What Is A VA Loan?
5-minute readAugust 09, 2021
These loans, insured by the U.S. Department of Veterans Affairs, come with two big benefits: You won't have to come up with a down payment and you won't be charged for private mortgage insurance. These loans can make buying a home less costly.
This doesn't mean, though, that a VA loan is right for everyone.
These loans do come with one negative: a funding fee that the VA charges borrowers when originating VA loans. This fee might make this loan more expensive for some borrowers.
Is a VA loan right for you? That depends. Read on to find out.
VA Loan Requirements
VA loans aren't available to most borrowers.
You can only apply for one of these loans if you're an eligible active-duty member or veteran of the U.S. military, National Guard or military reserves.
You can also qualify if you're the spouse of a military member who died while on active duty or because your spouse died of a medical condition connected to his or her military service.
The minimum credit score required for a VA loan is 580, as long as you meet three requirements. The loan must be for a 1 or 2-unit primary property, and no more than 38% of your gross monthly income can go toward mortgage payments. Your debt-to-income ratio (DTI) also cannot exceed 45%.
How Does A VA Loan Work?
If you do qualify, you might consider a VA loan because you won't have to come up with a down payment. Getting the cash for a down payment is one of the bigger challenges many home buyers face.
Consider that a down payment of 10% on a home costing $200,000 comes out to $20,000. That's a lot of money. Even a down payment of just 5% of that home's purchase price comes out to $10,000 – still not an easy amount for many buyers.
Another loan type insured by the federal government, the FHA loan, requires a down payment of just 3.5% of a home's purchase price if your FICO® Score is 580 or higher. Still, on a home costing $200,000, that comes out to a down payment of $7,000.
With a VA loan, you aren't required to come up with any down payment dollars. This can certainly make getting into a home an easier task.
To apply for a VA loan, you’ll almost always work with a private mortgage lender.
The U.S. Department of Veterans Affairs insures these loans, but it doesn’t originate them very often. That’s what private lenders do.
Fortunately, most mortgage lenders, including Rocket Mortgage, do originate VA loans, so finding a lender to work with shouldn’t be a challenge.
The only direct loans from the VA are for eligible Native American service members and veterans to get a mortgage for a home on Federal Trust Land.
VA Loan Benefits
Another benefit of VA loans is that you won't have to pay for mortgage insurance. This insurance protects your lender, not you, in case you default on your mortgage payments. You'll have to pay for it if you don't come up with a down payment of 20% or more of your home's purchase price.
How much you pay will vary depending on your loan size and down payment. But private mortgage insurance is typically between 0.5% – 1% of your loan amount annually. This is split into monthly amounts and added to your mortgage payment, disappearing only when you reach 20% equity in your home.
Your equity will increase as you pay down your mortgage and if your home's market value increases. Reaching 20% equity, though, can take years, especially if you put down a small down payment when first taking out your loan.
VA loans don't charge private mortgage insurance. You won't, then, have to worry about building up equity to eliminate this fee.
The VA Loan Funding Fee
These benefits are impressive. But there is one negative that comes with VA loans: the funding fee that mortgage lenders charge when originating them.
The funding fee you pay depends on your down payment and whether you've ever taken out a VA loan before.
If you are taking out a VA loan for the first time and you aren’t putting up any down payment, the funding fee for 2020 is 2.3% of your loan amount. This fee actually increased in 2020, rising from 2.15% in 2019.
If you’re taking out a VA loan of $200,000 with no down payment, then, you’ll pay a funding fee of $4,600.
That fee rises if you’ve already taken out a VA loan in the past. The fee for subsequent VA loans, with no down payment, is 3.6% of the loan amount. For that same $200,000 loan, then, you'd pay a funding fee of $7,200.
You can reduce your funding fee by providing a down payment.
The VA funding fee for both first-time and subsequent VA loans falls to 1.65% of your loan amount in 2020 if you come up with a down payment of 5% of your home's purchase price. It drops to 1.4% if you provide a down payment of 10% of your home's price.
Borrowers can either pay the funding fee upfront when they take out their loan or they can roll this fee into their monthly payments. Doing that will increase your payment each month, but it also means you won’t have to come up with thousands of extra dollars when closing your mortgage.
Certain clients are exempt from the VA funding fee. You don’t have to pay it if you’re currently receiving VA disability, you’re an eligible surviving spouse or you received the Purple Heart and are serving in an active-duty capacity.
This funding fee might make a conventional mortgage a better choice for you, especially if you have enough money for a larger down payment.
The key is those down payment dollars. If you have enough of a down payment to avoid private mortgage insurance, a conventional loan might be more affordable.
In any case, you can talk to a Home Loan Expert about your options.
VA Loan Interest Rates
When you apply for a VA loan, your lender will look at such information as your three-digit FICO® Score, your monthly debts, your monthly income and the money in your bank accounts.
The better these numbers are, the more likely you are to qualify for a VA loan.
What numbers should you aim for? Lenders consider FICO® Scores of 740 or higher to be excellent.
They also prefer that your total monthly debts, including your estimated mortgage payment, equal no more than 43 percent of your gross monthly income, although you can qualify for a fixed-rate VA loan with a debt-to-income ratio as high as 60% and still get a fixed-rate loan. This is an advantage over other loan options.
As with all mortgage types, the higher your credit score, the more likely you are to qualify for a lower interest rate. The good news is that mortgage interest rates were quite low as of the early months of 2020.
According to the Freddie Mac Primary Mortgage Market Survey, as of this writing, the average interest rate on a 30-year, fixed-rate mortgage stood at 3.47%. The average rate on a 15-year fixed-rate mortgage was an even lower 2.97%.
If you’re looking for a mortgage and you’re a veteran or active-duty member of the U.S. military, it makes sense to investigate VA loans.
This loan, with its lack of private mortgage insurance and 0% down payment requirement, might be the perfect loan for you as you search for your dream home. You can check out your options by applying online with Rocket Mortgage®.
1Rocket Mortgage® and Rocket HQSM are separate operating subsidiaries of Rock Holdings Inc. Each company is a separate legal entity operated and managed through its own management and governance structure as required by its state of incorporation, and applicable legal and regulatory requirements.
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