6 Reasons the VA Loan Blows Other Loans Away!
And Tips on How to Use it…
By Jed Bratt | March 7, 2016
In this awesome article, I’m going to share with you 6 reasons why the VA Loan Blows away other loans such as Conventional and FHA Loans! Be sure to read it to the end for many other home-buying resources!
For years past, there seems to have been a stigma against VA loans in Real Estate, and for the life of me, I don’t get how it still exists!!
As an 8 year Navy Veteran, Real Estate Broker and Real Estate Investor, I have personally used the VA Loan multiple times, and have represented dozens of Active-Duty and Veteran buyers in successful home purchases using the VA Loan. I have also personally obtained FHA and Convetional Loans multiple times for purchasing properties, so I believe I have the personal and professional experience to draw a sound conclusion when comparing these loan products.
VA Loans were originally part of the original GI Bill passed in 1944 to assist those who served our country by allowing them a straight-forward shot at owning a home. Fast-forward to today and the VA Loan is regarded by many to be the best loan product available to our Active-Duty and Honorable Prior-Service military (if you’ve earned it by service to our country).
Note: If you’re unsure about your VA Loan eligibility, you can view the VA requirements here.
Let’s get started!
#1. No down payment required (yes—this means as little as $0 to buy a house)
This is the most significant aspect of the VA Loan program to to most VA home buyers! This allows VA borrowers to STOP throwing their money away on RENT and instead—OWN their home—with no money down!
Let’s say for example that the average home on the market is selling for around $500,000. Let’s compare the out-of-pocket money costs due at Close of Escrow (“COE”) for these 3 types of loan programs:
Herein lies one of the biggest advantages to the VA Loan: while the average homebuyer must set aside money over many years to save enough for a large down payment (and therefore possibly missing out on any opportunities along the way), the VA Loan allows Veterans and Active-Duty Service-members to purchase a home—for NOTHING down.
Note: Even if a VA Borrower DID have $100k sitting around for a down-payment, that’s still a large chunk of change to part with! The option of holding onto liquid [cash] assets rather than placing them into a long-term non-liquid asset such as a house is valuable in and of itself. This allows you to purchase a home without the major opportunity cost of giving up your savings, should an investment opportunity present itself!
This is big, but there’s more…
#2. No Private Mortgage Insurance (“PMI”)
Ok, so I said #1 was the best part, but this is pretty awesome too. With nearly any other loan program, if you have anything less than 20% down on a property, you’ll have what’s called “Private Mortgage Insurance” which is pretty much mandatory insurance to protect the lender in case you default on the property.
Note: Private Mortgage Insurance is for the sole benefit of the lender and the guarantor of the loan program (for example, the VA for the VA Loan, and the FHA for the FHA Loan) and does not benefit you the borrower in any way, other than that its existence allows for riskier loans to be made available (lower down payment loans; less-than-prime credit score loans, etc).
With a VA Loan, there is NO Private Mortgage Insurance!! This not only saves you hundreds to thousands of dollars annually compared to a loan with PMI, but it also allows for you to be approved for a larger loan than you would with PMI premiums, considering your Debt-to-Income (“DTI”) ratio won’t have any PMI dragging it down!
Now there is a VA Funding Fee* of 2.15% of the purchase price for first-time VA Loan borrowers, and 3.3% for subsequent loans. One great thing about this fee however is that it does NOT have to be paid out-of-pocket and may be added to the loan balance—making this a truly ZERO-DOWN program to purchase a home.
The purpose of this one-time funding fee is to minimize the risk for the VA which guarantees the loan and allows for the program to continue.
*NOTE: If you are a Veteran receiving compensation for a service-connected disability rating, you are EXEMPT from the VA Funding Fee!
Let’s say for example that you were to buy a property for $500,000 with an FHA Loan and you placed down the required 3.5% ($17,500) as your down payment. For the life of this loan (until you sell the home, refinance or pay it off), you would owe a monthly PMI payment starting at $348/month ON TOP of your regular mortgage payment.
Note: This is an estimate only and may be higher or lower depending on the specific loan scenario. This payment amount would also go down through the years, considering it is 0.85% annually of the remaining balance on the loan.
When obtaining the loan, you would also be required to pay the required “up-front PMI” of 1.75% of the base loan amount, which may typically be simply added onto the loan balance.
For example, the base loan balance on this loan would be $482,500 ($500,000 – $17,500). The up-front PMI of 1.75% of $482,500 would be $8,444.
See below comparison chart to see the differences between these 3 hypothetical loans.
Now, some lenders will claim to have “low down payment programs” with no PMI, but you can be sure they are charging you more one way or another. For many conventional low down payment programs, they offer this by increasing the interest rate significantly from what you would typically be paying. This doesn’t mean it’s a bad deal, but it certainly has its down-falls compared with the VA Loan.
#3. LOW interest rates
As mentioned above, most other low/no money down loan programs come with a caveat PMI and/or higher interest rates. The awesome thing about the VA Loan is that—historically—VA Loan rates typically beat out FHA and Conventional Loan rates!
