VA Loan Mortgage Rates: How They Work & What To Expect
If you are a U.S. veteran or service member, a VA loan can help you qualify for affordable homeownership. These government-backed mortgages allow individuals in the military to purchase or refinance properties, even with a bad credit history.
In this guide, you’ll learn more about how VA loans work, how they compare to conventional loans, and what factors affect your interest rates.
What Is A VA Loan Mortgage?
A VA home loan is insured by the Department of Veterans Affairs. It offers affordable loans to active duty and retired service members, veterans, and military spouses who can’t qualify for conventional mortgages. These non-conventional loans have relaxed credit requirements and allow applicants to purchase a home without a down payment.
Furthermore, these affordable loans don’t charge private mortgage insurance (PMI), making monthly payments easier to manage. If you are a low-income, first-time homebuyer and military service member, a VA loan might be ideal for you.
Who Is Eligible For A VA Loan?
The Department of Veteran Affairs is responsible for determining who qualifies for a VA loan. Being a military service member is not enough to become eligible for this loan. You must also be eligible for the following terms:
You are an active-duty service member and have achieved
90 days of wartime service; OR
181 days of peacetime service
You have achieved six years of service under the National Guard or Selected Reserve.
You are the surviving spouse of a service member who passed away in the line of duty.
Applicants will have to submit a Certificate of Eligibility (COE) that demonstrates their proof of service. Active-duty service members can have their statement notarized by a personnel officer or unit commander.
Veterans must submit DD Form 214, which verifies military discharges. Surviving spouses who have access to a Certificate of Eligibility must also present their marriage license and spouse’s death certificate.
Pros & Cons Of A VA Loan
VA loans are highly beneficial to veterans who cannot qualify for a conventional loan. However, they do come with their fair share of drawbacks. Below are a few advantages and disadvantages of VA loans.
They don’t require a down payment. Unlike other mortgages for low-to-median income borrowers, VA loans don’t require a down payment. Thus, military service members can save more up-front to purchase additional furnishings and more.
They don’t charge private mortgage insurance. This government-backed loan doesn’t require its applicants to pay PMI. On conventional loans, PMI can cost anywhere between 0.5% to 2.25% of your loan. On a $250,000 loan, a 0.5% PMI would set you back an additional $1,250!
There is no minimum credit requirement. While VA loans don’t set a credit minimum, lenders favor borrowers with a credit score of at least 620. They also accept higher debt-to-income ratios – 50% on an adjustable-rate mortgage (ARM) and 60% on a fixed-rate mortgage.
There is a VA funding fee. Service members, veterans, and the like must pay this fee upon closing. This fee can cost anywhere between 1.25% and 3.3% of the total loan amount – on a $250,000 loan, a 1.25% fee will cost $3,250. If you request to roll the amount into your loan, it can increase your VA mortgage rates and overall borrowing amount.
There are property limits. Unlike conventional loans, VA loans cannot be taken out for investment properties or vacation homes. Veterans cannot purchase vacant land and co-ops, either – only primary residences.
Lower interest rates are still expensive. When it comes to any type of mortgage, 30-year fixed-rate loans end up costing more than their 15-year counterparts. Unfortunately, it’s more challenging to secure a lower interest rate on a 30- or 15-year VA loan than a conventional loan.
What Factors Influence VA Loan Interest Rates?
Several different factors affect how your lender determines your final VA mortgage rate. Some of these factors are beyond the lender’s control, such as economic changes and housing market complications. Others involve your unique financial history.
Here are the primary elements that make an impact on your VA loan rates.
Supply and demand within the housing market can directly impact interest rates. When there are fewer properties under construction or up for resale, low demand pushes VA loan rates downwards. Similarly, mortgage rates drop when people choose to rent instead of buy property.
When availability rises during periods of economic growth, increased spending skyrockets consumer demand. The more competitive the housing market, the higher interest rates climb. As the economy fluctuates, these rates become subject to change.
While VA home loans accept low to no credit ratings, a better credit score will secure lower rates. For instance, a VA home loan officer might grant a borrower with a credit score of 620 a lower interest rate than one with a score of 580. The current nationwide average is 688, which means that most people will qualify for a VA mortgage.
There are several methods of improving your credit score, such as:
Making debt payments on outstanding bills, such as those on credit cards
Reviewing your credit report and noting any errors
Lowering your credit limit
Loan Type & Structure
Different types of VA loans offer varying rates. For instance, how much interest you pay will depend on whether you’re applying for a VA Purchase Loan or VA Streamline IRRRL (Interest Rate Reduction Refinance Loan).
Refinance rates on an IRRRL will decrease the total amount you pay on your existing VA home loan. If preferred, you can also lower your rate by refinancing from a 30-year fixed VA loan into an adjustable-rate mortgage.
Borrowers can “buy down” their interest rate with discount points. A single discount point equals 1% of the total cost of the loan. For example, one discount point on a $250,000 loan equals $2,000. You can “buy” a discount point by paying a fee directly to your loan officer upon closing.
Discount points are most beneficial to a buyer looking into a 30-year fixed VA loan. Because you pay more upfront initially, these points allow the buyer to reduce the principal and save on interest over the life of the loan.
VA Loan Rates vs Conventional Rates
The primary difference between a VA mortgage loan and a conventional mortgage loan is that the former is for active-duty military members. Also, because the U.S. Department of Veterans Affairs backs VA loans, there is no down payment requirement or mortgage insurance.
However, there are a few more striking differences between the two home loans than you think.
