Written by Isaac F. Davis

Where interest rates are concerned, the advantage goes to VA loans over most other types of loans. The reason is that VA borrowers with lower credit scores generally don’t experience interest rate hikes like conventional borrowers do.  For example, conventional borrowers with credit scores below 720 will most likely be charged a higher interest rate than borrowers with better credit.  What’s more, conventional loans often require twenty percent down in today’s market.  Bigger down payments and higher interest rates are typically the way conventional lenders offset risk.

VA-approved lenders are authorized to make VA loans.  And, a portion of each VA home loan is guaranteed by the U.S. Department of Veterans Affairs.  For this reason, VA-approved lenders take on less risk if a loan goes into default.  The federal government guaranty makes interest rate hikes and big down payments unnecessary.  That is why VA mortgages are typically synonymous with “zero down” mortgages. 

Of course, there are advantages to lower interest rate mortgages for the VA borrower.  Since credit score does not drive the interest rates of VA loans, VA borrowers typically can save thousands of dollars over time in monthly payments.  A good example would be a $250,000 loan. The savings with just one-half of a percentage interest rate reduction would be $77 per month or $924 per year.  The lifetime savings on one-half percent interest rate reduction on the same mortgage is a staggering $27,000!

Additionally, a lower interest rate enables a VA borrower to pay less monthly for a more expensive home while a conventional borrower makes higher monthly payments on a home of lesser value.     

The VA loan interest rate advantage is not the only benefit VA borrowers can get with less-than-perfect credit.  Remember, in this day and age, 20% down is the norm for a $250,000 conventional loan.  Therefore, a potential conventional borrower would have to present $50,000 cash in order to qualify.  A potential VA borrower, on the other hand, would need no money down for the same size loan. It’s the zero-down feature of VA loans that reportedly leads 90 percent of VA borrowers to the VA home loan program.

Now, there are even more benefits associated with VA loans than just lower interest rates and zero down payments. For instance, VA borrowers pay no private mortgage insurance (PMI).  PMI is a fee paid on conventional and other type mortgages when the borrower has less than 20% equity in the home being financed. 

When no PMI is necessary, the VA borrower can save money in monthly payments.  For example, on a $250,000 conventional loan, the average monthly PMI payment would be $191 or $2,292 per year. 

One final, but noteworthy, benefit a VA borrower will likely experience is more relaxed qualifying standards than with most other mortgage programs.   VA-approved lenders consider qualifying guidelines established by the VA when determining whether someone can get a VA loan.  For instance, debt-to-income ratios and residual income standards set by the VA are more lenient than those of conventional loans.  Residual income requirements for VA loans vary for each geographic region.  A VA-approved lender can determine what’s required for a specific area.

Many of VA-eligible borrowers will find that they receive better terms because they do not have interest rate and down payment penalties due to lower credit scores. For more information about the interest rate advantage associated with VA loans contact a VA mortgage professional.