In many ways, VA loans are better than conventional loans thanks to factors like the lower rates and relaxed credit requirements. Here are a few reasons that account for the popularity of the program.
Top Reasons Why You Should Consider Using VA Home Loan
No Down Payment
The minimum down payment for an FHA loan is 3.5%, and for conventional financing is 5%. For the average veteran, putting up that kind of money is near impossible for many without years of saving. VA home loans ease this burden dramatically by skipping the down payment altogether.
No Mortgage Insurance
FHA loans force borrowers to pay private mortgage insurance (typically 20% of the purchase price) in addition to the monthly mortgage payment if they cannot afford a down payment. This is not the case with VA home loans. They do have a unique cost, however, in the VA Funding Fee, which is a set fee applied to every purchase loan or refinance.
No Prepayment Penalty
VA-backed homeowners can sell their home or refinance their VA loan at any time without paying a prepayment penalty. The existing VA loan can even be assumed by other VA-eligible home buyers.
Relaxed Credit Requirements
The kind of score needed to secure VA financing is a lot lower than what is required for conventional mortgages. And in spite of the relaxed credit score requirements, VA borrowers have access to interest rates competitive with those of conventional loans.
Closing Cost Limits
The VA home loan limits the fees and closing costs, with some expenses having to be borne by other parties.
Low Foreclosure Rate
The VA program actually has the lowest foreclosure rate of all the loan programs, despite the lack of down payments.
Flexible Loan Entitlement
Veterans who have earned the program can use it repeatedly in their lifetimes. They also don’t necessarily have to pay back one loan to be eligible for another. Plus, they can even hold two loans at the same time.
Flexible DTI Ratios
Lenders calculate the debt-to-income ratio by dividing your monthly income and debts, and require the figure to be below a certain threshold. The VA standard is 41%, higher than any other loan programs, and it can even go up.
Rebound from Foreclosure or Bankruptcy
Veterans do not automatically become ineligible for a VA home loan if they have gone through foreclosure. It depends on the amount of loan entitlement the veteran has remaining instead.
VA home loans are assumable
Unlike conventional home loans, VA loans are assumable, meaning the lender can normally agree to allow a new borrower to take over payments. VA loans share this property with FHA loans.