In an election year it’s all too easy to forget that Veteran’s Day is November 11, even though all federal offices and banks will be closed. The holiday was made official in 1954, having previously been celebrated as Armistice Day to mark the end of the First World War.
Our financial system has not forgotten those who served in our armed forces, whether in combat or in times of peace. There are many benefits offered to veterans to fund education, to supply healthcare, and to give them and their spouses a very special deal on mortgages.
What is a VA loan?
The VA home loan program was established in 1944 to help veterans get back into civilian life after World War II. It can be used by qualified U.S. veterans, active-duty military personnel and some surviving spouses. And it can be used more than once.
VA loans are available to those who had 90 days of service during wartime or 181 days of service during peacetime. For those who served in the National Guard, VA loans are available if you served in the Guard or Reserve for at least six years or served 90 days (with at least 30 of them being consecutive) in active duty under Title 32 orders. And you can qualify if you’re the surviving spouse of a service member who died while on active duty or from a service-connected disability, or a spouse of a POW or MIA serviceperson.
A VA mortgage is a private loan issued by a lender such as a bank, credit union or mortgage company. It typically requires no down payment. The fixed rate is lower than comparable standard mortgage rates. And because of the federal guarantee against loss, there is no private mortgage insurance (PMI) to raise the monthly payment.
Lenders can set their own standards for credit scores for VA loans. Around 600 is typically the minimum, but a search of VA loans online shows many offering this product to people with scores as low as the mid-500s. The property must meet VA appraisal requirements. And the amount of your loan is based on your debt-to-income ratio.
The first step is for your VA-approved lender to check your military record and help you get a “certificate of eligibility,” which can often be done instantly, depending on the documentation in the database. Or you can get it from the VA.gov portal.
Searching for rates
Every lender charges its own rates, within the VA guidelines, and depending on geography. You can compare VA loan rates at Bankrate.com. But beware, some of the lower advertised rates come with “points,” which add to the closing costs. Typically, VA mortgage rates are slightly lower than a conventional mortgage.
How much can you save at current rates? Assume a purchase cost of $650,000 with no down payment. If your credit score is in the 650-700 range, and you don’t have a lot of other debt, your VA mortgage rate might be 6.62%, with no points. (Any closing costs are paid separately.) That VA loan would have a monthly payment of $4,162. (That does not include an escrow for home insurance and property taxes.)
Now, compare that to a standard mortgage, which would require a minimum 3% down (almost $20,000) and have a 6.87% rate. The monthly payment is $4,708, which includes $567 a month in PMI.
That’s nearly a $550 difference in your monthly payment! And you still have your $20,000 in cash. Also, if rates drop significantly in future years, you can always refi to a new VA loan.
Special deals
If you search among lenders, you might find some very special deals. For example, Chase offers a $2,000 purchase closing benefit which can be used toward closing costs, first applied to any points or fees, and then toward reducing the principal of the loan.
Chase also offers mortgage “relief” programs for those in active duty, including reserves and national guard members called to active duty, under the Servicemembers Civil Relief Act, to cap mortgage rates at 4% through this period plus one year.
Not all lenders have expertise in VA loans, says Felton Ellington, community lending manager at Chase in Chicago, who provided the above examples. Ellington is a veteran who takes a special interest in these products.
With long term rates dropping only a bit in recent weeks, it’s worth the effort to search out a deal that many people forget: a VA mortgage that saves you from paying mortgage insurance. And that’s The Savage Truth.
(Terry Savage is a registered investment adviser and the author of four best-selling books, including “The Savage Truth on Money.” Terry responds to questions on her blog at TerrySavage.com.)
