VA first-time homebuyers must understand the process, benefits, and eligibility requirements of the VA mortgage before determining if it's right for them.
For most first-time homebuyers, coming up with a down payment is the hardest part of the process. On a $200,000 home, a conventional loan requires at least $6,000 down up front. If you want to avoid costly mortgage insurance? Then you’ll need a whopping $40,000.
Fortunately, VA loans offer service members a much more affordable route to homeownership — one without down payments, mortgage insurance, or sky-high interest rates.
Are you considering buying your first home? Here’s what you need to know about VA loans — and how they can help you.
VA loans are mortgages backed — or insured — by the U.S. Department of Veteran Affairs. This essentially protects the lender in case you fall behind on your mortgage. (If this happens, the VA would step in and compensate the lender for part of their losses.)
Because of the VA’s backing, lenders can take more risk when issuing these loans. That means they can allow for lower credit scores, forgo down payments, and still offer low-interest rates.
If you’re a VA first-time homebuyer, there are lots of perks to look forward to. Here are just a few of the advantages you’ll enjoy by using a VA loan to purchase your first house.
One of the greatest benefits to young families and first-time homebuyers is that the VA loan doesn’t require a down payment. Unlike FHA and conventional loans, which require anywhere from 3% to 20% down, VA mortgages allow borrowers to finance 100% of the home’s value and purchase with $0 down.
To see just how much this could save you, let’s look at an example. With an FHA loan, you’d need at least 3.5% down to buy a home. On a $250,000 house, that’d amount to $8,750 — and that’s not even including your closing costs and other expenses you’ll have due on closing day.
VA loans typically come with lower interest rates than FHA loans and conventional loans due to the lower risk they present to lenders.
In fact, according to data from ICE Mortgage Technology mortgage (formerly Ellie Mae), 30-year VA loans averaged a 2.72% rate in November 2020. Conventional and FHA loans both clocked in at 2.99%. These lower interest rates save you both monthly (meaning a lower monthly mortgage payment) and, over the long haul, significantly cutting down the total interest you pay over time.
To see the savings in action, let’s look at an example. Say you’re purchasing a $200,000 home. At the rates mentioned above, your monthly payment would come out to $813.31 on a VA loan. You’d also pay $92,790 in total interest over 30 years. If you opted for a conventional loan instead? Your payment would jump to $842.13, and you’d pay over $11,000 more in interest in the long-term.
Mortgage insurance is an added cost on FHA loans and, often, conventional loans, too. FHA borrowers will pay it both upfront and monthly — typically for the entirety of their loan term. For conventional borrowers, it will usually mean a monthly payment of about $30 to $70 higher.
VA loans, on the other hand, require no mortgage insurance whatsoever. This means a lower monthly payment and a more affordable mortgage on the whole.
Most conventional mortgage programs have very strict credit score requirements in place, making it hard for borrowers with lower scores to qualify. Those that are eligible? They typically see sky-high interest rates as a result.
VA loans don’t require lofty credit scores, and many times, borrowers can get approved with scores of 620 or higher. On rare occasions, some lenders may even approve scores below 620 since the VA doesn't set a strict minimum requirement. For those with lower scores, VA lenders can also take into account a number of other factors — like their debt-to-income ratio or payment history. These can help ease the approval process as well.
With a VA loan, there’s no cap on how much you can borrow. While the VA will only insure guarantee a certain portion of the loan, VA mortgages can be issued in any amount, regardless of where you live or what home prices are like in your market. The exact amount you’ll be able to borrow will depend on your VA entitlement and your lender’s assessment of your risk.
A quick note here: Despite the limitless loan amounts, it’s still important you borrow only what you can afford. Use a VA loan payment calculator to determine what price range you should be shopping in to stay on-budget.
There aren’t any hard-and-fast credit score or income requirements for VA loans — at least mandated ones. Individual lenders will set these requirements in-house, so they can vary from one mortgage company to the next. Typically, you can expect to need at least a 620 or higher.
Additionally, you will need to have a 41% debt-to-income ratio or less. This essentially means that your debts (student loan payments, car payments, etc.) account for no more than 41% of your monthly income. Don’t forget to include your new mortgage payment in this calculation.
The biggest requirement for a VA loan is that you meet the required thresholds for military service.
Here’s a breakdown of what those currently look like for Veterans and active-duty members of the Army, Navy, Marine Corps, Air Force, Space Force, and Coast Guard:
|SERVICE PERIOD||DAYS OF SERVICE|
|World War II - September 16, 1940 - July 25, 1947||90 days total OR < 90 days + a service-connected disability discharge|
|Post World War II - July 26, 1947 - June 26, 1950||181 continuous days OR < 181 days + a service-connected disability discharge|
|Korean War - June 27, 1950 - January 31, 1955||90 days total OR < 90 days + a service-connected disability discharge|
|Post-Korean War - February 1, 1955 - August 4, 1964||181 continuous days OR < 181 days + a service-connected disability discharge|
|Vietnam War - August 5, 1964 - May 7, 1975||90 days total OR < 90 days + a service-connected disability discharge|
|Vietnam War (Republic of Vietnam Service) - February 28, 1961 - May 7, 1975||90 days total OR < 90 days + a service-connected disability discharge|
|Post-Vietnam War - May 8, 1975 - September 7, 1980||181 continuous days OR < 181 days + a service-connected disability discharge|
National Guard and Reserve members may also be eligible if they have served at least 90 days of active duty since August 2, 1990 or have at least six credited years in the service. Surviving spouses of military members or spouses of Veterans who are missing in action or POWs can also apply.