VA loans were created seven decades ago to help veterans and military families get a foothold in the housing market. Today, this historic benefit program is making a difference for a new generation of military homebuyers.
VA loan volume has skyrocketed since the housing crisis. Three of the last five years have set new records for this $0 down loan program, and last year’s more than 700,000 loan guarantees were double the agency’s volume five years ago.
Tight credit and flat-lining income growth have helped fuel the surge in VA lending. A decade after the housing crisis, conventional financing is still a challenge for many veterans and military homebuyers.
VA loans help veterans secure home financing by offering features that make it easier to qualify. Let’s look at three big ways VA loans continue to fulfill their original mission of boosting access to homeownership.
Flexible credit guidelines
Many VA lenders only require a 620 mid-FICO score, making a VA mortgage one of the most inclusive home loans on the market today. Conventional products often require a 660 or higher. Even FHA buyers need at least a 640 to qualify with some lenders.
No matter what kind of mortgage you get, there are doubtless advantages to excellent credit scores—prime interest rates and reduced document requirements might be offered to buyers with scores north of the 720 mark. But, according to Ellie Mae, the average VA homebuyer falls short of “Excellent,” consistently clocking an average FICO score just over 700.
In addition to its flexible credit guidelines, the VA loan program is more forgiving when it comes to credit crises like bankruptcy, foreclosure and short sales. Depending on personal circumstances, some VA buyers may even be able to purchase immediately after a short sale.
$0 down payment
Misconceptions about down payments are an unfortunate but common barrier to homeownership. According the 2016 National Association of Realtors annual survey, 39 percent of aspiring homeowners think they need more than 20 percent down to buy a home. Far fewer have the means to afford it.
For military families, frequent moves and unexpected deployments make it harder to save for a large down payment. The VA home loan provides a solution. Eligible veterans can avoid a down payment entirely by utilizing their home loan benefit.
The $0 down advantage extends beyond starter homes. VA buyers can apply for 100 percent financing up to $424,100 in most parts of the country, with zero-down buying power even higher in more expensive housing markets.
No mortgage insurance
VA loans tend to win big in a side-by-side monthly payment comparison with other loan products. The reason? Mortgage insurance.
FHA buyers have to pay a monthly mortgage insurance premium for the life of their loan. To purchase a $250,000 home with the required 3.5 percent ($8,750) down payment, that’s an extra $174 a month for 30 years, regardless of equity.
Conventional buyers who put down less than 20 percent will pay monthly private mortgage insurance (PMI) as well, but these payments fall off once their mortgage shrinks to less than 80 percent of the home’s value.
The VA loan guarantees that lenders can recover 25 percent of the loan amount in the event of a default, meaning lower risk for them and no mortgage insurance for VA homebuyers.
There’s no “best loan product” out there—it varies based on individual needs and financial circumstances. But for eligible veterans and active duty homebuyers, the VA loan is certainly worth serious consideration. An experienced VA lender can help assess specific scenarios to find the best fit.
About the Author Chris Birk is the nation’s leading expert on VA Loan benefits. He authored The Book on VA Loans in 2011, and maintains the VA Loans Insider blog.