Tips & Special Topics
The Interest Rate Advantage with VA Loans
Added March 25, 2010
When it comes to interest rates, VA loans have a unique advantage over most other types of loans. A VA borrower typically won’t receive a rate hike due to his or her credit score like a conventional borrower might. For instance, if a conventional borrower has a credit score below a certain number, often 720, he or she will most likely receive a higher interest rate. Also, a conventional loan can often require a down payment of up to 20 percent. Higher interest rates and loftier down payments are a conventional lender’s way of offsetting risk.
Because VA loans are made by VA-approved lenders with a portion of each loan backed by the U.S. Department of Veterans Affairs, the risk to lenders is reduced. The guaranty from the federal government eliminates the need for rate hikes and hefty down payments. Hence, VA mortgage programs can offer competitive interest rates even on “zero down” loans.
Obviously, there may be advantages that come with a lower interest rate for a VA borrower. Because VA mortgage interest rates are not credit-score driven, the VA borrower can save thousands over time in monthly payments. A one percent difference in interest rate can save thousands of dollars over the life of a mortgage.
What’s more, a lower monthly payment can allow the VA borrower to purchase a more expensive home for the same monthly payment that a conventional borrower would pay with a higher interest rate on a less expensive home.
The interest rate advantage is not the only benefit for VA borrowers. There is no private mortgage insurance (PMI) associated with a VA loan. PMI is a fee that must be paid on conventional mortgages when less than 20% equity is present. The fact that no PMI is needed with veterans’ mortgages can, again, be attributed to the government guaranty. And, the VA borrower can save significantly in monthly payments.
Finally, a VA borrower will likely experience more relaxed qualifying standards with the VA Loan Guaranty Program than with many other mortgage programs. The VA has established guidelines for VA-approved lenders to follow when determining whether someone qualifies for a VA loan. The debt-to-income ratio requirements set by the VA are more lenient than those of many conventional loans.
Because the VA guidelines don’t include interest rate and down payment penalties for lower credit scores, many of VA-eligible borrowers find they get a more favorable loan. Like other lenders, VA-approved lenders may charge interest rate reduction points to borrowers who want to buy down to a lower rate. For more information about the interest rate advantage and other benefits to VA loans contact a VA home loan professional.
