For current or former members of the US Military, access to VA Loans is an incredibly attractive — and sometimes cryptic — advantage. But, though many service people know that they can purchase a home with a VA loan, it can be helpful to ask this question: “What are the benefits of a VA Loan?”
The thing is, there are a ton of benefits to using these special financing options, but many people who are eligible don’t even know the full extent of their opportunities. That’s why we wanted to take this chance to share all of the attractive benefits of taking care of your real estate needs with a VA Loan.
Home Purchase Loan Vs. Refinancing
Before we get too into the details of VA Loan benefits, however, it’s important to make a distinction between your lending options.
When talking about a VA Loan, most people are probably thinking about a Home Purchase Loan. This is when you use your VA benefits to buy a new home at an exclusive rate that is unavailable to people who haven’t served. This loan option is often very stable and attractive to home sellers — which means that you can often win a home without being the highest offer!
Home Purchase Loans aren’t simply for buying a new, single-family house, however. You can also use these funds to purchase a condo (provided that it is in a VA-approved condo project) or make changes to your current house to make it more energy-efficient. Perhaps most importantly, however, eligible applicants can use Home Purchase Loans to raise the funds necessary to build a home on an existing lot. Not only can this reduce the cost of building a home, but solving the financing upfront can reduce the number of questions to ask your builder — and lead to a less stressful build!
VA Loans can also be useful for refinancing a home. If you are interested in reducing the interest on your current mortgage, you can take advantage of a refinancing option called an Interest Rate Reduction Refinancing Loan (IRRRL).
When you apply for an IRRRL, also known as a streamline refinance, you can create more stability in your home loan. An IRRRL allows you to lower your monthly payment or stabilize your interest rate — as long as you are using it on a loan that is already backed by the VA.
Finally, there is another refinancing option called a Cash-Out Refinancing Loan. If you take this refinancing option through the VA, you can borrow against the equity of your home. This will let you pay for school, improve or renovate your home, or pay off other debts. In this sense, the Cash-Out path is very similar to a Home Equity Line of Credit (HELOC).
There are huge benefits to each of these services. But, considering the fact that having a VA loan is a prerequisite for using a streamline refinance, we are going to focus on the benefits of a VA-backed home purchase loan in this blog.
The Different Types of VA Home Loans
There are actually 2 different types of VA Loans for service people who are ready to buy a home: Direct Home Loans and VA-Backed Home Loans.
When mortgaging a house using a direct home loan, the Department of Veterans Affairs serves directly as the loan servicer. As the name implies, you apply for and receive your loan terms directly through the VA.
The other loan option is to apply for a VA-Backed Home Loan. In this instance, the VA acts as a sort of guarantor for a loan that you receive from a private mortgage lender. Rather than financing your home directly through the VA, you can shop around for a mortgage that suits your needs — and then the VA will guarantee a portion of your loan!
This means that even if the loan goes into foreclosure, the Department of Veterans Affairs will stand behind your mortgage — which can allow you to recoup some or all of your losses. This means that a VA-backed mortgage tends to be low-risk for the lender, enabling many of the benefits that we will explore below.
Benefits of a VA Loan vs Conventional
Of course, the most important aspect of the VA Loan system is the ways that it can help our nation’s service people. There are a lot of reasons that many veterans, active-duty military, and eligible spouses choose to finance a home through the VA. Here are the biggest benefits that come with using a VA Loan:
1. Low (Or No) Down Payment
One of the largest hurdles in someone’s home search is often the down payment. Putting down even just 3% of a home’s value can be a daunting sum — and in hot real estate markets like Washington DC and the surrounding area, it often takes way more than 3% to have a compelling offer! In fact, there are even mortgage guides out there that are simply designed to help people get the best deal by balancing down payment and longer-term costs.
However, those with access to VA lending options tend to be exempt from this particular stressor. Both direct home loans and VA-backed mortgages are often constructed to allow very low down payments. In fact, over 90% of VA-backed loans are granted with 0% down, according to the Department of Veterans Affairs.
2. Better Terms and Interest Rates
As mentioned above, VA-backed loans tend to be nearly risk-free for lenders. Because the government guarantees the mortgage, private lenders are not as worried about the homeowner defaulting and simply losing out on the payment.
Because of this low risk, lenders are often inclined to offer far better rates and terms for people with VA Loans. This means that the VA Loan is useful in both the short- and long-term — getting better terms at the start of a fixed mortgage means keeping those rates for the entire length of your mortgage!
3. High Borrowing Limits
Private lenders will only give people access to a limited amount of money. This limit is generally based on credit history, income, and outside cash sources — but with a VA Loan, this borrowing limit is often higher!
When you take advantage of a VA-backed mortgage, you can borrow up to the Fannie Mae/Freddie Mac conforming loan limit for your county. And, if you choose to pay a down payment, you can borrow even more! This means that service people can often get more valuable homes than they would normally qualify for, as long as they are using a VA-backed loan.
4. No Need for Private Mortgage Insurance
One of the hidden costs that come with buying a home is Private Mortgage Insurance. When you finance a home with a traditional lender, you almost always have to purchase Private Mortgage Insurance, or PMI, in order to be approved.
Typically, PMI costs between .5% and 1% of your home’s value every single year. This might seem small, but it almost certainly means that you will be paying thousands of dollars every single year — or tens of thousands of dollars across the span of your mortgage!
With a VA-backed loan, however, this requirement is waived. As with the interest rates, the reason for this is because of the low risk for private lenders. Financial institutions are not as worried about you defaulting on the loan thanks to the support from the Department of Veterans Affairs; therefore, they don’t require Private Mortgage Insurance.
5. Fewer Closing Costs
Here’s a dirty secret about real estate: closing on a home can cost a lot of money. A lot of homeowners are surprised to find out about these costs when they get to the closing table (especially if they aren’t working with a real estate agent who tells them what to expect). However, those who purchase a home using a VA loan actually have fewer closing costs!
As with many other VA benefits, the reason for this comes down to trust. VA Home Loans are guaranteed by the federal government. And just like homes with mortgage forbearance have some more stability during stressful times, these government-backed home loans are less risky than non-VA Loans.
What Can A VA Loan NOT Do?
Although a VA Loan is a very powerful tool for those who qualify, there are still some home-buying mistakes that it cannot help you solve.
In particular, having one of these loan options does nothing to help alleviate the stresses of finding and winning the right home. Luckily for you, that’s a problem that’s easily solved by working with a high-quality real estate agent!
If you are interested in finding the right home and winning it faster, for a better price, and with absolutely zero stress, then contact the Keri Shull Team today! Finding a home in the hottest neighborhoods of DC or anywhere else in the DC/MD/VA area can be very challenging if you try to do it by yourself — but our expert agents are standing by to help you!
So if you want to make your home buying process as amazing as possible, just click here and schedule a time to speak with one of our Home Search Experts!