Considering VA loans (those guaranteed by the U.S. Department of Veterans Affairs) are arguably the best mortgages available, they haven't got the best rep. Some people think they're difficult to apply for, take too long to close or are more likely to end in foreclosure. None of those is true, and the VA itself busts all those myths – and more.
In reality, these mortgages are almost always no-brainers for those who are eligible, and not just because they're easy to access, even if you have poor credit and no down payment. Their really big benefits are financial: They can save you literally thousands and thousands of dollars over the life of your loan.
No PMI Payments
If your mortgage is backed by the Federal Housing Administration (FHA), Freddie Mac or Fannie Mae and you don't have a big down payment, you have to find money each month to insure the lender against the risk of you getting into financial trouble and your loan going bad. This is called private mortgage insurance or PMI.
And we're not talking peanuts here. Even those with quite modest mortgages can pay $100 a month every month for prolonged periods, and those with bigger loans can easily hit $200 a month or more. With some mortgages, you only have to pay that for a few years until you've built up some worthwhile equity (the amount by which the current market value of your home exceeds the current mortgage balance), but with others you have to keep paying for as long as your loan lasts. So it could add up to tens of thousands of dollars.
VA loans aren't like that. You shouldn't have to make PMI payments, leaving you significantly better off than those with other types of mortgage. Learn more at A Closer Look at a Key VA Loan Benefit: Avoiding PMI.
Buy Now Before Home Prices Rise Further
One of the biggest frustrations for first-time homebuyers is saving enough for a down payment, especially when home prices are rising quickly. They set themselves savings targets to buy the sort of place they want, only to find they're short because those places have become more expensive. With home prices nationwide rising 6.8 percent year over year in February 2016, according to CoreLogic, this is a real problem, especially for those who want to buy in property hot spots where rises are even sharper. For example, CoreLogic reckons prices in Washington state had increased in the year leading up to that month by 12.4 percent.
None of this matters if you're eligible for a VA loan because you don't have to find a down payment – providing the home is appraised as being worth as much as or more than the mortgage's value, and the amount borrowed doesn't exceed your area's loan limits. Indeed, some VA borrowers don't have to find a single cent upfront for a property purchase. So you can buy now and see your equity (and net worth) increase year after year for as long as home prices appreciate – while those who haven't earned their eligibility through service to the nation are still saving up. And, again, that benefit could add up to thousands or tens of thousands of dollars.
Save on Closing Costs
Just like everyone else, those closing with a VA loan have to pay (or sometimes roll up into the loan) closing costs when they come to complete their purchase. These cover a whole range of fees, taxes and charges necessary to obtain the mortgage and safely transfer the title.
However, the VA caps the amount that can be charged by the lender as an origination fee, often one of the biggest expenses, at 1 percent of the purchase price. And it also insists that the buyer doesn't pay for certain other costs that purchasers with other sorts of mortgage might have to find. Get more details at VA Loan Fees: What the Borrower is Not Responsible for Paying.
The savings here might not run into thousands, but they can be worthwhile, especially at a time of financial stress, such as when buying a home. And if you add them to the advantages of avoiding PMI payments and building equity sooner, you'll see the headline is no exaggeration: a VA loan really can save you thousands, and can possibly see you better off by five figures.
More Benefits, More Savings
VA loans are rarely less flexible than other mortgages. You can generally refinance them, and you may be able to lower your interest rate in a streamlined refinancing that avoids out-of-pocket fees. And there are even greater benefits in the form of grants for those with special housing needs that arise from disabilities acquired during service.
It sometimes feels as if we, as a nation, are long on thanking veterans and those who still serve with words, but short on expressing our appreciation in practical ways. VA loans, which have been going since 1944, are an exception to that. They really do deliver worthwhile benefits to those who've earned them through their service.