One of the benefits of a VA loan is that it allows borrowers to purchase a home with no down payment. Additionally, VA loans do not require private mortgage insurance (PMI)1.
To qualify for a VA loan, you must meet certain eligibility requirements, such as having served in the military for a certain period of time or being the surviving spouse of a veteran who died while on active duty. Only spouses are allowed to be co-borrowers on VA loans, thus combining the household (married couple) income and assets vs. the Veteran’s alone. You will also need to obtain a Certificate of Eligibility (COE) from the VA to prove that you are eligible for the loan.
VA loans are subject to maximum loan amount limitations which change annually, however in certain cases higher loan amounts can be obtained2 with supplemental cash provided by the Veteran for a downpayment. Given that VA loans do not charge PMI, this option may be advantageous over conventional3 or FHA4 loans.
VA loans charge an up-front funding fee5, which can be added to the loan amount (financed).The funding fee is waived in certain cases, often determined by medical reasons for the Veteran at the time of discharge. The Funding Fee is in place to reduce the cost to the US taxpayers since VA loans require no down payment or Private Mortgage Insurance.
VA loans are designed to assist Veterans purchase their principal residence, and do not allow use of the program to purchase investment property.
In some cases, VA loans also have an assumable feature, which allows prospective purchasers to assume the VA and commence payment, retaining the existing interest rate on the loan.Borrowers who assume VA loans are not required to be Veterans but do have to submit paperwork and qualify to assume the loan. If the purchase price is greater than the amount of the loan, the purchaser (assumer) would be required to make up the difference in cash. This option can be very appealing to prospective purchasers if the terms of the VA loan are significantly better than other options available in the marketplace.
It is important to note that if a Veteran allows their VA loan to be assumed, it can impact their ability to use their VA benefits on another purchase as a portion of their VA benefit would still be in use and not available to the Veteran whose loan was assumed.
While VA loans offer many benefits, they may not be the best option for everyone. For example, if you have a high credit score and can afford a large down payment, you may be able to obtain a conventional loan with better terms than a VA loan. Additionally, VA loans may have higher interest rates than conventional loans in some cases.
In conclusion, if you are an eligible veteran or active-duty service member looking to purchase a home with no down payment and no PMI, a VA loan may be a good option for you. However, it’s important to weigh the pros and cons of a VA loan against other types of loans to determine which one is right for you. Working with a loan officer who understands these nuances can assist Veterans in making the best decisions to accomplish their homeownership goals.
1 See What is Private Mortgage Insurance? Do I need it and how do I get rid of it?
2 https://www.va.gov/housing-assistance/home-loans/loan-limits/
3 See Conventional Loans, what is Fannie Mae and Freddie Mac?
4 See FHA loan basics.
5 https://www.va.gov/housing-assistance/home-loans/funding-fee-and-closing-costs/
