What is a VA Loan?
In 1944 the U.S. government created the VA home loan program as a way to help returning troops with the purchase of a home. The special VA loan allows military servicemen and women the ability to buy homes at competitive interest rates with the best terms. While a VA home loan is made through a private mortgage company or lender, the federal government, in cases of default, guarantees repayment. As a result, over 20 million veterans have enjoyed affordable home financing, backed by the Department of Veteran’s Affairs.
In recent years, the VA home loan program has become even more important in the wake of a collapsing housing market that has tightened lending practices. Faced with tougher credit standards and higher down payment requirements, military members depend on VA mortgages to purchase homes or refinance existing home loans.
Loan Limits, Regulations, and Fees
There is no limit to the amount of money a bank or mortgage company may lend a vet for the purchase of a home, (or refinance) however there are limits to the amount of liability the Department of Veteran’s Affairs will assume. For the majority of the country, the current liability is $417,000. (Certain counties located in more expensive housing markets have higher limits, however). This means that the federal government will cover the mortgage in case the borrower cannot make the payments. It also provides that as long as the borrower stays within the loan limits, no down payment will be required.
Private mortgage lenders have an incentive to offer VA loan funding to military borrowers because of the protection the VA home loan affords. Up to 100% of the loan amount is guaranteed by the federal government if the borrower is unable to make the agreed upon payments.
A mandatory VA Funding Fee is required from the borrower and is used by the Department of Veteran’s Affairs to continue to support the home loan program. The fund further removes any financial burden from taxpayers and veterans, and fees vary depending on individual circumstances.
Veterans with service-connected disabilities pay no funding fee, while first-time borrowers usually incur a fee of 2.15% of the home’s purchase price. Subsequent users of the VA home loan program pay a 3.3% funding fee, based on the price of the home. This fee can be rolled into the VA loan itself, and sellers may pay most or all of the (limited) closing costs. In many cases veterans, and men and women currently serving, may purchase a home with no money due at the time of closing.
VA Loans vs. Conventional Mortgages
Both VA loans, and conventional mortgages offer borrowers the opportunity for home ownership and refinancing. Attractive VA home loans require that borrowers be active military, veterans of military service, reservists, Coast Guard, National Guard, or a qualifying widow or widower of a service member.
VA Loans offer the following:
- 0% down payment for those who qualify
- No private mortgage insurance, (PMI) required
- Competitive interest rates
- Less stringent loan qualifications
Conventional Mortgage Loans require:
- Up to 20% down to secure a home loan
- Private Mortgage Insurance, (PMI) to guarantee the payment of the home loan
- Less competitive interest rates
- Strict qualifications to borrow money for a home loan or refinance, including good credit scores
A VA home loan offers service men and women an excellent opportunity for home ownership that might otherwise be out of reach.