For a lot of military members and veterans, VA loans are the best way to get into the real estate game. And the VA is a big advantage for people with marginal credit. One of the great benefits of the VA loan program is its sweet spot, which is 100% loan to value. This translates to no down payment for the buyer, but you should know that there is more to this than meets the eye.
To explain, let's use the term par (like in golf) to describe the cost of the money to the lender. Anything above par, either in up front points or as a back end rate, is how the lender of the money for the home loan is paid. And buyers need to count on 2 points being buried in the deal somewhere. That normally means par plus 2. Some lenders take more and some take less, depending on the complexity and difficulty of the deal. So let's run a scenario to see how the VA Loan can actually works for you.
VA Loan Payment Example
Take a couple with a 650 FICO credit score -- a credit score that is not necessarily considered very good -- who are looking for 100% financing and a 30-year fixed mortgage.
What a VA Loan Might Look Like:
Getting a loan guaranteed by the VA would be developed based on a 5.875% interest rate (which equals par) + 2 points that will be equal to 100% of the amount of money required to buy the home. The whole amount will be put on one loan note, and no discount or origination points are due by the couple up front (i.e. zero down).
What a Conventional Loan Might Look Like:
The same couple have a conventional loan developed based on a 6.625% interest rate on a first trust plus the usual 2 points over prime. A second trust would be generated at 6.5 % with the 2 points added in would equal 8.5%. The second trust covers the last 20% of the loan and is the prime rate plus 2 because the couples FICO score is too low to get a better rate. Of critical importance is the fact that this package requires ? of a point discount to deliver 2 points to the lender for its payday. The couple would need to come to the settlement table with the usual and customary 3% closing costs plus $2,250 the buyer pays to get the lower rate from the lender.
If the couple in our example bought a house for $300,000 and hold it for ten years before selling it the VA loan will cost them zero dollars up front and $1,774.61 per month that includes principal and interest (no taxes or hazard insurance). Across ten years that payment schedule will total $212,953.59. The comparable conventional loan (or a non-VA loan product) would cost the couple $2,250 up front, $1,536.75 per month (principal and interest) for the first trust, and $425 per month interest but no principal on the second trust. At the end of the tenth year, the couple would have spent a total of $237,660 on their mortgages and ended up with about $4,361 less in equity because they did not pay down the principle on 20% of the loan.
VA Loan Rate Example Result:
The VA loan solution saves you $29,067.41 across ten years, or about $242 per month. As your FICO credit score goes lower the difference in costs would grow. If your FICO score is below 580, you are in jeopardy of not being able to attract a VA loan unless you were injured in combat and the injury resulted in the poor credit.
Visit the Military.com VA Loan vs. Conventional Loan Calculator to get personalized results.
Comparative Costs For a Couple With a Better FICO Score Rating:
If our couple had a credit score above 700, their first trust would be $39 cheaper per month. This would translate to a mortgage payment savings of $15,387, minus the points the couple would not need to pay for a net aggregate difference of $13,137 across 10 years ( $109 per month). What is important to note is that 20% of the deal that is wrapped up in a Home Equity Line of Credit and rides on the Prime Rate. When the Prime Rate increases so can your monthly payment. There are also interesting little privileges for the VA borrower such as having the seller pay several points to discount the loan even further. Also, keep track of your debt to income -- VA loans do not allow more than 41% monthly debt to income, which would include house costs of principal, interest, taxes and hazard insurance.
If you qualify for a VA loan, take the money and run. It's the best deal in town, even if you have a high FICO score. Work with the seller and make sure there is plenty of time for the appraisal. Have them pick up all the settlement costs, including a point or two in rate discount, and drive yourself a great bargain.
How can you make a lot of money? Hang onto the house when you move to the next one, making certain to keep the remarkably cheap mortgage. The local rental market is likely to allow the rent to cover the costs of the mortgage, taxes, insurance and maintenance. You will then be on your way to building your own House Ladder.
Fortunes are made when the returns on investment are high. When you pay nothing for a house that appreciates significantly, your return on investment should be extraordinary.
How do you get started using your VA Home Loan benefit to buy the home of your dreams and get started claiming your Big Rewards? Our VA Loan finder matches you with up to five rates from competing lenders, helping you get the best deal you can.