Becoming a first-time homeowner is an exciting time and a big milestone in everyone’s life. However, it can be also be stressful and confusing, especially with all the options, small details, and paperwork that is required. If you are military personnel, the VA has made this a much easier process by offering a VA guaranty. Still, it is important to understand the ins and outs of a VA loan before you sign on the dotted line.
The first thing you need to understand as a borrower is where the money comes from. A lot of people believe the VA itself provides the money, which is incorrect. The money is actually provided by private lenders such as banks, savings & loans, and mortgage companies. What the Department of Veterans Affairs does is step in with a loan guaranty that makes it more secure for the lender. The VA will pay a certain amount of the mortgage to the lender in the event that you default on your loan.
It is important to note that the VA does not guarantee the entire loan amount. In fact, it is only covers up to half of the loan, and sometimes less. Even so, it is still substantially higher than you would get with traditional insurance. Basically, you need to think of it less than a loan, and more of a “VA Insured Loan.”
There is no limit on how big of a loan you can get – it really depends on the lender and all the factors involved (house appraisal, income, etc). The VA does not limit how much you can borrow, but they put a cap on their guaranties, which vary from county to county.
Now that you know the difference between the loan and the VA guaranty, you might be wondering what the benefits are. For starters, you don’t have to make a down payment. Not only do you not have to ante up the initial cost, but the lender is also willing to give you a bigger loan with lower interest rates with the VA guaranty. You also have more money left over each month because you don’t have to pay private mortgage insurance.
If you are in the military or are a veteran looking to become a first-time homeowner, you should definitely look into VA loans as one of your options. With VA loans you get really great rates, reduced initial costs, and higher loans than you might otherwise obtain. You also will qualify for a VA IRRRL in the future, which makes refinancing a cinch.