What is a VA Loan?
A VA Loan or Veterans Affair Loan is a mortgage option made available at $0 down payment for qualified American Veterans, Service Member Personnel, reservists, and select surviving military spouses. Qualified lenders, usually private ones, issue the loan to borrowers. The United States Department of Veterans Affairs (VA) establishes the rules of qualification, provides guidelines and minimal requirements about mortgages to be offered, and guarantees the loan financially.
The U.S. Government first established VA Loan back in 1944. The program aims to benefit returning and active service members and their families purchase single–unit homes and some multi-unit properties, manufactured homes, condominiums, and in some instances, new constructions. The VA home loan program makes purchasing and refinancing of homes possible without paying any down payment amount or despite not having an excellent credit score.
Historical data shows that by mid-2018, VA had guaranteed and made at least 23 million VA loans possible. In the same reported year, 62.8% of Veterans, active on-duty military personnel, as well as their families, purchased new homes while the remaining 37.2% refinanced their mortgages. In 2016, however, the total loan amount released was split by 50-50 between the purchase of a new home and refinancing mortgages.
What’s the difference of a VA Loan from conventional ones?
Qualified military homebuyers can access a highly unique and very powerful mortgage loan program through different qualified lenders. But why VA loan? Here are a few points:
- Down payment. Conventional home loans typically require paying down payments that reach about 20% to 25% of the total loan amount. This, sometimes, hinders a lot of homebuyers from being able to own their dream house because paying such amount is simply out of their ability. VA Loan, on the other hand, offers a $0 down payment for qualified mortgagors.
- Private Mortgage Insurance. PMI is one of the requirements for borrowers to be able to finance home value of up to 80%, hence, adds up on one’s monthly expenses. As for VA Loans, private lenders do not require borrowers to purchase any Private Mortgage Insurance because the loan is government backed.
- Interest Rates. Without the government guaranteeing the loan, private lenders take on higher risks which result in higher interest rates. But with VA loans, lenders have higher flexibility and better safety that enables them to offer loans with more competitive rates.
- Conventional loans hold a more stringent qualification process because of high risks. But since the VA backs up borrowers, VA loans are less rigid in qualification standards which make it easier to attain.
How do VA Loans work?
While VA Loans were initiated by the U.S. government and re considered as a federal program, the VA nor any government office of the United States does not issue or originate any loans. Banks and other qualified private lenders do the processing and financing of the home loans and the Department of Veterans Affair serves as the guarantor. This guaranty is what gives lenders more protection against the risk of losing funds should a borrower defaults. It also provides incentives so mortgagees can provide better terms in the loan agreement.