How the VA Loan Benefits Home Buyers in Today’s Market
Today’s housing market is red hot. Homes are hitting record prices, and a nationwide shortage of housing isn’t making it easier.
On top of that, most loan programs have specific standards for deciding the home buyers they accept. For most home buyers, this might mean they need a higher credit score or larger downpayment.
Fortunately for VA members, there are hardly problems in today’s market. The VA loan, the main mortgage product available only to eligible members, has plenty of benefits that help home buyer’s in today’s market.
Here are a few reasons why a VA loan can help you get into a new home:
Lenders are willing to take on more risk
Risk is a big part of the job for lenders, and it’s part of the reason some mortgage applications are rejected.
Lenders often evaluate risk by looking at the:
- FICO score, or credit score
- LTV, or loan-to-value of the loan
- DTI, or debt-to-income ratio
Your credit score is straightforward, but most loan programs require a minimum score. FHA loans, which are well-known for having relaxed standards, require a minimum score of 620. Conventional loans have even higher credit score standards.
VA loans technically have no minimum credit requirement – part of the benefit of it being guaranteed by the VA. Loans with credit scores as low as 580 can get accepted, depending on the lender.
LTV is the portion of the loan that you’re financing. For example, if you’re buying a home and make a 10 percent downpayment, your LTV would be 90.
Because LTV represents how large of a downpayment is made, it’s an important number to track. According to Ellie Mae, the LTV of all closed loans in March was 79, meaning an average downpayment of 21 percent.
However, VA loans had much different numbers. The average LTV for VA loans was 98, meaning 2 percent down.
This is only possible because the VA doesn’t require downpayments, unlike other mortgage products. In a housing market where home prices may seem out of reach, being able to finance the entire home can make purchasing a home much more affordable.
Deb-to-income is the ratio between how much debt you have and how much of your income it takes. When lenders evaluate potential home buyers, they tally all their debt (from car payments to credit cards) and put it against their income.
After, lenders take would-be monthly payments of a loan and add it to the DTI calculation. As a result, DTI comes with two numbers: the first which is without a mortgage, and the second which is with a mortgage.
For closed loans in March, the average DTI was 26/39, showing that after the mortgage was approved, the average homeowner’s debt was 39% of their income. For closed VA loans, the average DTI was 26/42, meaning lenders allowed VA borrowers to take on more debt than non-VA borrowers.
All three of these factors were more relaxed for VA loan applicants, showing that it’s easier to get approved for a mortgage with a VA loan than other products – an important edge in a competitive housing market.
Lower mortgage rates
On top of the hot housing market, mortgage rates continue to increase. This forces monthly payments higher, and it pushes some homes out of affordability.
VA members get another benefit here because VA loans tend to have the lowest mortgage rates out there. In March, the average VA loan had a rate of 4.50%. The next lowest, conventional loans, had an average rate of 4.72%. That’s a huge difference, especially when spread over 30 years.
These low rates help keep homes affordable, and it gives VA home buyers more houses to choose from when they shop. With low housing inventory in most areas, this is a helpful advantage.
Not all homes on the market are move-in ready. With a VA renovation loan, VA home buyers can purchase these homes and get a loan to fix the homes up.
The VA renovation loan allows home buyers to borrow up to $35,000 on top of the value of their VA loan. This money goes toward repairs and improvements, making sure that the home fits the VA’s standards.
Fixer-uppers take more time to move in to, but many home buyers in today’s market can’t afford to buy a home and fix it. They also struggle to find financing to pay for both.
There are plenty of benefits with a VA loan, and many of them help home buyers in today’s competitive market. With summer just around the corner, many people are going to be looking for a new home – and a VA loan might give them the best chance at finding the right place.