Interest rates are a big deal for anyone wanting to stretch their dollar, especially when keeping your home for a long period of time. For example, see the table below to compare monthly payments at different fixed interest rates.
As you can see from the table above, a rate that is even just 1% lower can save you hundreds of dollars per month! This is a major benefit to Veterans using the VA Loan.
Please note that interest rates vary from day-to-day, so what’s considered normal today may be unheard of in five years. Once you lock in a 15 or 30 year fixed rate however, your payment is set, so you don’t have to worry about fluctuations in the market.
#4. Greater flexibility with credit and income requirements
When comparing the VA Loan to most Conventional Loan programs, you will often find that the VA guidelines offer greater flexibility for borrowers with some bumps and bruises on their credit or those that are pushing the typical Debt-to-Income thresholds.
Although hypothetically speaking a borrower with a 580 FICO score could get approved for a VA Loan under the right circumstances, the ideal minimum is 620 (which is still pretty darn flexible!).
#5. Use it for a detached house, a condo, or even a 2-4 unit INCOME property!!
This is one of my personal favorite advantages of this program. While you can obtain an FHA or Conventional Loan for 2-4 units, only with the VA Loan can you use leverage to the MAX by purchasing multiple units for NO MONEY DOWN!With an FHA or Conventional Loan, your down-payment will go up proportionally to your purchase price. With the VA Loan however, so long as you stay below your County’s VA Loan Limit (find out your County VA Loan Limit HERE) then you can purchase up to a FOUR unit property with your VA Loan! This means you could—in theory—purchase a four-unit property (so long as you live in ONE of the units for at least 12 months) and rent the other three units out and use the rent money to pay for your mortgage!
So, when you’re picking your neighborhood and search for homes, remember that you have options with the VA Loan, so make sure you’re picking the one that makes most sense to you!
Side story: My very first VA Loan purchase (see picture) was while I was in the Navy, stationed on a ship in San Diego, and it was to purchase a duplex (2-unit) near San Diego State University. After some minor (and a few major) improvements and some elbow grease invested in the spare time I had, I was living in the bottom unit and renting the second unit to college students for MORE than my entire mortgage payment (and under market rent)! It wasn’t the prettiest property, but it got me more excited than ever about Real Estate!
[Using the VA Loan for multi-family income properties] can be a very profitable move when executed correctly! We’ve helped several of our VA Loan clients purchase 2-4 unit CASH-FLOW properties with their VA Loan and the general consensus is that it was the best investment they ever made!
Note: For condos/town houses with condominium ownership (shared interest in common areas), the complex must be on the VA Approved Condos list within the VA Website Portal. This does not apply to PUDs (Planned Unit Developments), however. In most cities, there are plenty of approved complexes to choose from, but it is something to keep in mind when searching for a home. A similar list applies to FHA-eligible complexes as well. The search in the VA Website Portal can be confusing and difficult to use. If you’re a VA Buyer and you can’t find a certain complex in the portal, don’t give up! Give us a call and we’ll be happy to help! (619) 537-6016
#6. Use it for LIFE!
Get this—you can use the VA Loan over and over again—so long as you sell/pay-off your previous VA Loan under good standing. Sure, there are other loan programs promising low down payments, no PMI etc. As we discussed above, many of these have other costs associated with them in one form or another—whether it is PMI or high interest rates.
While these programs may come and go and change through the years (example: FHA recently changed the PMI to stick with the loan for life, while previously it was only 5 years), the VA Loan has pretty much only gotten better for our Servicemen and Servicewomen through the years.
Note: Contrary to popular belief, it is even possible to obtain a SECOND VA Loan (while keeping your first)! This is called a “Second-tier Entitlement” and under certain circumstances, allows a service member to obtain a full or partial entitlement on a second property, provided the circumstances meet the VA criteria! (see HERE for some examples of obtaining a SECOND VA Loan while keeping the first).
So to put it all together: If you have earned the benefit of the VA Loan, with it, you can buy a property for no money down with no PMI and a lower interest rate than most other loan programs—even use it for an INCOME-generating property—and use it again and again for years to come.
But wait, there’s more!
More Resources for USING your VA Loan to Buy a Home
If you’re Active Duty military or a Veteran, THANK YOU for your service to our great country. The VA Loan is a hard-earned reward and you deserve to know about the benefits it provides to you. Here you will find a video library for home buyers where you will learn about the first and most important first steps to take when buying a home.
One of the first things you’ll most likely want to do after getting pre-approved is begin searching the MLS for homes for sale (no, not Zillow or Trulia—a search that’s directly syndicated to the Multiple Listing System), which you can do for free here!
When picking your neighborhood, there are some helpful tools and tips we use all the time and think you will find valuable. You can find those some of those free tools here.
Also, there’s a chance you may have heard about a “VA Home Inspection” that happens when buying a home. This video clears that up for you, while this video explains what the home inspection actually is.
For more information on the VA Loan or about buying or selling real estate in Southern California, check out our site!