Ask any veteran how many places they have lived and they’ll probably start naming off numerous cities, states, and even countries. Few people move as many times as active military, and finding a new home in a new location with each change of a military base can be difficult, especially for those with growing families. Luckily, the Veterans Affairs office offers veterans and active duty military an excellent opportunity to take advantage of low VA home loan rates.
Those who are not active duty, or a veteran of any division of the military, have to pay for what is known as “private loan insurance,” or a small annual or monthly premium that insures the bank against loss should the borrower default on his or her loan. Ordinarily, escaping private mortgage insurance means that the borrower has to put up 20% of the purchase price as a down payment, which, in many markets, is far too much for most middle class families to afford.
Veterans, however, are rewarded with special treatment from the US Department of Veterans Affairs. The office provides its own money to insure the loan against loss; meaning that it is the Federal Government, not the borrower (through a down payment) or the private insurance company (through PMI insurance) that is on the hook for making good on any unpaid mortgages, or repossessed property.
In exchange for their service in the US Military, veterans can seek a VA loan which allows them to borrow as much as 103.15% of the total purchase price of their home, far more than a civilian borrower could expect to finance. Second mortgages are also offered for as much as 20% of the home’s value after the homeowner has built up significant equity to enable them to borrow from their house a second time.
A VA loan isn’t entirely free, though. Veterans must be willing to pay anywhere from 0-3.15% of the mortgage amount directly to the VA, which can be added to the loan, or financed in other methods, to cover the cost of the VA’s insurance. Even at 3.15% of the home value, this amount is significantly lower than private mortgage insurance, and borrowers with good credit may find that they pay nothing for the VA to insure their new mortgage—a win, win situation.
To purchase a home, active duty military would pay a funding fee of 2.15% if they put nothing down, 1.5% if they put down an amount between 5% and 10%, and 1.25% if they put down 10% or more.
This funding fee, which can stress new, cash-poor borrowers, is covered easily by the VA’s flexibility in allowing home sellers to price the cost of closing the sale into the home if these costs do not exceed more than 6% of the home’s value. Thus, if a borrower did not have the cash on hand to pay out of pocket for thousands of dollars of closing costs, the seller can offer to pay them for the borrower, and can price this into the home. It isn’t uncommon for VA deals to be agreed in two parts; either the borrower offers $x or $x plus closing costs for the home. Sellers find that paying the selling costs isn’t much of a big deal, as they get it back in a larger lump sum for their home, and veterans secure a new home without paying out of pocket.
How Much Can Veterans Borrow?
VA home loans have a cap, much like any other residential home loan that is insured by the FHA. This cap, which rests at $417,000 in most middle-class, middle-American markets, can rise as high as $1.1 million in higher-priced locales. This cap is only for homes which are financed without a down payment, so in putting down a small amount of money toward their home purchase, veterans can exceed this cap upon approval of the VA office.
Acceptance and Rates
Getting accepted for a VA loan is easier than other types of home mortgages. For one, the VA looks only at your credit score as a guide, and instead evaluates your history in paying back your debts, and your current “debt-to-income” ratio.
The lender, on the other hand, usually requires that you have some credit history, and preference is given to borrowers who cross the 620 threshold in their FICO credit scores. Rates vary based on your credit score; however, borrowers with 650+ credit scores should earn rates as low as 2-3% over the prime rate. The prime rate is the rate at which banks lend to other banks, and it can be found either by calling the bank, or by looking in a financial publication such as the Wall Street Journal. The rate fluctuates daily based on market activity.