What to Know About VA Loans as First-Time Homebuyers

If you're a first-time homebuyer, choosing from the various loan types can be an overwhelming experience. With all the different incentives, rates and requirements, it's hard to know the best option for you.

A VA loan stands out as the top choice for most eligible military and Veteran first-time homebuyers. Backed by a government guaranty, VA loans promise to compensate your VA lender if you default, making them a more secure option for lenders.

Even better, VA loans come with great perks such as no down payment required, generally lower rates and looser credit requirements than other loan types.

VA Loan Benefits For First-Time Homebuyers

The VA loan program has enabled countless Veterans and military members to join the ranks of first-time homebuyers. As a token of gratitude for their service and sacrifices, VA loans offer a handful of attractive benefits, including:

• No down payment
• Competitive interest rates
• Closing cost limits
• No private mortgage insurance
• Relaxed credit requirements
• Lifetime benefit
• No prepayment penalties
• Foreclosure avoidance
• No loan limits (for full VA entitlement)
• Assumability

Let's break down a few of those VA loan benefits in more detail.

No Down Payment

Easily the most significant benefit of VA loans, no down payment requirement is a game-changer for military and Veteran first-time homebuyers. As many first-time homebuyers may have acceptable income and credit but need more savings to make a large payment, avoiding a down payment can eliminate a considerable hurdle.

The benefit of not having a down payment is immediately apparent when comparing VA loans to other loan types. For perspective, FHA loans require a minimum 3.5% down payment, while conventional loans often demand 5%. When closing on a $400,000 mortgage, a borrower would need to bring $14,000 or $20,000 cash for an FHA or conventional loan, respectively. With a VA loan's zero down payment, you can preserve your savings and bolster your credit.

Competitive Interest Rates

Traditionally, VA loan interest rates are 0.5% to 1% lower than those of conventional loans. Over time, this can translate to enormous savings for first-time homebuyers.

Imagine you'd like to purchase a $300,000 home. Let's compare the interest costs of a conventional loan to those of a VA loan. Both have 30-year fixed-rate mortgages, but the conventional loan has a 7% interest rate, while the VA loan has a 6% interest rate.

Over the 30-year lifetime of the loans, the VA loan saves $34,633.73 more in interest payments than the conventional loan. That's thousands of dollars that stay in your pocket.

Closing Cost Limits

All mortgages involve closing costs. However, the VA limits the closing costs military and Veteran first-time homebuyers can pay. VA loan borrowers can ask the seller to pay up to 4% of the total loan in concessions. Furthermore, VA loan borrowers aren't allowed to pay more than 1% for specific non-allowable fees, such as loan application or processing fees, lender appraisals or interest rate lock-in fees.

First-Time Homebuyer VA Loan Requirements

You may qualify for a VA loan by meeting one or more of the following service requirements:

• 90 consecutive days of active wartime service.
• 181 days of active service during peacetime.
• 6 years in the National Guard or Reserves, or 90 days under Title 32 orders (with at least 30 of them consecutive).
• Being the spouse of a service member who died in the line of duty or due to a service-related disability.

Your service eligibility is reflected in your Certificate of Eligibility, a required document your VA loan lender can help you acquire during the application process. Additionally, while the VA itself doesn't set a minimum credit score, most VA loan lenders set a minimum credit score of at least 620.

VA Loan Application Process For First-Time Homebuyers

Now that you understand VA loan eligibility requirements, let's cover the steps of the VA loan application process.

1. Get preapproved: Getting a preapproval letter from a trusted VA loan lender informs your budget, while sellers and real estate agents will see you're serious about purchasing a home.
2. Find a house: Choosing a real estate agent well-versed in VA loans ensures the chosen property meets VA Minimum Property Requirements.
3. Get under contract: Once the seller accepts your offer, your lender can provide a clearer picture of expected closing costs.
4. Loan underwriting: A VA underwriter will vet your preapproved mortgage during the underwriting process. You may need to provide further documentation or information as they undergo their review.
5. Closing: Prepare to sign the final paperwork, pay any remaining closing costs and celebrate.

If you're ready to buy the home of your dreams, get preapproved today. Once you've received preapproval, your lender can guide you the rest of the way.