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Sunday, July 13, 2014

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If you're ready to buy a house, you're probably already thinking about home mortgages -- trying to figure out what the difference is between them all and which one is right for you. You may have even more questions if you're a Veteran or an active duty service and are exploring VA loans.

VA Loans In A Nutshell

Quite simply, VA loan eligibility are home mortgages that are available to current and ex-members of the U.S. military and their surviving spouses only. They are backed by the U.S. Government, which ends up providing some unique benefits to borrowers who qualify. Relaxed qualifications, low interest rates and low downpayment requirement, to name a few. This means Veterans and active duty service personnel who might not qualify for a traditional loan or can't provide a large downpayment could still get a mortgage through the VA program.

Choosing Between VA and Conventional Mortgages

When it comes down to it all loans are basically the same. You borrow money from a bank or lending institution to purchase a property and then repay that money back over a course of time, typically 15 or 30 years. You'll pay interest on that initial amount and may have downpayment requirements as well as taxes and fees due when you sign the initial paperwork.

If you're choosing between a VA or a conventional loan there are a few things you'll want to compare to determine which offers better terms. Namely,

    Interest Rates. This is the amount of interest you will be paying on the loan amount every month until it is paid off. It has a direct impact on the amount of your monthly mortgage bill. Conventional loans offer fixed or adjustable rates. VA Loans offer fixed rates only. The advantage of a fixed rate is that the interest rate does not change over the life of the loan. This is not the case with adjustable rates; the rate can go up or down depending on the financial markets, so while it may be a low rate today, if it's not fixed, it can rise in the future causing your monthly payment to go up. Interest rates vary depending on your credit history but VA rates are typically lower than conventional.

    Loan Length. Most terms are for 15 or 30 years. 15-years typically have lower interest rates than 30-years. Make sure you're comparing apples to apples when you examine mortgage terms. That is, make sure both offers are for the same length of time in order to get the best comparison.

    Downpayment Requirements. It's rare to find a conventional mortgage lender who will not require a downpayment of some sort. This can range anywhere from 5% to 20% of the property purchase price and must be paid at the closing. Even if you put money down, if it is less than 20%, you'll have to pay private mortgage insurance (PMI) every month, which protects the lender if you default on your mortgage. This can be in the hundreds of dollars every month, depending on the amount you borrow. Downpayment requirements are a huge stumbling block for many would-be buyers, who do not have that amount of cash available. VA-approved lenders waive these downpayment requirements meaning you can get into a new house with no money down. Furthermore, they waive the monthly PMI too, saving you money every month.

    Credit Requirements. Many hopeful homebuyers are rejected by lenders because of poor credit history, lack of credit or bankruptcy. VA Loans are more relaxed in their credit requirements, which makes it easier for buyers with these types of credit issues to obtain a mortgage. Part of the reason lenders are willing to overlook these issues is because the mortgages are backed by the US Government. This reduces their lending risk and makes them more likely to approve your application.

Assess Your Situation

The first thing you'll need to determine is if you're even eligible for a VA loan. If you're not a Veteran or active duty service member, surviving spouse or current or ex member of the National Guard or Reserves, you are not eligible for a VA loan.

If you do meet these eligibility requirements, you'll need to assess your financial situation.

    Do you have a good credit history or any history to speak of? If not, you may not qualify for a traditional mortgage or, if you do, the terms may not be all that great. Higher risk applicants are typically charged higher interest rates.
    Can you provide the required downpayment? If so, how much? Is it enough to avoid paying monthly PMI?
    Income. VA loans have less stringent income requirements than conventional loans. They also have a higher debt-to-income ratio than traditional mortgages.

The best course of action may simply be to apply for both types and see which one offers the better repayment terms. Just make sure you're comparing the same data. Keep an eye on the length of the loan, the interest rate (fixed or adjustable) and the downpayment requirements. Once you have solid numbers in front of you, it will be easy to see which offer best fits your needs.


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