VA Loans: Why Are They So Powerful Today?

The VA home loan program has been around for seven decades. This long-cherished benefit has backed more than 24 million military mortgages since 1944.

But in many ways, it’s more important today than ever before.

Many lenders tightened their lending requirements after the housing market collapse. Access to credit is starting to loosen, but it’s still tough for many service members and veterans to secure a conventional mortgage.

That’s a big reason why the historic VA loan program is experiencing a resurgence. VA purchase loans have increased eight years in a row, with younger veterans and service members leading the way.

To be sure, VA loans aren’t automatically the best fit for every veteran. But they feature significant benefits that can make homeownership possible for those who might otherwise struggle to secure financing.

Here’s a look at four reasons VA loans are so powerful in today’s housing market.

1. Flexible requirements

VA borrowers don’t need a sky-high credit score to secure a mortgage. Lenders are generally looking for a credit score of about 620, which is considerably lower than what you’ll typically need for conventional financing.

VA lenders can also have flexible benchmarks when it comes to your debt-to-income (DTI) ratio, which looks at the relationship between your monthly income and major expenses. While the VA wants to see a DTI ratio of 41 percent or less, some lenders may allow a higher percentage for otherwise qualified borrowers.

VA borrowers can typically look to secure a new mortgage just two years removed from a foreclosure, short sale or bankruptcy.

2. No mortgage insurance

On top of that, all FHA borrowers and conventional buyers who can’t put down 20 percent are required to pay for mortgage insurance. That can add a couple of hundred dollars to your monthly mortgage payment.

Conventional borrowers can often get out from under their mortgage insurance once they’ve built up about 20 percent equity in the home. But FHA borrowers now pay their mortgage insurance for the duration of their mortgage term, which is often 30 years.

Despite the $0 down payment, VA loans don’t come with or require mortgage insurance. That’s a huge benefit that helps veterans stretch their buying power.

3. Rates and closing costs

Contrary to common misconception, interest rates on VA loans are competitive with conventional mortgage rates, if not consistently lower. That’s another potential cost-savings benefit for VA homebuyers. Lower rates can mean lower monthly payments.

The VA also limits what veterans pay in closing costs. In fact, VA borrowers are flat-out barred from paying some costs. Sellers can pay all of a buyer’s mortgage-related closing costs and up to 4 percent of the purchase price in concessions, which can cover things like prepaid property taxes and homeowners insurance.

There’s no guarantee a seller will pay some, all or any of your closing costs. But these protections and benefits help put VA borrowers in a great position to get the most from this increasingly powerful loan option.

4. Zero down payment 

Being able to purchase a home without making a down payment is a tremendous benefit for military borrowers.

Many homebuyers must spend years saving enough money to cover the usual minimum down payment for conventional (5 percent) or Federal Housing Administration (FHA) loans (3.5 percent). On a $300,000 purchase, you’re talking about a nest egg of $15,000 for conventional and $10,500 for FHA.

VA borrowers don’t need to come to the closing table with that kind of cash. That allows veterans and service members to get into homes sooner.

What Exactly Are VA Loans?

A VA mortgage loan (also known as a Veterans Administration home loan) is one of the most useful military benefits. If you qualify, you can buy or build a home, or refinance an existing home mortgage, with as little as $0 down, great rates, and financing up to $484,350 (2019 limit) – more if you live in certain high-cost areas like New York City.  Another benefit over traditional mortgages is that there is no PMI (Private Mortgage Insurance, the monthly insurance fee charged to protect the bank until you reach at least 20 percent equity).

For most service-members and veterans who qualify, a VA loan is one of their most valuable benefits and a no-brainer over other, traditional mortgage types. This section offers an in-depth explanation of the VA loan process, and instructions on how to submit an application.

VA Loan VS. Conventional Home Loans

VA loans are some of the only loans remaining that offer no down payment.  With conventional loans, the buyer is required to provide up to 20% down, which can often make it too difficult to purchase the right type of home for your family.  Since with a VA home loan there’s no private mortgage insurance this can save hundreds of dollars a month over conventional loans, depending on how much you borrow.  Because the VA loan is backed by the government, the rates are often much better than a conventional loan, which will save you a considerable amount of money over the life of your home loan.  Lastly, the VA home loan has a more lenient lending policy, allowing you to qualify for a VA loan when you might not meet all the requirements for a traditional loan.

VA Loan Basics

While VA Loans are issued by private lenders they are backed by the U.S. Department of Veterans Affairs, which is why they can be offered oftentimes with little to no down payment and no PMI.  Since 1944, the VA has helped over 22 million military men and women purchase homes using this type of mortgage program.

VA Loan Funding Fee

Nearly every VA loan comes with a VA Funding Fee.  This fee goes directly to the Department of Veterans Affairs and helps back the VA loans of the future.  Not everyone has to pay the fee, such as military men and women with a service-related disability.  Fees range from a little over 2% for first time VA loan recipients, to 3.3% for repeat home buyers.  The good news is you can roll this fee into your loan amount.  In addition, closing costs are less and often the seller can pay these costs, too.

VA Loan Limits

As of 2019, the VA allows for no down payment on loans up to $484,350.  This does not mean that’s all a veteran can qualify for, it means that’s the limit in most cities you can secure a mortgage with no down payment.  In cities that are more expensive to live in, that number rises. For example, in New York City the maximum you can qualify for with no down payment is over $726,000.

How Much Can I Qualify for on a VA Loan?

The amount you can qualify for varies depending on a number of factors. One of the biggest factors is your debt ratio.  It helps to determine the amount you can afford to pay each month.