Using your VA loan benefit is a great way to purchase a home with no money down. This can mean earlier home ownership for military members, Veterans, and their families. The favorable loan terms that often come with VA loans can also help home buyers save a lot of money by providing lower interest rates and no PMI requirement.
No Down Payment Required
Saving up a down payment for a home purchase can take many years, delaying the ability for potential buyers to purchase a home. The VA loan helps by not requiring a down payment for those eligible. In high cost-of-living areas, using a VA loan to purchase a home may be the only way that a potential buyer can make the purchase. The chart below compares hypothetical home purchases using the VA loan or conventional financing.
Whether you are in the market for a home for $100,00 or $300,000, your down payment using the VA loan remains the same. This can make a big difference, particularly in areas with high home prices.
No Private Mortgage Insurance
Loans that require less than 20% of the purchase price as a down payment often require the borrower to pay Private Mortgage Insurance, or PMI, until they reach the 20% value. PMI provides insurance for the lender, should the borrower be unable to make their monthly payments.
Exact PMI payments will depend on your credit score and the amount of money that you are putting down. With the VA loan, you do not need to worry about or pay PMI, no matter how much you put down as a down payment.
Low Interest Rates
VA loans are guaranteed by the Department of Veterans Affairs, lowering the risk to financial institutions who lend money through the VA loan program. This means that they can often offer lower interest rates and more favorable terms for the buyer. Over the life of a 30-year loan, these savings can add up. The chart below shows how much a buyer can save by reducing the interest rate by just 0.5%.
|Home Purchase Price||3.75% interest||3.25% interest|
These savings are even more when the rate is lower.
No Payment for Paying Off Early
Some loans include a stipulation that any pre-payment triggers a penalty payment. Paying off a loan early can save the borrower money in interest but results in less overall payment to the lender, which is why so many include a pre-payment penalty in their loan terms.
The VA loan does not include a pre-payment penalty, making it a great option for those wanting to pay off their mortgage early.
Using Your BAH
When qualifying for a mortgage, Basic Allowance for Housing (BAH) counts as income. This benefit can be used to pay a mortgage, home expenses, or other lifestyle costs. BAH varies based on cost-of-living in your specific location, paygrade, and number of dependent family members.