What are the benefits of a VA loan?
A VA loan is a benefit for active military and eligible veterans to purchase a home with no down payment. The VA offers below market rates with no mortgage insurance. VA buyers with less than perfect credit, limited assets, and high debt ratios can still qualify for VA financing. If you are eligible for VA financing, it is likely the best program available to you.
We are a local lender serving veterans in Omaha, Papillion, La Vista, Bellevue and all of eastern Nebraska. If you would like to know if you qualify for VA financing we can help.
- Below market rates
- No mortgage insurance
- No down payment
- Lower closing cost
- High debt ratios allowed
- Low asset requirements
- Less than perfect credit allowed
- No loan limit as of 2020
- Multiple VA loans allowed
Below market rates
The VA loan is issued by private lenders and guaranteed by the Department of Veteran Affairs. That VA guarantee protects lenders from losses and allows them to provide rates below standard market rates. VA loan rates, depending on credit score and loan size, are typically .25% to .5% lower than traditional financing. These lower rates allow eligible buyers to qualify for “more house” than they would under a conventional or FHA loan.
The rate on VA is also less sensitive to credit score than conventional financing. Buyers will less than perfect credit can still get a great mortgage rate through VA financing.
No mortgage insurance
This is a huge benefit for VA financing. FHA loans have high monthly mortgage insurance for the life of the loan. Conventional financing will require mortgage insurance if a buyer is putting down less than 20%. However, VA loans do not require monthly mortgage insurance even with no money down on the loan. A VA buyer can purchase a home with no money down, get a great rate, and pay no monthly MI. Mortgage insurance is insurance for the lender against default by the borrower. It does not provide any benefit to the buyer so avoiding it is a huge plus.
No down payment
As has been mentioned earlier, VA does not require any money down to qualify. The VA loan is one of the only loan programs that does not require any down payment. VA also allows the seller to give up to 4% of the purchase price in credits. When you combine the 0% down loan with a 4% seller credit, many VA buyers can purchase a home with $0 money out of pocket. It is common to see VA buyers purchase their home with not one penny towards the purchase.
Lower closing cost
Closing cost on all loans, for the most part, are pretty much the same. However, VA loans do have restrictions on certain third party fees. The realtors transaction fee, recording fee, termite fee, and notary fee cannot be charged to the buyer. These fees must either be covered by the seller or waived. These fees can often add up to over $1000 in total cost so that can be a huge savings for the VA buyer.
High debt ratios allowed
For all mortgage loans, the lender will take the minimum payments showing on your credit report, add in your new house payment, and compare it to your gross income to get your ‘Total Debt Ratio’. This debt ratio is used to determine how much house you can afford to purchase. Each loan program has their debt ratio requirements and max debt ratios. Of the big three loan programs (conventional, FHA, VA), VA allows the highest maximum debt ratios. Unlike conventional and FHA, there is no set max debt ratio on VA. VA will review your “residual income” this is the income you have left over after all debts and factoring in child care and home maintenance expenses. In some cases, I have seen VA go as high as 80% ‘Total Debt Ratio’. For comparison, conventional is maxed out at 50% and FHA at 56.99%. If the residual income is there, VA will give eligible buyers a lot of flexibility on debt.
Low asset requirements
Earlier I went through how a buyer can get into a home without one penny out of pocket on VA financing. But I also want to touch on asset reserves for home financing. Many mortgage programs require reserve assets. These are liquid assets available after all cash needed at close. The purpose of asset reserves is to show that the buyer has the ability to save and that they have a cushion of funds available to make the payment if something happens to their income. How much reserves are required depends on the specific buyer’s credit, debt ratios, and down payment. The better other compensating factors look then usually the lower asset reserves required. The VA loan can require reserve assets for an approval, but, like on debt ratios, it is much more forgiving than other loan programs. Depending on the buyer’s application, it is possible to get into a home with no money out of pocket and no reserve assets verified.
Less than perfect credit allowed
The VA loan technically has no minimum credit score requirement. However, most lenders put their own score “overlay” on to VA rules. A lender can add their own restrictions and limits to any government loan program and most VA lenders are going to limit the credit to score to a minimum of 620. Like FHA, there are some lenders who will go down to 580 on credit score. My team and I recommend every buyer get their scores to at least 620 even if the lender is willing to go lower. The rate and fees are drastically effected with scores below 620.
However, at a 620 credit score a VA buyer can still get an excellent rate with no money down (and, with a seller credit, potentially no money out of pocket). The VA rate does increase as the credit scores move lower, but it is not as significant as more traditional financing.
No loan limit as of 2020
This is another area where VA loans are unique. All other government loan programs have loan limits. Conventional financing will not lender above $510,400 as of 2020 and FHA is limited to a loan of $331,760. If you are not VA eligible and need to go above these loan limits, you will have to look at private or jumbo financing.
Up until 01/01/2020, VA also had loan limits. While VA did not limit the loan to a specific amount, above a certain loan amount VA started to require down payments. That down payment would increase as the loan amount increased. As of January 1st 2020, VA no longer has any loan limit on 100% financing. If you are VA eligible, and have the income, you can purchase a million dollar home with nothing down (and potentially nothing out of pocket).
Multiple VA loans allowed
It is possible, in some cases, to have multiple VA loans out at the same time. The VA loan is limited to primary home purchases. You must live in the house as your primary residence at the time you purchase with VA financing. But if you have remaining eligibility, it is possible to move out of your current VA home, convert it to a rental or second home, and purchase a new home using VA financing.
Whether or not you can do this will depend on your VA eligibility. Every eligible VA buyer is issued a certain amount of VA eligibility that will be listed on their Certificate of Eligibility. Your VA loan will use up all or part of that eligibility. If you have some remaining after the purchase of your first VA home, you can use the rest to buy a second VA primary home. There are many factors that go into using VA eligibility for multiple homes so make sure to reach out to a local mortgage lender before making any purchase offers.
Do you have more questions about the VA loan in Omaha NE?
The VA loan is benefit provided to active military and eligible veterans. Because of the guarantee by the Department of Veteran Affairs, the VA loan program is one of the best available loan products on the market. If you are not sure about your VA eligibility, we can look that up for you. If you would like to know how much home you can afford with your VA loan we can run a free application. We are local and can sit down with you to go over everything.
The VA loan is an amazing program, but as you can see from this list it has some unique requirements and rules that are not as black and white as some other loan programs. The best thing to do is sit down with a loan officer early in the process.
Other useful links
- How to improve your credit
- The 20% down rule on conventional
- What is Escrow?
- How is income calculated?
- Why your assets matter
- Mortgage Calculator
- Is Credit Karma accurate?
- FHA vs Conventional, which is better?
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