What it means
The VA does not usually lend the money. A bank or mortgage company makes the loan, and the government promises to repay a share of the lender's loss if the borrower defaults.
Because the lender carries less risk, it can accept smaller deposits and flexible credit standards. The best-known benefit is that many borrowers can buy a home with no down payment.
There is also no monthly mortgage insurance premium, which is a charge that most other low-deposit loans require. The savings on that premium can reduce the monthly payment noticeably compared with other loans with small deposits.
In place of mortgage insurance, most borrowers pay a one-off VA funding fee, a percentage of the loan amount. The percentage depends on factors such as the size of any down payment and whether the borrower has used the benefit before, and some people, for example those receiving disability compensation, are exempt.
The fee can be paid at closing or added to the loan. To qualify, a borrower needs a certificate of eligibility, which shows that service requirements have been met, and must satisfy the lender on income, credit and the property.
The home must generally be the borrower's main residence and meet VA standards for condition. Lenders set their own rates and charges, so it pays to compare several quotes.
The loan can also be used for purchase, refinancing and certain home improvements. There are limits on the guarantee, which affect how much can be borrowed without a down payment in some cases.
The details change over time, so buyers should check the current rules with the VA or a lender. For employers and financial advisers who work with veterans, the loan is a useful benefit to understand.
It can make home ownership possible for those who have not saved a deposit. It also shows how a government guarantee can lower the cost of credit for a target group.
In practice
Real-world examples.
Example
A recently retired service member wants to buy a $350,000 house but has little savings. A VA loan lets her buy with no down payment, and she adds the funding fee to the loan so she does not need cash at closing.
Example
A veteran who receives disability compensation is exempt from the funding fee. On a $300,000 loan, he avoids a charge that could otherwise run to several thousand dollars.
Example
A married couple, one of whom is a veteran, refinances their mortgage into a VA loan to lower their interest rate. They compare the lender's closing costs with the monthly savings to find the break-even point.
Formula
Calculation
Total loan = purchase price - down payment + funding fee financed
Suppose a veteran buys a $400,000 home with no down payment and the funding fee is 2% of the loan, an assumption for illustration since the real percentage depends on the borrower's circumstances. The fee is 400,000 x 0.02 = $8,000. If the fee is added to the loan, the total borrowed is 400,000 + 8,000 = $408,000. The veteran pays no monthly mortgage insurance, which on a conventional loan with a small deposit might otherwise add a few hundred dollars a month.Case study
Seen in the real world.
Harrowgate Mortgage Advisers is an illustrative, fictional firm that helps households compare home loans. One client, a veteran with $5,000 in savings, wants a $320,000 home and is unsure whether a conventional loan or a VA loan is better.
The adviser prepares a comparison. A conventional loan with a 5% deposit needs $16,000 in cash and adds monthly mortgage insurance, while the VA loan needs no deposit and no monthly insurance, but adds a funding fee that can be financed.
In this illustrative story the client chooses the VA loan. The adviser reminds him that a larger loan means more interest over time and that he can make extra payments if his income rises.
Watch out
Common mistakes.
- Believing the VA lends the money, when a private lender makes the loan and the VA guarantees part of it.
- Ignoring the funding fee, when it can add thousands of dollars to the amount borrowed unless the borrower is exempt.
- Assuming a VA loan can be used for any property, when it is generally for a main home that meets VA condition standards.
Questions
People also ask.
Who is eligible for a VA loan?
Eligible service members, veterans and certain surviving spouses, based on service requirements shown in a certificate of eligibility.
Does a VA loan need a down payment?
Often not, although a borrower may choose to make one to lower the funding fee and the monthly payment.
Can a VA loan be used more than once?
Yes, in many cases, although the funding fee may be higher for repeat use.
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