Eligible servicemembers and their families find that the VA home loan program provides an exceptionally strategic way to finance more than 80 percent of a property purchase without having to pay for mortgage insurance. Lenders participate because they are protected from default by the U.S. government. But there are other benefits to financing this way:
- No down payment requirements
- Flexible underwriting guidelines
- No minimum credit score
- Loans are assumable
- VA property requirements ensure the property is safe, sanitary, and sound
- VA staff assists borrowers who become delinquent on their mortgages
Down Payment Benefits with VA Loan
There is no maximum loan amount or purchase price imposed by the VA. However, the VA does limit the amount of losses it will cover for the lender if a borrower defaults. Lenders generally loan up to $417,000 for home purchases, provided the applicant is income and credit qualified and the property appraises for the asking price. In higher-cost areas, though, 2014 loan limits are higher -- to a maximum of $1,094,000 in the most expensive market.
While no down payment is required, borrowers can save on their funding fees by making a five or ten percent down payment. Funding fees can usually be wrapped into the mortgage so the borrower needn't pay out of pocket.
Reserve Requirements Eliminated
Reserves" refers to money the borrower has that can be used to pay a mortgage if he or she experiences an interruption of income. Reserves are typically expressed in months -- if a mortgage payment -- principal, interest, taxes and insurance -- is $800 a month, and the applicant will have $3,200 in the bank after closing on the home purchase, he or she is said to have four months in reserves. Many programs require two-to-six months of reserves. With VA loans, lenders do not typically require reserves. Applicants should know, however, that their total amount of liquid assets does go into the overall assessment of credit worthiness.
VA Loan Closing Costs
VA participant borrowers may not be required to pay VA closing costs. The lender can take the interest rate up a bit and cover the closing costs for a cash-strapped home buyer. In addition, under the terms of the VA loan, the home seller can contribute as much as four percent of the property's appraised value to cover certain closing costs.
VA Mortgage Rates
The government does not set mortgage rates for VA loans. VA mortgages are funded by private lenders, like banks, mortgage companies and credit unions, and the government just guaranties the loan, lowering the risk and cost to the mortgage company. The VA warns borrowers to shop for their loans and compare offers from competing lenders to get the best deal they can. That's easy to do online on sites like LendingTree.com.