If you’re a veteran or active member of the military, you may have heard about VA home loans. Whether you’re looking to purchase a home now, or in the future, preparing to get a VA home loan will help you achieve your homeownership dreams.
If you’ve ever wondered what a VA house loan was all about, we’ve put together a list of the five most important things you need to know about a VA home loan before you start house hunting.
We’ll cover everything from VA loan guidelines and requirements (including credit scores) to and VA home loan benefits and even some interest rate information so you can begin preparing for your home purchase today.
1. What Is a VA House Loan?
The VA home loan program was originally implemented as part of the Servicemen’s Readjustment Act of 1944 (G.I. Bill) in order to help veterans establish establish their credit and purchase a home.
Because veterans had been away serving their country, they didn’t have as much time to establish the creditworthiness needed to purchase a home when they returned. The VA home loan program helped them catch up with greater homeownership opportunities.
Today, VA home loans still meet this need and can be used for several purposes, including purchasing, building, repairing, or refinancing a home you intend to use as your primary residence.
These loans are backed by the government but are provided by private lenders, like banks and mortgage companies, who get approved by the VA. Because of the government backing, if you happen to default on the loan, the government will pay the lender a portion of what you owe. This added protection allows VA-approved lenders to offer lower interest rates on their VA loans.
2. VA Loan Guidelines for Eligibility
In order to qualify for a VA home loan, you must meet the VA loan guidelines for eligibility. Once you are considered eligible, you can begin the process of applying for your VA home loan.
A full list of those who qualify can be found on the Department of Veterans Affairs website, but Individuals who may qualify include:
- Current servicemen and women
- Spouses of servicemembers who died in the service
- Spouses of POWs or those MIA
- Some Public Health Service officers
- Cadets of the United States Military, Air Force, or Coast Guard Academy
- Midshipmen at the U.S. Naval Academy
Other eligibility requirements include things like having satisfactory credit, a sufficient income, a valid Certificate of Eligibility (COE), and an eligible property.
Understanding if you qualify is the first step towards getting your VA home loan and making your dream of becoming a homeowner a reality.
3. VA Home Loan Benefits
Many service members choose to use a VA house loan because of the numerous benefits they offer. While there are lots of conventional loans and other types of government home loans, they have different benefits than a VA loan and often cost the buyer more in up-front fees. Here are the most common home loans and how VA loans compare.
These are the traditional mortgage loans most people get for their homes. They are not government backed and approvals are heavily based on credit. In fact, according to Ellie Mae, the average credit score for a conventional home loan is around 753.
They also require a minimum down payment of 3.5%, but it can be as high as 20% of the total loan amount. For down payments below 20%, you will be required to pay PMI (private mortgage insurance) until your loan-to-value (LTV) ratio is 80% or less.
FHA loans are backed by the government and although there is no minimum required credit score, scores of 620 and up are usually preferred. They are less expensive to purchase initially and only require a 3.5% down payment at closing. However, you will need to pay MIP (mortgage insurance premiums) for the duration of the loan.
These are also government-backed home loans, but they are only available in rural areas. Again, there is no minimum credit score, but a 660 and up is preferred.
VA Home Loans
VA home loans have many benefits, including no down payment, no mortgage insurance, and no prepayment penalties. There are also limits on how much you have to pay for closing costs, so you might need negotiate with the seller to have them covered.
The myriad of benefits makes it easy to understand why many eligible servicemen and women choose to pursue a VA house loan when looking to finance their home.
4. Credit Score for a VA Loan
Most loans and lines of credit rely on a credit score to determine eligibility. Credit scores range from 300 to 850, and a credit score above 740 is typically considered excellent credit. While many conventional lenders look for excellent credit scores, VA loan guidelines are not so strict.
VA approved lenders often prefer a score of at least 620; however, there is no minimum credit requirement for VA house loans. Some VA-approved lenders, like Low VA Rates, take into account other factors that might be affecting your credit score.
Because credit score is not the end-all-be-all with VA loans, most lenders will also look at your debt-to-income (DTI) ratio. A DTI of 41% or lower is usually preferred, but again, VA loans are much more flexible than conventional loans and often allow a higher DTI ratio.
If for some reason you are not approved for a VA home loan, don’t despair. Credit scores and DTI ratios are not set in stone. You can always take some time to improve your credit, pay down some debt, and apply for your VA home loan again.
5. VA Loan Interest Rates
If you are worried about your VA loan interest rate, don’t be. VA loan rates are usually much lower than rates for conventional home loans because they are government-backed. The rate you are approved for will vary, depending on your loan terms, type, and other factors.
In general, 15-year VA home loans have lower interest rates that 30-year VA loans. Additionally, adjustable rate mortgages also tend to offer lower initial rates than fixed rate mortgages, but they can fluctuate over the life of the loan and go up, so keep that in mind as you search for the VA loan that’s right for you.
VA loan interest rates are still currently quite low, so now might be a good time to purchase or refinance your home with a VA home loan.
Choose VA-Approved Lenders
As you begin your search for a new home, there are many things you’ll need to prepare for. However, if you follow these guidelines, you’ll be starting down the right path. Just make sure your guide is someone you can trust, like a VA-approved lender with experience doing VA loans.