VA Home Loans: Making the Best of a Great Situation

Once upon a time, in the days of compulsory US military service, thousands of new people were added to our country’s veteran roster each year. Nearly 50,000 men were drafted in 1972 alone. But nowadays, fewer than 10% of our population have served in the military. Less than 0.5% of US residents are currently serving. Our total living veteran population is about 19 million. But active service members and veterans still have access to some exceptional benefits. Chief among them is the VA home loan.

Since 1944, when the GI Bill first introduced the VA mortgage program, some 24 million vets have taken advantage of the unique opportunities offered by VA mortgages. And yet, many vets and active service members aren’t familiar with the details of the benefit. A 2018 survey found that a full third of active and former US service members had no idea VA loans were available—let alone that they offered so many advantages over conventional loans. Have you served in the military? Has your spouse? If you’re considering a home purchase or refinancing a home, you’d be remiss if you didn’t explore this exclusive benefit. Most home buyers are unlikely to find a better deal than a VA loan.

Why VA Loans?

First and foremost, VA loans put homeownership within reach of a wider population. That’s because, while they’re issued and administered through a wide range of lending institutions, all VA mortgages are federally guaranteed. Lenders consider them lower risk than other loans. That means that people with average or even below-average credit scores are more likely to be approved for a VA loan than a traditional loan. If you have a high debt-to-income ratio or you’ve fallen behind on your credit card payments in the past, you may be eligible for a VA loan, even if you’ve been turned down for a private mortgage in the past.

What’s more, vets and active-duty soldiers can often purchase a loan with no down payment. Military wages aren’t the most generous. In 2020, new service members earned as little as $19,000 per year, while the median salary in the US is nearly $50,000 per year. Particularly for people who are just starting out in their military careers, it can be tough to amass enough savings to match the down payment requirements associated with traditional loans. If you take out a private loan and put down less than 20% of your home purchase price, you’ll be required to pay for Private Mortgage Insurance (PMI) until you’ve established 20% equity in your home. That can add $100 or more to your monthly homeownership expenses. The government stipulates that VA loan borrowers don’t have to take out PMI. 

Finally, VA loan interest rates typically track below market averages. Again, that’s because lenders consider them less risky. What can that mean in savings for you? Here’s just one example. A 0.5% interest rate reduction on a $200,000 30-year mortgage can save you more than $19,000 in lifetime loan costs. And that’s before you factor in PMI payments. The more you borrow, the more you benefit from a low interest rate. The median purchase price of a US home in 2021 is over $400,000. So chances are, you could wind up saving more with a VA loan. 

Avoid The Most Common VA Loan Mistakes

As a home buyer, the most serious mistake you can make, of course, is not investigating VA mortgages before taking out a loan. You earned this important benefit with your service and you deserve to access it. In fact, you can access it again and again. There is no limit on the number of VA loans you can take out in your lifetime. So if you find you need to upsize or downsize your home or pull up stakes every couple of years—a common experience among active service members—you can take advantage of your VA loan benefit every time you buy a home.

For current homeowners who took out a traditional mortgage, not exploring the option of refinancing under the VA loan program can be another costly misstep. Even if you took out a VA loan a few years ago, it’s smart to look into refinancing right now because mortgage interest rates have reached a near-historic low right now. The VA makes it easy to refinance into a lower interest loan through its VA Interest Rate Reduction Loan (IRRRL) program.

How to Secure Your Best VA Loan Deal 

While VA loan interest rates can be substantially lower than traditional mortgage rates, lenders offer their best interest rates to the most qualified buyers. That’s true of any kind of loan. Before seeking a VA mortgage, do your best to make yourself as creditworthy as possible.

Lenders judge your creditworthiness largely on your credit score. Before you begin shopping for a  mortgage, download a free copy of your credit report and if your score is lower than 670, take a look at what you can do to bring it up. Bring all of your credit accounts up to date as a first measure, but understand that late payments will affect your score for quite a few months, or even years. You may be able to secure a lower interest rate if you keep your accounts current for a significant period before applying for a loan.

Some homebuyers have low credit scores simply because they haven’t amassed a long or varied enough credit history. If that’s the case, you can likely raise your score by a few points by judiciously applying for small amounts of credit, such as you might be offered by Amazon, a retail store in your neighborhood, or a traditional VISA card or Mastercard. Make small purchases and pay them off at the end of every billing cycle to establish the pattern of consistent debt repayment lenders look for.

Although the option of applying for a no-down payment loan is available through the VA program, you can also make yourself more creditworthy by putting down as large a down payment as you can afford. Lenders prefer when they’re not the only ones invested in your home.

Be a Smart Shopper

Even among VA lenders, mortgage rates vary. It pays to shop around. If you belong to a credit union, you might start your comparison shopping there. You may even want to join a credit union because, as not-for-profit institutions, they’re in business to serve their members and often offer lower interest rates than their commercial counterparts. If you have an established relationship with a bank, see what kind of deal you can get there. Banks want as much of your business as they can get. In addition, many online lenders source mortgages with multiple institutions and can be a great resource for researching the lowest rates. 

About the writer:  Susan Doktor is a journalist, business strategist, and principal at Branddoktor. She writes on a wide range of subjects, including personal finance, real estate, and government affairs. Follow her on Twitter @branddoktor.