The Veteran Advantage: What Makes the VA Home Loan a Powerful Tool
If you are part of a military family, you've probably been told at some point that you have access to an amazing home loan benefit, the VA Home Loan. However, not everyone can explain to you exactly WHAT makes it so great, WHY lenders are willing to do it, or HOW you can take full advantage of it. If you've found this to be true, you've come to the right place. Here at VAFinances, we're going to lay out the basics of VA Home Loans and give you some resources to help you dive deeper into your incredible benefit. As always, feel free to Email Bill if you have any questions or would like to discuss any of this further.
In order for you to fully understand a VA Loan (or VA Home Loan, or VA Mortgage--you'll find these terms used synonymously), you need to have a basic understanding of the types of mortgages available to civilians, so let's start there. If you were not a Veteran, when you went to purchase a new home you would have three choices: 1) Put in 20% of the purchase price as a cash down payment; 2) Pay Mortgage Insurance (MI) as an extra monthly fee for not putting 20% down; 3) or use alternative method that would either increase your cost or your risk factor (like an MI buyout or a 2nd Mortgage).
The absolute biggest benefit of a VA Home Loan is that no matter what down payment percentage you place down, you never pay MI. In fact, often you can put as little as 0% down. Really.
The amount you must put down is determined by the purchase price of the home and the amount of Entitlement you have left to use.
The purpose of the Mortgage Insurance that we just discussed is to provide the bank a way to recoup some of the money they would lose if you did not pay your mortgage. Since putting less than 20% down means more risk for the bank or lender, most of them will not lend you money without putting 20% down or paying MI to compensate them for the extra risk.
Since you are a Veteran and we just explained that VA Home Loans do not require MI, that extra "guaranty" has to come from somewhere for the bank to be willing to lend you money with any equity in the new home. That's where the Veterans Administration (VA) comes into play. If you get a VA Home Loan, the VA guarantees 25% of the purchase price up to the VA County Loan Limit for your particular county. This means, that if you buy a home equal to or less than the VA County Loan Limit, you will not be required to make ANY down payment. That saves you, obviously, quite a bit of cash.
For a deeper look at your entitlement, buying a home OVER the county loan limit (hint: you can) and whether or not you can have two VA Home Loans at the same time (hint: you can) read this article: Certificate of Entitlement Examples.
While we have already discussed that VA Home Loans can require no (or at least a lower) down payment and that VA Home Loans never require Mortgage Insurance, there are in fact other benefits too.
Did you know that Government back home loans like VA and FHA often have lower rates than conventional mortgages? This is because they both come with added insurance to the bank that they will be compensated if you default. FHA makes you pay for the insurance with expensive MI premiums. VA Home Loans have that insurance covered through the VA Guaranty, which you do not pay for directly (although most Veterans do pay a "Funding Fee" to access the program, it is still less than FHA's UFMIP (up Front Mortgage Insurance Premium).
Side by Side Comparison—VA vs. FHA vs. Conventional
In order to illustrate just how powerful of a benefit you really have with the VA Loan program, let me talk about another client that we helped in Maryland. This Marine pilot owned a home in Alabama that he had bought before moving back up north. Consequently, he had only enough Entitlement left to cover $217,000 worth of house without making any down payment. The home he wanted had a purchase price of $350,000. As we know by now, he can buy that house, he just needs a down payment of 25% of the difference between $350,000 and $217,000, which is a down payment $33,250. That would make his VA Loan amount $316,750, and represented a down payment percentage of 9.5% of the total purchase price. This was no problem, he had the cash to do so, but with that large of a down payment that he was committed to making, he wondered whether he should just go ahead and take an FHA or Conventional loan and avoid the funding fee altogether. Fair question. So, we made him this chart (literally, this is the actual chart, so forgive the hideous color scheme that my partner prefers):
As you can see, given the same down payment amounts and even after the funding fee was rolled in (which was lower than the FHA Up Front MIP) the monthly payment was still substantially lower than his other options. Quick note: this was an actual example, but it happened last year, so don’t make any correlation between the rates you see here and the rates that may be available on the day that you read this.
Some of you may be exempt from the VA Funding Fee, which you would know by looking at your COE. Typically, this means you have a certain level of disability or are an eligible surviving spouse. For the rest of you, the VA Funding Fee amounts depend on the following tiers and criteria:
In exchange for the VA guaranteeing your loan, you do pay a fee, much like the Up Front MI portion of the FHA loan, or a single premium conventional MI buyout for a conventional loan.
In your case, it's called a VA Funding Fee. The chart above shows you the percentage of your loan amount that you will be charged for using the program depending on what type of loan you are needing.
Attention Home Shoppers:
If you are looking for...
- No Down Payment
- Best VA Mortgage Rates
- Customized Mortgage Plan
... you have found the right place!
VA Home Loan Resources
- Looking for a VA Mortgage Calculator that can tell you what your monthly payments would be? We got one. And it can even be downloaded as an app with just your name and phone number!
- Looking for other calculators? We have a few more for you here
- Not sure if you should Rent vs. Buy? These articles might help you decide.
- Need to know the 2016 VA County Loan Limits (and FHA) for High Cost Counties?
- What's the difference between a Prequalification vs. Pre-Approval vs. Loan Approval?