Written by Kristine Wylie
It’s no doubt VA loans can save eligible borrowers money. Military members stand to save the most with these unique VA loan features:
- Zero Down Payment
- No PMI
- Seller-paid Closing Costs
- Interest Rate Advantage
Because VA home loans are backed by the federal government, the extra security of a down payment is not required. Let’s compare conventional and VA purchase loans to show just how much a veteran can save. Each borrower purchases a home for $250,000. Many conventional lenders recommend 20% down payment – that’s up to $50,000 cash upfront from the conventional borrower vs. $0 from the VA borrower.
Another great benefit of VA loans is no private mortgage insurance (PMI). This insurance premium is required with FHA and conventional mortgage programs if borrowers bring less than 20% down to the closing table. To illustrate the savings, let’s compare the same $250,000 house purchase. Assuming the conventional borrower puts $25,000 down for a 30-year loan of $225,000 at 4%, the estimated mortgage premium is $101. This premium must be paid monthly for 5 ¾ years until 80% loan-to-value is achieved. That’s a total of $6,868 from the conventional borrower vs. $0 from the VA borrower.
With VA loans, the seller can pay up to 4% of the buyer’s closing costs and concessions. This can include the buyer’s VA funding fee, property tax and insurance prepayments, selling incentives such as appliance packages, interest rate reduction points, and payoffs of judgments and other debts. Conventional loans only allow for 3% seller-paid closing costs.
In conventional lending someone with a credit score of 650 might qualify but may be considered higher risk than someone with a score of 720. The borrower with the lower credit score may be given a “high-risk” interest rate. According to VA guidelines, no minimum credit score is required for qualifying. VA lenders often set their own minimums, usually lower than that of conventional qualifying. And, VA borrowers typically receive one low interest rate as long as they qualify. This is known as the interest rate advantage. A veteran with a 4% interest rate on a $250,000 30-year fixed rate loan can save $73 per month and a whopping $26,343 over time vs. a conventional borrower with the same loan at 4.5% interest.
Finally, VA Streamline refinances are a quick and easy way for eligible borrowers to get a lower interest rate on an existing VA loan. Little or no interest and credit re-qualifying is required. And, the VA funding fee is just .5% for all Streamline loans. Many conventional lenders no longer offer Streamline refinancing.
For more ways to save with VA loans, contact a specialized lender.
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