VA loans operate similarly to private mortgages. The interest rate you qualify for will depend on the same factors (income, debt, and credit score), and most private mortgage lenders offer VA loans. However, because the government guarantees a portion of the loan, the lender is able to offer a few advantages for qualified buyers. To qualify for a VA loan, you must be a current or former service member, National Guard or Reserve member with an honorable discharge. The loan is also available to spouses of veterans who died on duty or as a result of military service.
Advantages to a VA loan
VA loans generally offer long terms and competitive interest rates. VA loans also limit debt-to-income ratio at 41%, which is higher than most conventional mortgages. This means borrowers with more debt may still qualify for lower interest rates. VA loans also do not require a down payment (usually 10-20% of the value of the house). Because the loan is government backed, the buyer is not required to pay private mortgage insurance - usually required with low down payments. Furthermore, VA loans limit the amount of closing costs a buyer pays.
In addition to upfront savings, VA loans offer several advantages in the long run. The government offers qualified VA loan borrowers a loan modification program, if at any point the borrower has difficulties making repayments. VA loans also make it easier to refinance to a lower rate within the program. They also offer the buyer the right to pay the loan balance early without penalty. And finally, VA loans are assumable, which means they can be transferred directly from seller to buyer (as long as both are VA qualified). If interest rates have risen since the seller took out the original mortgage, you will benefit from assuming the mortgage with lower interest rates.
One disadvantage to VA loans is that most charge a funding fee, which is typically around 2% of the loan. In addition, because VA loans are sold in a secondary market, most loans are limited to $417k. If you were looking to purchase a home above this limit, you would have to seek a conventional mortgage.
The Bottom Line
As always, remember to shop around and compare offers from several different lenders. It is not a bad idea to include some conventional mortgages in your comparisons as well - although VA loans offer many advantages, you may still find a better deal elsewhere. For qualified borrowers, a VA loan is a very good option, but not the only option.