Many homebuyers are looking for affordable mortgage options, which may steer them to specific products. But if you're a military veteran, you have another option -- a Veterans Affairs (VA) mortgage. VA mortgages are some of the most powerful and affordable options on the market, if you can qualify.
What is a VA mortgage?
A VA mortgage is a home mortgage loan backed by the U.S. Department of Veterans Affairs. Much like an FHA loan, the government insures a portion of the loan so that you can get a better rate and lower down payment from the bank. It reduces the risk the bank has to accept, and it gives you a lot better terms than you might otherwise qualify for if you hadn't served in the military.
A VA mortgage can be used on any home that meets the conforming loan limit set for that year. Your certificate of eligibility (COE) acts as your down payment. If you've never used it before, or you paid your last mortgage in full before closing on your new home (even if it's a back-to-back closing), you'll be eligible for a zero-dollar down payment for any home you qualify for.
Benefits of a VA mortgage
VA mortgages are one of the exceptional benefits that service members receive. Benefits include:
- Zero-dollar down payments. Your service was your down payment, so instead of paying out of pocket if your COE hasn't been used, you'll simply substitute the COE for your down payment. It's a really great deal for a lot of homebuyers.
- No mortgage insurance. VA loans don't have mortgage insurance, though they do have up-front funding fees that can be rolled into the loan. You won't have a monthly mortgage insurance premium, despite having used your COE in place of a down payment.
- Lower than market interest rates. Often (though not always), VA mortgages are made at interest rates below the market price. This pricing is due to the lower risk involved in lending to a military member, plus the lower risk that comes from the government's involvement in the loan.
- Surviving spousal benefits. In some cases, surviving military spouses can use these benefits, even if they didn't serve in the military. Spouses who qualify for Dependency and Indemnity Compensation (DIC) or whose spouses are missing in action (MIA) or being held as prisoners of war (POWs) should contact a VA lender to find out how to get the ball rolling.
Drawbacks of a VA mortgage
VA mortgages have very few drawbacks, but there are a few things to consider:
- You must occupy the home while using a VA mortgage. Unlike some other types of mortgages that you can continue to use while you're renting a home or allowing someone else to live there, a VA mortgage is for you and your family. If you're not living there anymore, you may have to refinance.
- Not all military members will qualify. You must be a military member to get a COE, but not every member will qualify. If you weren't honorably discharged, didn't serve for enough time (based on your dates of service), or aren't the qualifying spouse of someone who met the requirements, you may not get a COE.
- COEs can be used again, but it can be complicated. To reuse your COE, you'll have to meet very specific criteria. It's easiest to do if you simply sell your home with the VA loan and pay the loan in full before buying the new home. (This can be done in a back-to-back closing if your banker is aware of the situation.) However, if you wanted to keep that house for some reason, or sell it with an assumable loan, things can become very complicated, and the math gets weird. This is where you need professional advice.
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Who are VA mortgages good for?
VA mortgages are great for former members of the military and their qualifying spouses, especially if they were career military or active duty for a significant amount of time. These loans help veterans get on the property ladder by essentially providing a down payment on their behalf that they never have to repay, with a competitive interest rate and no mortgage insurance.
If you want to flip homes or plan to move from home to home quickly, a VA mortgage might be the wrong call, simply because they're not really designed for that. Getting a certificate of eligibility can take time, and restoring your eligibility under those circumstances can also be a grind. But if you simply want a home of your own and plan to stay there a while, VA mortgages cannot be beat.
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