By Jay Motes
A VA loan is a mortgage loan product offered to current and former members of the military. The Department of Veteran's Affairs provides insurance to the lender of a portion of the loan amount. This backing reduces the risk to the mortgage lender, which can improve the loan terms offered to the borrower. Buyers should understand how VA loans vary from other mortgage loans and determine for themselves whether or not using a VA loan is a good idea for their situation.Typically, interest rates for VA loans will be less than the interest rates for other mortgage loans. Though the difference in the interest rate might not be great, the cost savings over the course of the loan can be substantial. In addition, lending guidelines for VA loans are more lenient than for conventional mortgages. Traditionally, borrowers with less-than-perfect credit pay higher interest rates for mortgage products. But the easier-to-meet VA loan guidelines reduce the risk of these penalty rates.
One of the biggest advantages of using a VA loan to buy a home is that VA loans do not require a down payment. With a conventional mortgage loan, lenders require a 20 percent down payment. This down payment requirement makes buying a home difficult for most buyers. VA loans do include a fee for a no-down-payment loan. The fee varies but is generally from two to three percent. Buyers can choose to include the fee in the loan and do not have to pay it out of pocket at closing.
Private mortgage insurance (PMI) is insurance that lenders require borrowers to purchase when making a down payment of less than 20 percent of the home's value. Lenders require PMI to reduce their risk if the borrower defaults on the mortgage loan. Borrowers using a VA loan are not required to have PMI as the VA's loan guarantee takes its place. By not having to pay PMI, VA loans will have a lower monthly payment amount and lower total costs compared to a conventional mortgage.
One problem with VA loans is that the loan amounts are not very high. The standard limit for loan amounts is $417,000 in 2011 according to the Department of Veteran's Affairs. This amount will vary in certain high cost areas of the country. For example, the limit in San Diego, CA, is $537,500 and in Alexandria, VA, the limit is $818,750. This does not mean that lenders cannot approve larger loans for borrowers, but that the VA loan guarantee will only cover the loan up to the limit amount.
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