What are VA Loans

What is a VA Loan and How Does it Work?

Getting to the point in your life where you are able to buy a home is hard work. And if you're a veteran or serving in the military, it can be more of a challenge than for people who aren't.

So what are your options if you are a veteran looking to buy a home? Well, there is a veteran mortgage option: the VA loan.

Let's take a closer look at how a VA loan works and if it's your best option when you are about to get into the real estate market.

What is a VA Loan?

A VA loan is a mortgage loan that is issued by private lenders and approved by the U.S. Department of Veterans Affairs is supported. It helps U.S. veterans, active service members, and military widowed spouses buy a home.

VA loans were introduced as part of the GI Bill in 1944, but they have grown in popularity in recent years. In Q1 2019, 8% of home purchases were made with a VA loan.1 This type of loan is an attractive option because it's pretty easy to qualify and doesn't require a down payment.

How does a VA loan work?

VA home loans are one of the two non-conventional (or government) loans that are available today. They don't work exactly like a regular mortgage you get from a bank because VA loans are specially guaranteed by the government.

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It simply means that if you fail to make your payments (default) or if you lose your home (foreclosure), the government agrees to repay some of the loan to the bank.

Since banks take less risk compared to a conventional loan, VA loans are relatively easy to come by. In 2018, the VA guaranteed 610,513 purchase and refinancing credits. 2

What are the VA Loan Requirements?

To obtain this loan if looking to buy a home, military personnel must meet specific VA service requirements.

In general, if you fall into one of these three categories, you are eligible:

  • You are an active duty member or discharged veteran who has served 90 consecutive days of active service in wartime or 181 days of active service in peacetime.
  • You have served in the National Guard or Selected Reserve for more than six years.
  • You are the spouse of a service member who died in the service. 3

When you go through the application process, you will need a Certificate of Eligibility (COE) to show mortgage lenders that you qualify for a VA loan.4 You can apply for a COE through the VA website, through the mail, or through your lender.

What Are The Benefits Of A VA Loan?

Here are some of the key features and benefits of a VA loan:

  1. You can buy a home with no down payment. VA loans are one of the last zero down payment home loans available today. In 2018, around 50% of homes bought with a VA loan were bought with no down payment

  2. There is no limit to the amount you can borrow on a VA loan, but there is a limit to the amount of liability the VA assumes. For 2019, the VA guarantees a maximum of 25% (up to $ 121,087) on a home loan, which equates to a maximum loan of $ 484,350.6 Anything beyond that is not guaranteed by the VA. Sounds dangerous? It can also be!

  3. You don't have to pay private mortgage insurance (PMI). With the loans backed by the government, you can say goodbye to PMI! The PMI can be anywhere from 0.5% to 2.25% of your loan. So if your PMI rate is 1% on a $ 200,000 loan, that would add an additional $ 166 monthly mortgage payment!

  4. There are no minimum credit requirements. But lenders usually still look for borrowers with a credit score of 620 or higher. While we believe your ideal credit score is zero - because that means you have no debt - you should be aware that missing a credit score could make lenders nervous when it comes to lending you a loan.

  5. The VA provides support to struggling borrowers facing a possible foreclosure sale. The agency's lending technicians can negotiate with lenders on behalf of borrowers who are struggling to make their mortgage payments.

  6. There is no early repayment penalty. This means that if you pay off your loan early, you will not be penalized.

  7. You don't have to be a first-time home buyer to get a VA loan. As long as you pay it off every time, you can take advantage of it again and again.

  8. Bankruptcy and foreclosure will not permanently affect your chances. If you've filed for bankruptcy or went through foreclosure, you can still qualify for a VA loan after two years have passed from the bankruptcy or foreclosure date.

What are the disadvantages of a VA loan?

It all sounds so good, doesn't it? But if you dig a little deeper, you will find some serious problems with this type of loan.

  1. The zero deposit makes you vulnerable. A small change in the real estate market can mean paying more for your home than it's worth! That means you could sit on the house until the market recovers or you could suffer financial loss if you have to sell the house in a rush.

  2. You must pay a VA loan finance fee between 1.25% and 3.3% of the loan amount.7 For a $ 300,000 loan, this fee can range from $ 3,750 to $ 9,900. The fee is usually included in the loan and thus increases your monthly rate and the interest you pay during the term of the loan. You may also need to factor in the lender's processing fees. Yuck!

  3. The lower interest rates on VA loans are deceptive. While the interest rates on 30-year VA loans are usually the same or slightly lower than 30-year conventional fixed-rate loans, neither loan is a good option. Both will cost you much more in interest over the life of the loan than their 15-year counterparts. Also, you are more likely to get a lower rate on a conventional 15-year fixed interest loan than a 15-year VA loan. We can prove it.

  4. A VA loan can only be used to buy or build a primary residence or to refinance an existing loan. So you can forget about trying to buy an investment property or a vacation home with such a loan. (Also, using a loan to buy an investment property or vacation home instead of 100% cash is always a bad idea because it means more debt.)

  5. Only certain types of real estate are eligible for a VA loan. Vacant land and cooperatives are not qualified.

Is a VA Loan Worth It?

When you compare a VA loan to a conventional mortgage, you will see that, despite the benefits, when it comes to the cold, hard cash, it's best to go with a conventional loan!

You'd have a better interest rate of around 3.6%, and you wouldn't have a PMI, either.8 And you would really see the savings if you look at the interest rates over the life of the loan.

So what if you decided to save a 20% down payment on a $ 200,000 home and choose a conventional 15 year fixed rate mortgage instead?

Let's compare the numbers. We assume the current interest rate on a 15 year VA loan to be around 4%

Cost of Home$200,000$200,000
Funding fee$4,300$0
Total loan amount$204,300$160,000
Interest rate over 15 years$67,713$48,156
Total cost of the loan$272,013$208,156

On a conventional 15 year fixed rate loan, your total interest is $ 48,156 - nearly $ 20,000 less than what you would pay in the VA loan example!

When you factor in the loan amount, financing fee, and total interest paid, the total cost of the VA loan is $ 272,013. So you pay more over the 15-year term than with a conventional mortgage. Think what you could do with all the money you would save!

The bottom line is this: VA loans tend to be one of the most expensive ways to buy a home. If you need to take out a loan to buy a home, choose a conventional mortgage with a 15 year fixed interest rate and a 20% down payment to avoid the PMI. If you don't want to buy your home with cash, this is the best way to go.

If you are looking for a skilled lender who can help answer all of your mortgage questions and enable you to make the best decision for you and your family, you should look at Churchill Mortgage. For over 25 years, Churchill Mortgage's mortgage experts have helped hundreds of thousands of people buy a home the right way.