VA home loans have many well-known benefits, including low rates and the exciting combination of no down payment and no mortgage insurance. Lenders are able to offer veterans these excellent terms because VA home loans are backed by the U.S. Department of Veterans Affairs.
In addition to major down payment flexibility, VA loans offer many more useful features that you may not know about. Read on to learn about 10 of the most important VA home loan benefits, plus a look at two VA refinance options: the VA cash-out refinance and VA streamline (IRRRL) refinance.
1. No Down Payment on a VA Loan
Whether your expenses come in the form of student loans, supporting other family members, or just the high costs of living in 2020, many can have a difficult time saving up for a down payment. If you are struggling to scrape up a down payment, you are not alone. In a new Bankrate survey, 27% of millennials and 37% of Gen Xers said they don’t think they will be able to save up enough for a down payment. Surprisingly, the previous generation has even greater concerns, with 60% of baby boomers worried they will never be able to afford a down payment on a home.
By offering mortgages with low or no down payments (as long as the sales price does not exceed the appraised home value), VA loans make home ownership possible for many. This gives veterans the chance to make an investment in a home and start building equity, even without a large down payment.
2. No Private Mortgage Insurance
There are other home loans available with low or no down payment options, but the majority of them will require mortgage insurance as a result. Private mortgage insurance, or PMI, is required for buyers who take out a conventional loan with less than 20% down, have a loan-to-value ratio that is over 80%, or on any FHA-insured loan. This insurance, paid for by the buyer, protects the lender in case the buyer defaults.
However, VA loans come with extra backing from the government, removing the PMI requirement. This benefit can save you roughly 1% of the loan value, which for many can mean a savings of anywhere from $100 to $200 per month.
3. Relaxed Credit Requirements
VA loans, due to their backing by the U.S. Department of Veterans Affairs, can be offered by lenders to veterans with a range of credit histories, such as little credit history and lower credit scores. This flexibility makes these loans a useful option for veterans who might otherwise be unable to meet all of the requirements for other home loan options. The U.S. Department of Veterans Affairs does not set a strict credit score limit for these home loans, and therefore the requirements can vary by lender.
4. Forgiving DTI Ratios
Do you know your credit score? What about your DTI ratio? Less well known than your credit score, your DTI, or debt-to-income ratio, is just as important when it comes to qualifying for a mortgage. Your DTI is calculated by comparing your recurring monthly debt amount to your monthly gross income.
As an example, if you have monthly gross income (wages/salary, pension, social security, child support/alimony income) of $6,000, and recurring monthly debts (loans, property taxes/insurance, child support/alimony payments) totaling $2,000, your DTI ratio would be $2,000 divided by $6,000 or 33%.
In general, most lenders look for a DTI ratio of 35% or less, but with VA loans lenders can be more generous, with a DTI ratio requirement of 41% or less. VA loans can even be made for households with DTI ratios greater than 41%, as long as they meet specific regional residual income requirements.
5. Funding Fee Flexibility
All mortgages come with some fees and closing costs, and VA home loans are no exception. However, one unique benefit of VA loans is a reduced funding fee. It is a percentage of the loan amount, usually between 1.25% and 3.3%, that goes directly to the U.S. Department of Veterans Affairs and helps cover losses on loans that go into foreclosure, along with helping to cover the cost of running the VA loan program.
Another benefit of VA loans is that you have flexibility when paying this fee and other closing costs: the funding fee can either be paid at closing or rolled into the total loan amount with no cash out of your pocket.
6. No Prepayment Penalties
Whether you want to save on interest costs, or just have specific financial goals, paying off your mortgage early may be something that interests you. You can do this via making multiple extra payments, or with a single lump-sum early payoff. Either way, you will not be charged prepayment penalties if you pay off your VA loan early.
7. Easier to Qualify for VA Loans
Flexible down payment options, relaxed credit requirements, and forgiving DTI ratios all add up to making VA loans much easier to qualify for. VA loans have no down payment requirements, lower qualifying credit scores, and any loan fees or closing costs can be packaged into the mortgage.
By comparison, FHA loans have lenient qualifying credit criteria and low down payment options, but do come with mortgage insurance requirements, and closing costs that must be paid by the seller or buyer.
8. Government Guarantee
As previously mentioned, VA loans are not actually offered by the U.S. Department of Veterans Affairs. They are offered by private lenders, but the loans are guaranteed by the U.S. Department of Veterans Affairs via entitlements that are worth around 25% of your loan amount. Because of this financial partnership, private lenders are able to offer attractive loan terms to veterans, such as no down payment, no mortgage insurance, and low interest rates.
9. VA Loans are Assumable
Even if you bought your home with the intent to stay in it forever, changes in your personal life may necessitate a move. Obviously, you can sell your home and pay off your mortgage with the proceeds, but some VA loans offer the option of being assumable. Assumption is when another person takes over and becomes responsible for your original loan. Not all VA loans are assumable (you will need to get approval from your lender), but this option can give home sellers and their loved ones additional options in times of transition.
10. Lower Closing Cost Limits
Closing costs on all mortgages include lender’s fees, property and other taxes, insurance, and the costs of other services needed to complete the sale of a home. They usually add up to 3-6% of the cost of the home.
