Reasons why veterans should apply for VA loans first
Veterans Affairs home loan benefits
- VA loans are one of the few loans that offer 100 percent financing.
- VA loans can be paid off early without penalty.
- An existing VA loan can be refinanced quickly and easily to obtain a better rate.
- The VA charges an upfront funding fee that can increase after the veteran uses the benefit more than once.
Homebuyers have many choices when shopping for the right mortgage, but the nation’s veterans usually have an extra option.
Military service members, veterans and qualifying surviving spouses are eligible for U.S. Department of Veterans Affairs (VA) loans.
The government guarantees the loans that the borrower gets through a mortgage company. The government backing means that the rates stay competitive and the program offers other perks that aren’t widely available.
VA loan perks
There are some good reasons why a veteran may want to consider a VA loan first.
No down payment required.
A VA loan is one of the few loan programs that offers 100 percent financing, which requires that the homebuyer put nothing down on the home. By contrast, the government’s Federal Housing Administration (FHA) loan program requires the buyer to put down at least 3.5 percent of the total loan amount. Conventional loans that meet Fannie Mae and Freddie Mac’s guidelines — the most common type of loan in the overall mortgage market — also require at least 3 percent down and usually more than 5 percent.
Fees are typically less expensive than other government loan programs.
The VA charges an upfront funding fee to offset the government backing and administrative costs, but the amount is less than the insurance costs for a typical FHA loan. With FHA, borrowers have to pay an upfront fee and an annual premium for the life of the loan. VA loans also don’t require private mortgage insurance.
Also, if the borrower does put money down on the home, the initial VA funding fee will be reduced. Veterans with military-related disabilities do not have to pay the initial funding fee at all. That savings can be rolled into the escrow account to pay for closing costs on the loan.
No prepayment penalty.
Some loans include a penalty fee for borrowers who pay off their mortgages early, but the VA program does not allow prepayment penalties.
VA streamline refinances are easier.
The VA also offers a streamline refinance, known as an Interest Rate Reduction Refinancing Loan, or IRRRL, which can make it relatively quick and easy to refinance an existing VA loan in good standing, and get a better rate. Typically, for example, the borrower will not have to obtain an appraisal or provide the detailed paperwork to establish creditworthiness. However, the underwriting guidelines depend on the mortgage company.
VA loan drawbacks
Although VA loans have some advantages, it might not necessarily be the automatic choice for every single veteran, says Tony Adkins, a California-based lender and veteran who specializes in VA loans.
As with any product, a VA loan can have some disadvantages. For example, although a veteran can obtain a VA loan more than once, it becomes more expensive after the first use of the benefit. The funding fee on a no-down payment loan can increase by more than a percentage point on the second use of the benefit.
Another possible glitch is that lenders sometimes layer additional restrictions, known as credit overlays, on top of the VA program’s guidelines. This can sometimes make it harder to obtain the loan for borrowers with weaker credit.
The qualifying veteran also may have other goals that make other loan products more attractive. Some borrowers may prefer to put a significant amount of money down on a home, and can avoid paying private insurance on a conventional loan.
“It depends on the borrower,” Adkins says. “In general, certainly, as a veteran, it is a well-deserved benefit and enables a person to purchase a home with nothing down.”
Adkins says, however, that many veterans are still not aware of the program.
“The biggest issue that I have seen over the years is that the veteran is not as informed about the VA loan as they should be, just like the benefits,” Adkins says. “Every day my conversations are 20 percent talking about a loan and talking about other benefits.”