The home loan program administered by the U.S. Department of Veterans Affairs is a critical benefit for veterans and members of the military. However, don’t assume that you will automatically be offered the lowest mortgage rate just because you qualify for the program. Getting the best deal on your VA loan involves doing your due diligence and learning how to navigate the system.
For purchase loans, the VA program offers favorable terms such as no down payment and no private mortgage insurance (PMI) to those who qualify, but the loans themselves are still issued through private financial institutions, just like any other mortgage. While it’s true that VA loan rates are generally lower than conventional mortgages, the actual amount a borrower pays is affected by market conditions and creditworthiness.
With this in mind, here are some tips to ensure you get the most out of your lead.
1. Understand the types of VA loans
The Department of Veterans Affairs offers home purchase and refinance loans to those who meet the service requirements and have a Certificate of Eligibility (COE).
Like other mortgages, the VA loan rate will depend on the specifics of the loan, including the term and whether it is a fixed or adjustable rate mortgage.
If you choose to pay off your mortgage over a short period, with a 10- or 15-year mortgage, these terms often have a lower interest rate and overall cost. However, short-term loans have higher monthly payments.
Meanwhile, a traditional 30-year loan will have lower monthly payments, but the overall cost and interest rate will be higher because the bank will take on more risk.
Like other home loan programs, refinance rates for VA loans generally tend to be slightly higher than purchase loans.
There are two main options in the VA loan program. An Interest Rate Reduction Refinance Loan (IRRRL) is a streamline refinance that can be used to get a lower interest rate on a VA loan if the mortgage landscape changes.
The other type is a cash-out refinance, which allows you to borrow against the equity in your home and use the money to achieve other financial goals. A cash-out refinance replaces your current VA loan with a new term and rate.
Finally, the VA has many other mortgage-related programs that may be of interest to veterans. Be sure to ask your lender about rates on the following items if you are interested and think you qualify:
- Energy Efficiency Mortgage: Allows qualified borrowers to roll the cost of acceptable home energy improvements into their VA loan.
- Native American Direct Loan: If you are a veteran and you or your spouse is Native American, you can get this low-interest loan to buy, build or improve a home on federal trust land.
- VA Construction Loan: Borrowers can use this type of loan to obtain favorable terms and competitive interest rates to finance home construction or renovations.
2. Reduce your debt-to-income ratio
To calculate your VA loan rate, lenders will take a holistic look at your monthly expenses to determine your ability to repay a mortgage.
VA loans have lower interest rates than conventional loans, but your credit is still important.
Lenders look closely at your debt-to-income ratio (DTI), which is your total debt divided by your gross income. This generally includes major installment debts like mortgages, student loans, credit card debt, and auto loans pulled from your credit report.
As a general rule, the VA recommends a debt-to-income ratio of 41% or less, including your mortgage. However, lenders set their own maximum and may be willing to accept a higher debt-to-income ratio in exchange for a higher interest rate. They may also have some guidelines in terms of credit scores that they are willing to accept.
Reducing your debt-to-income ratio falls into the category of something that’s easy to say, but harder to accomplish: You may have to stick to a strict budget for a long period of time to make enough of a dent in your debts. As always, start by paying off high-interest debts, like credit cards.
3. Determine whether you should make a down payment
Fully eligible borrowers do not have to provide a down payment on VA loans, which is a major benefit. (VA entitlement refers to the U.S. Department of Veterans Affairs that guarantees your loan. Your certificate of eligibility will show whether you have full entitlement, which is the maximum guarantee, or just the “residual entitlement.”)
In the event of default, the VA provides a federal guarantee that will reimburse the lender – 25% of the full loan amount for those who are fully eligible. This reduces risk for lenders, allowing them to offer loans with no down payments.
However, there are several circumstances in which a VA loan borrower without full eligibility would be required to make a down payment; for example, if the cost of a house exceeds the loan limit. Veterans can read the down payment requirements for “residual entitlement” on the VA website.
Even if it is not required by the lender, a down payment can be a vital help in getting the property and loan terms you want. It can lower your interest rate because a down payment is a signal to the lender of financial strength and means you will have equity or be closer to having equity. Making a down payment can also help you stand out from home sellers in a competitive market by making it clear that you mean business.
Finally, making a down payment can reduce your VA financing fee. VA-backed loans require first-time homebuyers to pay a financing fee of between 1.25% and 2.15%. If you are purchasing a home for the second time, the VA financing fee could be as high as 3.30% of the loan amount. With a larger down payment, you will pay a lower financing fee.
4. Consider applying for state loan programs for veterans
In addition to available federal assistance, eligible veterans may also be able to take advantage of special homebuying assistance programs in their state. These programs may provide rate discounts, down payments, or closing cost assistance.
One example, Florida’s Salute Our Soldiers military loan program, offers qualified veterans or active military members 30-year fixed-rate mortgages that are below market rate. The program also offers several down payment options or closing cost assistance worth up to $10,000.
Most states and counties provide similar state-run veteran home loan programs to help eligible VA borrowers purchase a home at an affordable rate.
5. Compare lender rates before settling on a VA home loan
A mortgage is one of the most expensive financial commitments you will make in your life. Therefore, it is important to compare VA lenders and consider all options to get the best deal.
Before you start shopping for rates, you should know the type of loan and term you want. You should also know the loan amount, the type of rate (fixed or variable) you prefer, and whether you will offer a down payment.
The next step is to contact several lenders you are considering and request a loan quote. For a mortgage loan, requesting a pre-approval letter from three or more lenders will give you a realistic idea of what a lender is willing to give you based on a thorough credit check.
Pre-approval letters are typically good for 30 to 60 days and include information regarding the type of loan, purchase price, qualifying interest rate, and loan amount you would get. Please note that interest rates may change after pre-approval unless you lock in the rate.
When you shop for a mortgage, multiple credit inquiries within 14 to 45 days will be reported as a single credit check on your credit report.
To narrow your search, be sure to take into consideration estimated upfront costs, including origination fees and closing costs, as well as interest rate, loan terms and lender eligibility requirements.