payment of 10% or more, the fee can drop to as little as 1.4%. If you’re reusing your VA benefits and are making no down payment, expect to pay a funding fee of 3.6% of the loan amount.
Although VA no longer has limits on loans over $144,000, they limit the guarantee made to lenders to 25% of the loan amount. What this means is that if you default on your loan payments, VA will pay your lender up to 25% of the county loan limit. As a result, some lenders may choose not to approve your loan if it’s over a certain amount, effectively limiting how much you can take out to buy your dream home.
Can Only Be Used for Primary Residences
VA loans are only granted to borrowers who intend to live in the property they buy, or who have previously lived in a house in the case of refinancing. There are a few exceptions to this rule, for example in cases where occupancy has been intermittent due to employment, or cases in which a spouse can fulfill the occupancy requirement if their partner is deployed. However, you can’t use a VA loan to buy a property that would be used for rental, or a vacation home.
It’s Not for Everyone
What sets VA mortgages apart from other government-backed loans, such as USDA or FHA loans, is the fact that military service is a key requirement. This makes it easier for veterans, service members and their families to buy their first home by providing them with key benefits such as no PMI and no down payments.
However, even if you haven’t served in the military, there are other non-conventional mortgages that can make home buying easier and more affordable.