Tight credit, tougher mortgage lending and flat-lining wages have all breathed new life into the historic VA loan program. Veterans and military families are turning to these flexible, no-down payment loans like never before.
The Department of Veterans Affairs backed a record number of loans in fiscal year 2015, with volume expected to increase 36 percent over the next five years. Created originally to help World War II veterans get a foothold in the housing market, this hard-earned benefit has evolved into one of the most powerful mortgage options on the market.
A handful of key benefits have spurred the program’s emergence as a lifeline for today’s military homebuyers.
Here’s a look at five of the biggest.
■ 1. No down payment
This is the signature benefit of VA home loans. Qualified buyers can purchase up to $424,100 in most parts of the country before needing to put money down. That figure is even higher in costlier housing markets.
Conventional loans often require a 5 percent down payment, while FHA loans require a minimum 3.5 percent down payment. On a $244,000 loan, which was the average VA loan amount last year, buyers would need $12,200 for a conventional down payment or $8,540 for FHA. It can take years for veterans and military families to save that upfront cost.
■ 2. No mortgage insurance
This is another big expense that VA buyers don’t face. Conventional borrowers who can’t muster a 20 percent down payment often get stuck paying for private mortgage insurance. FHA buyers pay both an upfront and an annual form of mortgage insurance. These expenses can add $100 or more to your monthly mortgage payment and linger until you’ve built sufficient equity in the home. Federal Housing Administration buyers now pay mortgage insurance fees for the life of their loans.
VA buyers don’t pay for mortgage insurance, but they do have an upfront funding fee that most choose to roll into the loan. The VA funding fee is paid to the VA and helps keep the loan program running. Buyers who receive compensation for a service-connected disability are exempt from this cost.
■ 3. Flexible credit guidelines
This loan program’s financial flexibility is matched by common-sense credit underwriting. VA loans were created to boost access to homeownership for those who serve our country, and the government urges lenders to take a more holistic look at a buyer’s credit and financial profile.
In fact, the VA doesn’t set a credit score requirement for these loans. But the private companies actually making these loans typically will have a score cutoff, albeit a lower one than conventional lenders often require.
Would-be buyers can also bounce back faster in the wake of a bankruptcy or foreclosure. Veterans can often obtain a VA loan just a year removed from filing a Chapter 13 bankruptcy and two years following a Chapter 7 discharge or a foreclosure.
For conventional mortgages, the “seasoning period” can be considerably longer – four years following a Chapter 7 discharge, two years after a Chapter 13 discharge and seven years after a foreclosure.
■ 4. Interest rates
Veterans and military members also have access to the lowest-rate loan product out there. VA loans have had a lower average interest rate than conventional and FHA loans for the past 30 consecutive months and counting, according to data from mortgage software firm Ellie Mae.
That benefit helps boost buying power. Rates will ultimately vary depending on your credit, the lender you’re working with and more.
■ 5. Closing costs
VA buyers can ask a seller to pay all of their loan-related closing costs and up to 4 percent of the home’s value in concessions. Those concessions can cover a host of costs, from prepaid property taxes and homeowners insurance to paying a buyer’s funding fee and even paying off collections or judgments at closing.
The VA also limits what costs and fees lenders can charge, and there are a few that buyers aren’t actually allowed to pay.
To be sure, VA loans aren’t the right fit for every military homebuyer. But these flexible government-backed loans continue to make a critical difference for millions of veterans and military families.