VA loans prohibit and limit some of these fees, keeping closing costs low for veterans. The VA does not allow lenders to charge attorney services fees, mortgage broker commissions, settlement charges, and/or prepayment penalties. In addition, the VA does not allow lenders to charge VA borrowers more than 1% of the loan amount as their origination fee.
The 10 Critical VA Home Loan Benefits
1. No down payment on a VA Loan:
VA loans offer mortgages with low or no down payments. This gives veterans the chance to make an investment in a home and start building equity, even without a large down payment.
2. No private mortgage insurance:
There are other mortgage options available with low or no down payment, but most will come with expensive monthly PMI payments until certain criteria are met.
3. Relaxed credit requirements:
VA loans, due to their backing by the U.S. Department of Veterans Affairs, can be offered by lenders to veterans with a range of credit histories, even with little credit history and lower credit scores.
4. Forgiving DTI ratios:
Most lenders look for a DTI ratio of 35% or less, but with VA loans lenders can be more generous, with a DTI ratio requirement of 41% or less.
5. Funding fee flexibility:
With a VA loan, you have options when it comes to paying this fee and other closing costs: The funding fee can either be paid at closing or rolled into the total loan amount with no cash out of pocket.
6. No prepayment penalties:
You can pay off your mortgage early without prepayment penalties if you pay off your VA loan early.
7. Easier to qualify for VA loans:
VA Loans have no down payment requirements, lower qualifying credit scores, and forgiving DTI ratios, all of which can help you qualify for the loan you need.
8. Government guarantee:
A partnership with the U.S. Department of Veteran’s Affairs allows private lenders to offer these unique loans with attractive terms only to veterans.
9. VA loans can be assumable:
Not all VA loans are assumable (able to be transferred to another buyer without a new loan), but this option can give home sellers and their loved ones additional flexibility in times of transition.
10. Lower closing cost limits:
Keep this expense under control with a VA loan — VA loans prohibit and limit some of these fees, keeping closing costs low for veterans.
Are You Eligible For VA Financing?
If you are a veteran looking to take advantage of the financial and lifestyle benefits that come with home ownership, you may want to consider a VA loan. If the following are true, you’re most likely eligible for VA financing:
- You have served 181 days of active duty during peacetime
- You have served 90 days of active duty during wartime
- You have served six years in the Reserves or National Guard
- Your spouse was killed in the line of duty and you have not remarried
Note: Your eligibility for VA financing does not expire, even if your service was completed long in the past
2020 VA Loan Limits
VA loan limits define the maximum amounts that the U.S. Department of Veterans Affairs can guarantee without homebuyers contributing a down payment. In 2019, the VA loan limits matched those set by the Federal Housing Finance Agency on conforming loans. The 2019 limit was $484,350 in non-high-cost U.S. counties, and higher in expensive areas, such as San Francisco and Los Angeles Counties.
However, those loan limits are now gone. As a part of the Blue Water Navy Vietnam Veterans Act of 2019 (signed into law in June and effective Jan. 1, 2020) VA loan limits have been eliminated.
Other VA Loan and Refinance Options
For veteran homeowners looking to refinance, a VA refinance might be a better fit than other loan types, due to low interest rates, low closing costs, and more flexible loan criteria. Two common options for veterans looking to refinance are the VA cash-out refinance and VA streamline (IRRRL) refinance.
VA Cash-Out Refinance
If you have a lot of equity in your home, an easy way to put that investment to work for you in other ways is by completing a VA cash-out refinance. With a VA cash-out refinance, you will replace your current loan with a new fixed-rate VA loan, and simultaneously convert any extra home equity into cash. For example, if you bought a home for $200,000 that is now worth $250,000, you may be able to refinance up to $225,000 — giving you $25,000 in a “cash-out” payment.
Most people use the cash-out refinance process to apply their equity to:
- Paying off other high-interest debt, like credit cards
- Converting an existing non-VA loan to a better rate and term
- Paying off student loans, or using the cash for new education
It is often thought that only veterans with current VA loans can complete a VA cash-out refinance, but that is not true. Even if you have a conventional, FHA or USDA loan, a VA cash-out refinance might be an option for you if you meet the eligibility requirements listed above. It’s often the best choice for veteran borrowers due to low rates, plus terms that allow for low monthly payments.
VA Streamline (IRRRL) Refinance
Have interest rates dropped significantly since you bought your home? A VA streamline refinance is a great choice for existing VA borrowers who want to take advantage of low interest rates, and it’s quicker and easier than a typical refinance.
A VA streamline refinance, also known as Interest Rate Reduction Refinance Loan (IRRRL), can help VA loan borrowers reduce their monthly payments by refinancing their current loan to a new loan with a lower interest rate. These “streamline” loans have earned that name due to the fact that they require very little paperwork, fewer steps in the underwriting process, and often no out-of-pocket costs. A VA streamline refinance is a great choice for homeowners who want to take advantage of interest cost savings with no other updates to their loan terms.
Apply For a VA Loan Today
For veterans looking to build equity and enjoy homeownership, a VA loan comes with many benefits. From down payment flexibility to budget-friendly features like low rates and no PMI, a VA loan can help you easily reach your personal and financial goals. Pennymac is a top VA lender, serving over 360,000 veterans. Put this experience to work for you, reach out to a Pennymac Loan Officer today to talk further about a VA loan or your VA refinancing options. Know you’re ready to take advantage of a VA Loan, apply online today.