Compared to conventional mortgages, VA home loans have no minimum credit score requirements or maximum debt-to-income ratios. With that in mind, a typical VA loan officer will more likely approve a credit score of at least 620, which is the minimum requirement for conventional lenders.
Similarly, VA lenders prefer borrowers with a debt-to-income ratio of no higher than 41%, compared to the conventional requirement of 36%. Despite this, qualifying for a VA mortgage loan with a poor financial history may not be as easy as you think – lenders set their own standards to protect themselves from risk, which means that you may qualify with one but not another.
Both types of loans charge an origination fee, but VA loans charge an additional funding fee. This fee protects lenders if a borrower defaults. It is a one-time up-front charge between 1.4% and 3.6% of the entire loan payment amount. Your fee’s final cost will depend on whether you make a down payment and what amount.
If you can’t afford to pay the fee up-front, you can request to roll it into your loan. However, doing so can increase your monthly payments and overall VA loan interest rate. Only veterans who receive disability compensation can avoid paying a VA funding fee.
Conventional loans charge private mortgage insurance (PMI) to borrowers who make a down payment of less than 20%. The amount of PMI you pay will vary across lenders and other deciding factors.
On the other hand, VA loans don’t charge any sort of mortgage insurance. Instead, you pay a funding fee. However, making a sizable down payment can reduce this funding cost, lowering your VA interest rate.
How To Get The Best VA Mortgage Rates
A VA loan rate is typically lower than that on a conventional loan. However, your interest and monthly payments will vary by lender, loan type, and financial history.
Whether you are taking out a loan with a private lender, the Navy Federal Credit Union, or USAA, below are a few helpful tips for getting the best VA loan rate.
Improve Your Credit Rating
Despite the relaxed credit requirements on a VA home loan, improving your rating can make a tremendous impact on your rates. If your credit rating is lower than 620, a few ways you can raise it quickly are:
Pay your utility, water, and other bills on time.
Review your credit report for any errors and have them amended.
Pay outstanding debts on your credit cards.
Make smaller, more frequent payments on your credit cards.
Compare Different Lenders
VA rates and fees will vary from lender to lender. As a rule of thumb, compare quotes with at least two to three lenders.
Request estimates on both your interest rate and annual percentage rate (APR). The interest rate will be added to your monthly payment, whereas an APR represents what you’ll be paying every year.
When calculating your annual percentage rate, consider lender fees, closing costs, property appraisals, and other associated dues. You can use online tools such as a mortgage calculator or determine your APR in the following steps:
Add the total interest to other fees.
Divide this number by the total loan amount.
Divide this number by the total days in your term.
Multiply this number by 365 to get your APR. Multiply your APR by 100 to convert this into a percentage.
Make A Sizable Down Payment
While it’s possible to apply for a VA loan without making a down payment, you might benefit from putting down at least 5%. Alternatively, you can buy discount points to lower the rate of your funding fee and monthly payment.
The advantages of making a larger down payment are:
Reducing your closing costs and origination fees
Making up for a low credit rating
Paying off your mortgage sooner
Get A 15-Year Fixed Instead Of A 30-Year Fixed VA Loan
Many first-time VA borrowers will apply for a 30-year fixed loan. In fact, 90% of homeowners prefer them. A 30-year loan term allows borrowers to build savings with a relatively low monthly payment. However, it may end up costing veterans more than a 15-year fixed VA loan would.
On a 15-year fixed VA loan, the initial balance will be higher. However, it will reduce and become more affordable over time.
Veterans who want to build equity on a fixed-rate mortgage might be better off applying for a 15-year term. Though interest is higher, each monthly payment will go towards the loan’s principal balance, saving them thousands of dollars in the long run.
Alternatively, veterans who are more interested in a 30-year VA loan can reduce their overall interest by making early payments, given that the lender does not charge a prepayment penalty.
Frequently Asked Questions About VA Loan Rates
How do lenders determine VA mortgage rates?
Current VA mortgage rates are not set by the USAA or the Department of Veterans Affairs. Instead, lenders determine loan rates according to economic circumstances and your financial history. The higher your credit rating, annual income, and debt-to-income ratio, the less risky you will be to insure and the better your rates will be.
How much does a VA loan cost?
How much a current VA loan costs will depend on your mortgage rate and funding fee. You can lower your rates by making a down payment of at least 5% or purchasing discount points upon closing.
VA refinance loans might charge lower fees compared to traditional loans. Also, if you are a disabled veteran, surviving spouse, or have received a Purple Heart, you may be exempt from these fees.
Are 30-year fixed-rate VA loans better than 15-year VA loans?
While a 30-year VA loan is more common than its 15-year counterpart, it might end up being more expensive overall. Get the best 30-year term rates by working with a real estate agent who can link you up with the right lender.
With each lender, request an estimate that includes your APR. You can also use online tools to calculate the APR yourself.
How do you get a better interest rate with the VA?
There are several ways to reduce your mortgage rate. First, compare quotes and calculate your APR with different lenders. Consider whether you prefer to get a loan directly from the USAA or with a private lender.
Note that these rates will often be subject to change depending on how the housing market is performing. If you already have a conventional mortgage, VA refinance rates may be lower.
If you are a military member and struggling to secure low rates on a conventional loan, a VA mortgage may be more suitable for you. Get the best VA rates by improving your credit, contacting several lenders, and calculating your APR.
Are you interested in applying for a VA mortgage today? Consult with experts at Wesley Mortgage, LLC! We also provide helpful online tools that you can use to determine what type of mortgage best suits your needs.