There are several reasons why it can be a smart idea to consider applying for a VA mortgage loan instead of a conventional loan or other non-VA options.
Some of the most attractive perks of the VA loan benefit are simply not available for conventional mortgages, and other government-backed loans may not offer the same types of advantages for some buyers-especially those who have VA disability ratings or are eligible to receive compensation for service-connected disabilities.
No Down Payment Required For Most VA Loans
The no-money down option is a standard feature for VA mortgage loans. Borrowers are not required to make a down payment except under certain conditions related to creditworthiness.
Borrowers may be required to pay money up front in cases where the appraised value of the home is lower than the asking price. Thanks to the VA loan “escape clause”, a borrower is not required to purchase a home in such cases, but those who choose to do so cannot finance the difference between the appraised value and the sales price.
VA Loans: No Private Mortgage Insurance Required
Private mortgage insurance, or PMI for short, is generally required by conventional lenders when a borrower does not make a high enough down payment. In general you may find conventional lenders requiring PMI when the loan-to-value ratio is 80% or higher.
That means in order to avoid PMI on a conventional loan you may be required to make a down payment totally 20% of the adjusted value of the home (or more). Credit scores can also be a factor, depending on circumstances.
The FHA single family loan program, another government-backed loan similar in many ways to VA mortgages, does not require private mortgage insurance, but does require an up front mortgage insurance premium and an annual premium paid over either the lifetime of the loan or for 11 years, depending on factors including (but not limited to) the loan-to-value ratio, and the duration of the loan.
VA Loan Funding Fees
It’s true that VA home loans do include a VA loan funding fee, which is affected by the amount of down payment you choose to pay (if any), and whether you are a first time buyer or have used your VA home loan benefits before. The people who qualify for the lowest VA loan funding fee are first-time buyers who choose to put 10% down on the loan.
However, the VA loan funding fee is waived for all service members receiving or eligible to receive VA compensation for service-connected medical conditions or injuries. This waiver is NOT automatic and must be applied for. Those who wish to apply will be required to furnish a completed copy of VA Form 26-8937 which shows the exempt status of the borrower. Here’s a sample copy of VA Form 26-8937.
The VA loan funding fee waiver also applies to certain Purple Heart recipients who are still on active duty who furnish proof of the award before loan closing time.
Refinancing From Non-VA Loans To VA Mortgages
VA loans are not just for new purchases-if a borrower has a non-VA mortgage and wants to refinance into a VA mortgage loan, this option is available for financially qualified borrowers. Those who wish to refinance from non-VA to VA mortgages will need to find a participating VA lender willing to perform the transaction.
VA loans can be refinanced into lower mortgage payments and/or interest rates with a VA Interest Rate Reduction Refinance Loan, also known as the VA IRRRL. Ask a participating VA lender about the VA-to-VA IRRRL option.
Joe Wallace is a 13-year veteran of the United States Air Force and a former reporter for Air Force Television News.