The greatest benefit of using the VA home loan to purchase a property is it doesn’t require a down payment. But what no one ever explains to veterans is why it doesn’t require a down payment. Understanding this will help you plan for the future and strategically use your VA loan benefit.
Lenders don’t require veterans to make a down payment because the VA guarantees 25% of the loan in the case of default. This means that if the veteran doesn’t pay the mortgage and the bank has to foreclose on the property, the bank is practically guaranteed not to lose money. Even if we’re in a down real estate market or the veteran has caused damage to the home or neglected routine maintenance, the VA is going to pay the bank 25% of the loan. Which means the bank should be able to resell the property and not have lost money by lending to the veteran in the first place.
Private mortgage insurance (also known as PMI) is an insurance that homeowners pay for, but it doesn’t do anything for them. Rather PMI insures the lender against default. That’s right, you read that correctly. The homeowner pays the premium for an insurance policy that protects the bank. If the homeowner stops making the payments and the lender forecloses on the property, the lender can file a claim against the PMI to reimburse them for any losses as a result of the homeowner defaulting on the loan. In order to avoid paying PMI, you would have to pay at least a 20% down payment at the time of purchasing the home.
This is just one of the things that makes the VA loan such an awesome benefit for veterans. Because the VA guarantees 25% of the loan, as far as the bank is concerned it’s the same as if the veteran put down 25%. Therefore, veterans using the VA loan are not required to pay PMI. The VA loan is the only product out there that allows you to finance 100% of the cost of a home without paying PMI or exorbitant interest rates.
You may be eligible for a VA loan if you were separated from service:
Enlisted – After 9.7.1980
Officers – After 10.16.1981
• 24 months continuous active duty - with other than dishonorable discharge
• At least 181 days or completed the full term that he or she was ordered to active duty with other than dishonorable discharge
• At least 181 days active duty - and discharged for hardship, early out, convenience of the Government, reduction in force, condition interfered with duty or compensable service-connected disability
• Less than 181 days active duty - if discharged for a service-connected disability
You may also be determined eligible if:
• You are an un-remarried spouse of a Veteran who died while in service or from a service-connected disability
• You are a spouse of a Servicemember missing in action or a prisoner of war
• You are a surviving spouse in receipt of Dependency and Indemnity Compensation (DIC) benefits in cases where the Veteran's death was not service connected
Note: A surviving spouse who remarries on or after age 57 and on or after December 16, 2003, may be eligible for the home loan benefit. However, a surviving spouse who remarried before December 16, 2003, and on or after age 57, must have applied no later than December 15, 2004, to establish eligibility.