If you've recently separated from military service, you may be excited at the prospect of putting down roots in a new location without the possibility of facing relocation orders within the next few months or few years. However, the rebound of the housing market in many areas has made it more difficult for some to make an initial home purchase, particularly those who don't have the traditional 20-percent down payment often necessary to get the best mortgage interest rates. As a military veteran, do you have any other options to keep your new mortgage payment affordable? Read on to learn more about the benefits of Veteran Administration (VA) loans to determine whether this is a good lending option for your situation.
What makes VA loans different from other types of loans?
VA loans, like their cousins, FHA and USDA loans, are a type of government-backed loan product that can make it easier for certain borrowers to obtain mortgages at competitive interest rates. While most traditional mortgages require the borrower to put down a percentage of the home's value as a down payment, VA loans have no minimum down-payment requirement—meaning you'll be able to obtain a mortgage of up to 100 percent of the appraised value of your new home. Because the federal government guarantees this loan, the lender is assured of payment regardless of whether the borrower pays it off or defaults eventually; for this reason, the lender is able to offer competitive loan rates and terms even in the absence of a down payment.
VA loans have several other unique qualities that can set them apart from other types of mortgages, even federally-backed ones like USDA and FHA mortgages. Those who have a VA loan are afforded some extra protections in the foreclosure process and may be given the opportunity to cure any delinquency by making extra payments rather than proceeding straight to the foreclosure and eviction process. In some cases, the VA may even pay this delinquency directly rather than allowing the lender to foreclose on the loan. VA loan holders also won't be required to purchase or pay for private mortgage insurance (PMI), as is required of many borrowers who don't put down much of a down payment. And finally, VA loan holders who run into a cash crunch or would like to make home improvements are able to refinance their loan (again up to 100 percent of the home's value) in a cash-out refinance.
How can you decide whether pursuing a VA loan is the right decision?
In many cases, there are multiple benefits and very few potential pitfalls of taking out a VA loan. These loans can be the boost many military families need to get themselves into a permanent home and end the renting cycle.
In some situations, it can make more sense to wait a year or more to save up the necessary down payment to get into the home of your dreams using a traditional mortgage. However, in areas where housing prices are rising more quickly than your ability to save, using a 0-percent down VA loan to get into a home can give you the financial leverage you need to upgrade to a larger or better-suited home at some point in the future. And because there is no pre-payment penalty on a VA loan, you're always free to pay the amount off early or even refinance into a non-VA loan if interest rates later drop. You may want to compare mortgage rates between a VA loan and a similar non-VA loan to determine how much more you'll end up paying in interest, but in most cases, you should find the right choice to be clear.