Why Mortgages for Veterans Are Less Expensive Than You Think

If you're shopping for your first home, there are several different loan options available. Conventional loans require as little as 3% down, but also require excellent credit for the best rates. FHA loans have a 3.5% down payment requirement and relaxed credit standards but have higher upfront and ongoing costs. And USDA loans have no down payment requirement, but are only available in certain qualified rural areas.

If you serve or have previously served in the United States military, there could be another option that is far better than any of these -- the VA loan.

What are VA loans?

VA loans are a type of mortgage loan that is guaranteed by the U.S. Department of Veterans Affairs, or VA. They are originated by private mortgage lenders, but if you are unable to pay the loan back, the VA guarantees the loan so the bank doesn't lose money.

Active members of the military qualify, as do honorably discharged veterans in most cases. Surviving spouses of deceased military members could also qualify.

If you qualify for a VA loan, you typically don't have to put any money down to buy a house. And while there technically isn't a minimum credit score requirement, lenders generally want to see a FICO® Score that's at least in the 600s.

VA loans can only be used to buy a personal residence that you're going to live in full-time. They cannot be used to finance a second home or investment property.

Big advantages over other types of mortgages

To be sure, VA loans aren't the only way to buy a home without a high credit score, or with a low down payment. For example, FHA loans only require a minimum credit score of 580 with a 3.5% down payment, and there are even 3% down payment options with conventional loans. USDA loans offer 0% down financing for certain rural homes. But there are some key advantages to using a VA loan. Specifically:

• VA loans don't require mortgage insurance, even if you use a 0% down payment. Mortgage insurance is typically required if your down payment is 20% or less, and it can add a substantial amount to your monthly payments.
• VA loans can be easier to qualify for than conventional loans, as the government is providing the bank with a guarantee. Most lenders do have credit score requirements for VA loans, but they are usually rather modest.
• VA loans often have lower mortgage interest rates than comparable conventional loans. As one example, major VA lender Navy Federal Credit Union Mortgage is advertising 30-year conventional mortgage rates as low as 6.750% as of this writing. For VA loans, the 30-year rate starts at 6.250%, with the same discount points.

The bottom line

If you qualify for a VA loan, it is likely to be your best option for financing your next home. Many top mortgage lenders offer VA loans, and some are experts in helping veterans get into homes of their own.

Of course, it's still a good idea to evaluate all of your options, especially if you can afford a 20% down payment and can avoid mortgage insurance on a conventional loan (conventional loans allow borrowers to avoid paying the VA funding fee). But VA loans were designed to help those who serve the United States buy homes at a big cost advantage, and they do a very good job of this.