Why Should You Choose a VA Loan Over a Conventional Loan?
The Veterans Administration offers mortgage insurance to veterans and current service members looking to buy a house of their own. If you qualify for VA insurance, lenders know that if you default on the mortgage, the VA will protect them from losing money. This allows the lender to offer better terms than on a conventional loan.
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History
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The Veterans Administration mortgage program was created in 1944 under the Servicemen's Readjustment Act. The government's goal was to make it easier for servicemen to readjust to civilian life by helping them buy a home. Insuring mortgages was considered a cost-effective alternative to paying out cash bonuses.
Significance
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The VA loan guarantee makes it possible for many veterans to buy a house with no money down. With a conventional loan, you'd have to make at least a 20 percent down payment or face much higher interest rates, and the lender might require you to buy mortgage insurance as well. A VA loan can save thousands of dollars in upfront costs.
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Benefits
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The Veterans Administration helps you save in other ways: closing costs may be slightly lower, and you may be able to negotiate a lower interest rate. There's also no prepayment penalty if you refinance or sell the home early into the mortgage. You do have to pay a funding fee for the loan, but if you're classified as 10 percent disabled, the VA will waive the fee. If you have a permanent service-related disability, you may qualify for a $50,000 grant to modify your home.
Qualifications
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To qualify for a VA-backed loan, the Veterans Administration states, you have to obtain proof of military service and a certificate of eligibility stating how much of a loan the VA will support. The VA website provides instructions on obtaining documentation.
Size
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A certificate of eligibility entitles a veteran to $36,000 of mortgage insurance. VA lenders will consider no-down-payment loans for up to four times that amount, or $144,000. In areas of the country where $144,000 won't buy much, the VA states, the agency increases the eligibility levels. In San Francisco, for example, as of 2010, you can secure a loan amount of more than $900,000 without having to make a down payment.
Considerations
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If you pay off your mortgage, the VA states, you'll regain your $36,000 eligibility to use on your next home purchase. If you default on the mortgage, and the government has to cover your losses, you won't qualify for a certificate of eligibility unless and until you pay the government back.
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