Today’s low interest rates do not automatically cause the market to favor homebuyers. Lenders everywhere are tightening their credit and income requirements, which makes it more difficult for borrowers to get these near-record low interest rates on their loan. Even if buyers qualify, the down payment on conventional loans may soar as high as 20 percent and closing costs won’t be covered by the seller.
But for honorably-discharged veterans and qualifying active-duty military members, VA loans eliminate a number of these financial constraints common to conventional loans. Qualifying homebuyers won’t need to bring as much money to close a VA loan as they would on a conventional loan. Not only are VA loans one of the last no-money-down options, they’re loaded with benefits to make home buying easier for our nation’s heroes. Because the VA insures up to one-quarter of a loan’s amount, thus reducing lenders’ risk, lenders are likely to lower borrowers’ interest rates.
All loans fall into one of two categories: conforming and non-conforming. Two government-sponsored enterprises, Fannie Mae and Freddie Mac, issue guidelines. Loans that meet these guidelines are conforming and usually are loans valued up to $417,000. All loans with terms outside the GSE’s parameters are non-conforming, or jumbo, loans.
Homebuyers also have to decide whether they want a fixed rate mortgage or adjustable rate mortgage. VA and conventional loans come in both forms. Homebuyers need to know how long they plan to live in the home and how much money they expect to have during the life of the loan to figure out which type of rate is ideal. In addition to knowing these basic concepts, borrowers should know the difference between VA loans and conventional loans.
First of all, not every veteran qualifies for the Veterans Affairs Home Loan Guaranty program. Military members who served 90 days during war time or 181 during peace time and who spent 6 years in the National Guard or Reserves may be eligible, as may spouses of those killed in the line of duty. Members who served fewer than 90 days but were discharged because of a duty-related disability may be eligible.
Once members establish their eligibility, they can capitalize on the home loan program. Qualifying for a VA loan is far easier than getting a conventional one. In fact, about 80 percent of veterans who qualified for a VA loan could not get a conventional loan. The VA has no credit or income requirement for borrowers. However, VA-certified lenders expect to see a score of at least 620. That’s not much different than conventional loans where scores above 740 often land the most favorable terms, and anything below 620 tend to have interest rates.
-Borrowers with a history of bankruptcy can still qualify for VA loans. After chapter 13 and chapter 7 bankruptcy borrowers need to wait one year and two years after the date of discharge, respectively. Full explanations of the bankruptcy need to be provided. Proof of payments on chapter 13 bankruptcies and written approval from the court is necessary too. Compared to conventional loans that often require longer waiting periods post-discharge,
-On top of that, VA loans curb the initial financial headache for qualifying borrowers. Up to 6 percent of closing and concession costs may be covered by the seller. Conventional loans’ appraisal fees and origination costs add to the up-front costs, and require borrowers to empty their pockets when they close the deal. They might have the option to lump some of these costs into the mortgage, but that will likely inflate interest rates.
-Often, borrowers get lower interest rates with VA loans because of the VA’s insurance against the borrowers’ default. Active-duty military members have the added perk of caps on interest rates. To shrink monthly costs even further, VA loans do not have private monthly mortgage insurance fees. As long as borrowers put down 15 to 20 percent of a conventional loan, they won’t pay mortgage insurance. Otherwise, this cost adds up every month.
-When VA loan borrowers pre-pay, the will not get penalized. Most conventional financing deals include prepayment penalty clauses. The penalty is charged against the borrower who is trying to pay off the mortgage ahead of schedule. Agreeing to such a term with a prime lender may get the borrower a lower interest rate, or avoid this penalty clause altogether. Subprime lenders aren’t likely to let borrowers off so easy. Regardless, prepayment penalties disappear after the first three to five years of the loan’s life. Even so, lenders will usually accept prepayments of up to 20 percent of the balance in a year before levying the penalty.
-Processing a VA loan may take longer than finishing conventional financing. The latter gets done in about two to three weeks, while VA loans might take one or two months to process.
Of course, if you qualify it makes sense to apply for a VA loan. The VA loan program is designed to abet those who served our country and struggled to develop great credit and savings because of travel or other hardship. However, conventional financing has its place. Prospective homebuyers with stellar credit and enough savings for a hefty down payment may earn those unprecedented interest rates with a conventional loan.
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