7 surprising perks of VA loans
Home loans guaranteed by the Department of Veteran Affairs have been growing in popularity over the past few years. Lenders made a record 629,300 VA loans during fiscal 2013.
And no wonder.
Banks and mortgage companies like them because the VA agrees to cover up to 25% of the loan amount if the borrower defaults.
Home buyers benefit because that protection allows lenders to make VA loans at competitive interest rates, with cheaper terms than conventional mortgages.
“The VA loan has spectacularly good terms — nothing else comes close,” says Joe Parsons, senior loan officer at PFS Funding, a Dublin, California, mortgage broker.
Yet only a small minority — less than 12% of the 16.4 million service members and veterans with a mortgage — take advantage of VA loans, according to the National Mortgage News.
Is it time for you to consider a VA loan? Here are the key advantages, or perks, they provide.
The VA makes sure buyers don't overpay for a home and that it's move-in ready, without any costly, unexpected problems.
It does that by requiring all properties to be evaluated by a specially trained VA-certified appraiser who will:
- Determine the home's fair market value.
- Make sure it meets the VA's Minimum Property Requirements, a list of health, safety and structural requirements that is unique to VA loans.
Bare wires in the kitchen? An addition that was built without the proper permits? These must be fixed or brought up to local building codes before the sale can be completed.
The appraisal process typically takes 10 days or less and can provide buyers with peace of mind.
In 2013, Sandy Magura and her husband, a medically retired army veteran, purchased a home in Stafford, Virginia. Regarding the VA’s experts, she says, “Not only were they extremely thorough, but they were also adamant about the seller getting the things done before we closed."
Let’s count the ways you'll save by financing with a VA loan.
- No down payment on purchases up to $417,000 in most areas.
- No mortgage insurance — even with no down payment.
- Strict restrictions on the type and amount of closing costs.
- Competitive interest rates, even if you have relatively poor credit and high debt.
How competitive? In most cases, you'll pay the same interest rate as borrowers with a 760 credit score and a 20% down payment. Some lenders — Navy Federal Credit Union and USAA, for example — offer lower interest rates to VA borrowers than they do to prime, conventional fixed-rate borrowers.
The only financial drawback to a VA loan is what's called the funding fee, which can range from 1.5% to 3.3% of the amount you're borrowing.
The fee can be added to the loan so you won’t have to pay for it up front. If you have a service-connected disability, the funding fee is waived.
Back in the day, virtually all home loans were assumable. Someone who bought your house could accept responsibility for your mortgage and start making payments.
There was no need to go through the expense and uncertainty of another loan.
Today, virtually no mortgages are assumable, except for VA loans, which can be passed on to new owners in one of two ways.
If the person buying your home has served in the military and can qualify for a VA loan, he or she can assume your mortgage. You’re free to take out another VA loan.
If the person buying your home does not qualify for a VA loan, you can still allow it be assumed. You won’t qualify for another VA loan until the new owner pays it off.
"This is a tool that can be used to be creative in selling a home,” says Yael Ishakis, vice president and loan officer at First Meridian Mortgage in Brooklyn, New York.
“A veteran can use VA eligibility more than one time and, in some cases, can have two VA loans on two homes simultaneously,” explains Louise Thaxton, military specialist and branch manager at Fairway Independent Mortgage in Leesville, Louisiana.
Let's say you take out a VA loan and pay it off. You can take out another VA loan to buy another home. There's is no limit on the number of sequential mortgages you can have.
Or you might be living in a VA-financed home and need to relocate for work or family reasons.
You might be able to get a second VA loan to buy a place to live in your new hometown without selling and paying off the government-backed mortgage on your first home.
Qualifying for two VA loans depends on how much "entitlement" — that's the total amount the government is willing to guarantee — you have left on your benefit. But it's something that's routinely done.
With most mortgages, you're on your own if you run into financial trouble and can't make the payments.
Lost your job? Fallen ill and can't work? Going through a divorce?
That's too bad.
But the Department of Veteran Affairs provides its borrowers access to all sorts of emergency assistance and advice. That's why default rates on VA loans are so low.
If you’ve recently faced problems such as a job loss or sudden illness, VA Regional Loan Centers offer financial counseling specifically designed to keep your home out of foreclosure.
The counselor assigned to your case might negotiate a revised repayment plan with your lender or guide you through a sale if it's simply not possible for you to continue as the owner.
In extreme cases, the VA might even opt for what's called a deed in lieu of foreclosure, in which the government assumes ownership of the home and releases you from any future financial liability.
Perhaps you took out a VA loan several years ago when interest rates were higher. There are three ways to refinance into a new and cheaper mortgage.
The Interest Rate Reduction Refinance Loan is for borrowers with a history of on-time payments. The application process doesn't require a home inspection, appraisal, credit check or income verification.
The program’s purpose is to reduce monthly payments, so you’re not allowed to take cash out of your home or consolidate other loans.
If you want to do that, you must request a cash-out loan, which requires a full-blown application process, including a home appraisal.
VA loans are one of the few types of mortgages that can be refinanced when the borrower is behind on payments. A loan officer must analyze each case, determine why the homeowner got in trouble and ensure the problem has been resolved. For instance, a borrower might have been laid off but recently returned to work.
Adding an Energy Efficient Mortgage to a purchase or refinancing provides up to $6,000 for qualified improvements.
This work can include new windows and doors, programmable thermostats, additional insulation, heat pumps and solar heating and cooling systems.
The idea is to make the home more comfortable and reduce future utility bills. These loans are most often used when buying or refinancing an older home that needs some serious renovations.
The first step is to have an expert assess the home and generate a score using the Home Energy Rating System index. The HERS report will include specific recommendations for improvements and their projected monthly savings. That way you know you're getting the biggest bang for your buck.
The money is usually placed in an escrow account, so that it's available to do the work after closing. It's repaid by rolling the balance into the primary VA loan.
Wise home-buying never changes: It's about figuring out what you can afford, how much you can put into a down payment and then sticking to your plan.
Click here to get started.
You'll soon discover that when you were a renter, you had the easy life. Owning a home is a lot of work. Here are 7 surprises for new owners.
Click here to get started.