Planning to Move This Summer? How a VA Loan Works for You

presented by:
July 11, 2019
keyboard_arrow_down

With summer in full swing and the kids out of school, it’s a good time to consider a move. Homeownership lets you put down roots and avoid the high — and sometimes unpredictable — costs of rent.

But if you’ve done the math, you may think you can’t afford a home. The median home value in the United States is $217,600, and prices can go much higher depending on where you’re buying. Most mortgages will include a 20% downpayment, which would be more $43,000 for $217,600 home — a hefty amount of savings.

While you can still buy with a smaller downpayment, you’ll be stuck with another cost: private mortgage insurance. PMI protects the bank in case you default on your loan, and you’ll have to pay it until you earn 20% equity in your home. The cost of PMI varies depending on your downpayment and credit score, but it’s an extra expense that you may not want to pay.

Fortunately, veterans have a way to avoid the high costs of getting into a home with a Veteran Affairs loan.

Homeownership for Veterans

VA mortgages give veterans another option when they’re shopping for home loans. While these loans are provided by private lenders, they’re backed by the Department of Veterans Affairs. That backing means that lenders are happy to give you a mortgage with no downpayment, no PMI,and low credit requirements.

With a VA loan, you can get into a home quickly, without the extra costs a conventional loan might entail. You can use a VA mortgage to buy, build, refinance or remodel a primary residence, so most homebuyers can take advantage of them.

Whether you’re a first-time homebuyer or you’re looking for a new home with room to grow, a VA mortgage can help.

Which Veterans Are Eligible for VA Loans?

Many, but not all, veterans are eligible to get a VA mortgage. Typically, you’re eligible if you meet one of the following criteria:

  • You served 90 days during wartime
  • You served 181 days during peacetime
  • You served 6 years in the National Guard or Reserves
  • You left the service due to a service-connected disability
  • You’re the surviving spouse of a veteran who died while in service or due to a service-connected disability

These are good rules of thumb to see if you might be eligible, but you should review the full eligibility requirements to be sure you qualify.

If you do qualify, you’ll need to apply for a Certificate of Eligibility from the VA before you can get a loan. You can apply on the VA website or through your lender, though going through your lender is usually quicker. You’ll need to provide documentation of your service, though the exact paperwork varies depending on type of service.

Be aware, however, that getting your Certificate of Eligibility doesn’t necessarily mean you’ll be approved for a loan — a COE says you’re eligible to apply for a VA loan, but the lender still has to offer you the loan. While VA mortgages typically have more lenient requirements than other types of mortgage, your lender will have its own financial requirements.

What Are the Benefits of a VA Loan?

When you’re shopping for loans, you have lots of different options — but if you qualify, a VA loan can be one of the best. Let’s run down all of the benefits that come with a VA loan.

VA loans are easier to qualify for

Because these are loans backed by the VA, lenders tend to have more lenient credit and income requirements. Even if you don’t have perfect credit, you can usually get a VA loan (expect to need a credit score of around 620). If you’ve gone through bankruptcy or foreclosure, you’ll likely have to wait two years — but that’s still usually better than the requirements for other types of loans.

VA loans have lower costs

Unlike conventional and FHA loans, VA loans require no down-payment which can help you get into a home without spending months — or years —saving up a downpayment. And even without the downpayment, there’s no private mortgage insurance, which helps keep your monthly payments low.

But that’s not the only way VA mortgages help to keep your costs low. Your closing costs — a variety of fees required to complete your home purchase —are also limited by the VA. If you decide to pay your loan off early, there’s no prepayment penalty.

Most importantly, these loans tend to have lower interest rates than conventional mortgages. That means you’ll pay less month to month and less over the life of the loan.

The VA will help if you have trouble making payments

If you have trouble paying a conventional mortgage, you’re on your own for figuring out how to make things right. But with a VA mortgage, you can get help negotiating payment plans and loan modifications that can help you avoid foreclosure.

You’re eligible for life

There’s no time limit to get a VA mortgage: if you’re eligible, you’ll always be eligible. You can also get VA loans again and again — though you have to have paid off the previous loan before you can get another. Whether you’re buying your very first home or you’re looking for a place to retire, a VA loan can help.

VA Loan Restrictions

Though VA mortgages have many advantages over types of mortgage, they also have restrictions other mortgages lack. Before applying for a VA loan, you should know exactly how VA loans work.

You can only get a VA loan for your primary residence

While you can purchase many types of homes, they must be your primary residence. That means you can’t use a VA loan to buy a vacation home or investment property.

You also typically have to occupy the property within 60 days of closing, though that can be extended in certain cases. For active duty service members, spouses can typically fill occupancy requirements. But whenever your move-in date is, you must intend to use the home as your primary residence.

