Many people struggle to fulfill their dreams of home ownership because they can't afford the ideal 20% down payment. You can put less than 20% down, but if you do, you'll have to pay private mortgage insurance (PMI) on top of your regular monthly payment. This can make it more challenging to afford your home, especially because those who put less money down typically also have to pay more in interest over the lifetime of the loan.
Fortunately for active military members and veterans, there's a way to avoid all of this and get the home you want without all of the hassle. It's called a VA loan, and if you qualify, it's worth looking into. Here are some of the most important things you need to know.
Active-duty military members and military veterans are eligible for a VA loan after serving for six months. Spouses of military members who died in action or as a result of injuries sustained in battle can also qualify. National Guard members and reservists may qualify as well, though they must wait six years before they can apply unless they are called up to active duty.
These loans are backed by the VA, which has no minimum credit score to apply. However, that doesn't mean you'll be guaranteed acceptance. The VA is not a mortgage lender itself, so you will have to work with a lender that offers VA loans. The company may have its own minimum credit score that you must meet in order to qualify. If your score is under about 620, your application will most likely be denied. But if you have a credit score of at least 620 or above, you may be able to secure a VA loan at a more affordable rate than you'd get with a conventional mortgage.
Unlike other types of mortgages, VA loans don't require any money down when you make a purchase. And if you put less than 20% down, you aren't required to pay any PMI. This can save you thousands of dollars over the lifetime of your loan. Say you purchase a $200,000 home on a 30-year fixed-rate conventional mortgage with a 4.25% interest rate and 5% down. According to one PMI calculator, you'd end up paying around $65 extra per month until you reach 20% equity, which would take almost 10 years to reach. That amounts to over $7,000 in PMI when it's all said and done. That money would stay in your pocket if you had a VA loan.
In general, you should be wary about purchasing a home with little or no money down just because you can. With conventional mortgage loans, the less money you put down, the higher your interest rates will usually be. This can increase the cost of your monthly payments and may make it difficult for you to keep up with them. If you fall behind, you could lose your home. It's important to do the math and figure out how much you can reasonably afford to pay each month and how much you can spare for a down payment. Make sure the home you're looking at is well within this budget.
However, VA loans tend to have lower interest rates than traditional mortgages, which can also help you save money over the lifetime of your loan. Conventional 30-year fixed-rate mortgage rates are currently hovering around 4.7%, but it's possible to get a VA loan for around 4.4%. Even that three-tenths of a percent can make a big difference. If you're borrowing $200,000 (assuming there's no PMI), you'll pay a total of about $374,000 over 30 years at a 4.7% interest rate. But at 4.4%, you'd now only pay a total of about $360,000.
In exchange for these lower interest rates and the option to purchase a home without a down payment, you are required to pay a funding fee at closing. This fee is usually a small percentage of the cost of the loan, but the exact amount will vary depending on the amount you're putting down and what your military status is. If you don't put any money down, you may have to pay 2% or more of the home's value, whereas if you put 10% to 20% down, you may only have to pay 1% of the home's value. Active-duty servicemembers will usually end up paying less than other qualified borrowers.
Help when you need it
Ideally, you'll be able to keep up on your mortgage payments easily, but if you fall on hard times, the VA can assist you so your home doesn't go into foreclosure. They will negotiate with your lender on your behalf and may be able to get your loan modified or help come up with a payment plan that you and your lender can agree on.
However, this is only for extreme emergencies. If your payment is going to be a little late one month, you're much better off contacting the mortgage lender and notifying them directly rather than contacting the VA.
If you qualify for a VA home loan, it's probably going to be your best option. But there are still a lot of decisions to make. Set aside some time to do the math and figure out how much of a down payment you can afford and what kind of rates that will get you.