VA Loan Benefits

By Liz Clinger Updated on 7/31/2017

Due to the VA Home Loan program's flexibility, guaranteed backing by the federal government, and major benefits, a VA home loan can help members of the service who may otherwise struggle to find and purchase a home of their own.

Down Payments Not Required for a VA Loan

Since military personnel and their families are typically never in one place for long, building any stable credit history and savings can be problematic. 

Unlike traditional loans that require a hefty down payment, VA loans give qualified veterans the opportunity to finance the total amount of the home's value with zero upfront cost. 

Veteran loans are calculated based on their entitlement. VA loan entitlement is the base amount for which the VA will insure a loan, based on veteran income. Most lenders will issue loans equal to or less than four times the amount of the total entitlement.

The entitlement allowed for the purchase of a home is done in a calculation of the sales price versus the county loan limit, multiplied by 25%. The VA will use the lesser of the two scenarios.

Example:  Sales price of $300,000 with a county loan limit of $417,000.

• $300,000 X 25%= $75,000. 
• $417,000 X 25%=$104,250.

This means the VA will guarantee up to $75,000 of any costs associated with the purchase. Once the veteran uses his/her VA entitlement, they are required to pay any of the costs related to a subsequent purchase. 

Once the initial home is sold the entitlement will be fully reinstated. All VA guarantees only apply to primary residence purchases. However, the VA has programs in place for refinances on investment properties and second homes.

No PMI on a VA Loan

PMI, or private mortgage insurance, is usually a required expense for those looking to finance a home purchase unless the borrower can put down a larger amount initially (typically 20% down). 20% down on the house with a value of $100,000 is $20,000 out of pocket. Most military members or veterans would find either option a tall order.

Lenders require PMI to protect themselves in case the borrower defaults on the loan. However, VA loans do not require the same protection since the government backs them. 

With the VA loan advantage, military families have the chance to build equity over the life of their loan, which will save them money in the long run. 

Interest Rates

The interest rate on a home loan is determined by the risk the bank takes on to finance the loan. The lenders can charge more interest when the risk is higher. A government guarantee backs VA home loans, so the lender assumes less responsibility for the loan. Because there is decreased risk for them, lenders can offer lower interest rates than with a conventional loan. 

Interest rates for a VA loan can be anywhere from 0.5 to 1% lower than traditional rates.

No Prepayment Penalty

One way the lender can ensure financial gain is to place a prepayment clause in the loan terms which enables them to compensate for the interest payments lost when a borrower pays off their loan early.

VA home loans do not have these penalties. Borrowers are free to pay off their loan at any time without penalty, which gives the flexibility to consider other options such as refinancing or other home-owning opportunities.

Basic Allowance for Housing

Veterans can qualify for Basic Allowance for Housing, or BAH, which can be counted as a portion of your effective income. Your BAH, which varies in amount based on factors such as dependents, location, and pay grade, can be applied to part or all of the monthly costs associated with the loan.

The advantages of a VA loan are numerous, and there may be additional benefits based on your particular home or situation. Contact your local VA-approved lender today for more details on how a VA home loan can be an asset to you and your family.