You can only borrow so much

There are limits on how much you can borrow, based on where you’re buying. In most parts of the country, VA loans can go up to $484,350, but in more expensive areas you can borrow up to $726,525. Be sure to check the maximum loan amount in the area you’re trying to buy. If you want a more expensive property than the VA will lend you, you’ll need to make up the difference with a downpayment.

Homes also need to be appraised by the VA before you can buy them, and you can’t get a loan for higher than the appraisal. In this case, you can negotiate with the seller for a lower price, ask the VA to reconsider the appraisal, or make up the difference in cash.

There’s no downpayment, but there is a funding fee

While you don’t have to make the typical downpayment of 5-20%, the VA does have a fee for granting you the loan. You’ll pay more if you served in the Reserves or National Guard, if you aren’t making a downpayment, and if you’ve gotten a VA loan in the past. The funding fee ranges from 1.25% to 3.3% of the purchase price, and can be rolled into the loan amount instead of paying it out of pocket.

However, some veterans are exempt from the funding fee: typically, disabled vets and surviving spouses don’t have to pay the funding fee to get a VA loan.

You still have closing costs

Though VA mortgages limit the amount of closing costs, there are still closing costs —and they can’t be rolled into your loan for a refinance if enough equity is available. While you may be able to negotiate with the seller to pay closing costs, you should be prepared to pay closing costs out of pocket.

No downpayment + funding fee could leave you underwater on your mortgage (you owe more than the property is worth) if property values drop.

VA Loan Downpayments

The lack of a downpayment is one of the biggest benefits of a VA loan, because you can get into a home even without the savings for a large downpayment. But even though VA loans don’t require a downpayment, you should consider making at least a low downpayment.

Putting down more than 5% or more than 10% will lower your funding fee. The lowest funding fees — 1.25% of the total mortgage amount — are for regular military who put down 10% or more. If the same veteran made no downpayment, the funding fee would be 2.15% if it’s their first VA loan or 3.3% if it’s their second VA loan. However, if you’re a disabled vet or a surviving spouse, you may be exempt from the funding fee requirement, in which case you don’t have to worry as much about the downpayment.

However, a downpayment will still save you money over time, because it will cut down on the interest you have to pay. It’s usually worth making a downpayment — even a low downpayment — if you can afford one.

VA Loan Rates

The interest rate you’ll pay on a VA loan is set by the lender, and varies based on current interest rates. Interest rates can change constantly, so if you’re serious about buying, you’ll want to talk to your lender about locking in an interest rate. This lets you lock in the interest you’ll pay at the current rate while you complete your home purchase, so you’re protected from sudden increases.

Many lenders will offer a free 30-day rate lock, but some will charge a fee for a rate lock, or charge a fee for a longer rate lock. You can lock your rate as long as you have a loan application on file and a specific property in mind. From there, you can either keep an eye on current rates and lock when they’re low, or wait until you have a contract on a house, so you have time to close without having to worry about fluctuating interest rates.

15-Year Mortgage vs. 30-Year Mortgage

The duration of your mortgage has a big impact on how much you’ll pay. Typically, your options are a 15-year mortgage — meaning you’ll pay off the loan over 15 years — or a 30-year mortgage — meaning you’ll pay off the loan over 30 years. The right choice depends on your financial situation.

A 15-year mortgage will cost you less in interest, because you have the loan for a shorter period of time. That means the total amount you pay will be less — but it also means you’ll have higher monthly payments. If you can handle the higher payments, this will save you money.

But a 30-year mortgage lets you have lower monthly payments, which can make homeownership more affordable. However, because you’ll have the loan for longer, you’ll pay more in interest, making the house more expensive over time. Still, this is often the best way to make homeownership affordable.

A mortgage is a long-term commitment, so take the time to consider what you’ll be able to afford your mortgage before you buy.

VA Loans from PenFed

If you’re considering a VA mortgage, consider getting it from PenFed. We offer competitive rates and great benefits on 15-year fixed and 30-year fixed VA loans.

All loans offer a free 45-day rate lock, letting you lock in a low interest rate while you’re shopping, no fees required. You can also use PenFed Real Estate Rewards to save even more: by using our network of real estate agents and title providers, you can save up to 0.5% of your loan (up to $20,000). That can take a big chunk out of your funding fee, making a new home even more affordable.

So, what are you waiting for? With a VA loan you can get into a home almost immediately, whether you have a downpayment or not. Start house hunting today!

To receive any advertised product, you must become a member of PenFed Credit Union. Federally Insured by NCUA. ©2019 PenFed Credit Union