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Buying a home through the VA loan program: What you need to know

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Clark Howard Staff

When it comes to home buying, there are special considerations that go along with wearing the uniform of our nation. Chief among them is should you even buy a home when you might have to move post in a few years?

To arrive at the answer to that question, your first stop should be to consult a “Rent vs. Buy calculator.” Look at sites like BankRate.com, Trulia.com or any other popular home pricing website to find a calculator. The answer can vary widely by region around the country!

3 things to know about the VA loan program

If you do decide to buy, you’ll likely be eligible for the VA loan program. Here are some things to know about this program:

No down payment is required

This effectively means you can get into your house quicker without having to save up a 20% down payment as would have to for a Federal Housing Administration (FHA) or conventional loan.

But just because you don’t have to bring down payment to the table, it doesn’t mean you shouldn’t. There is a one-time funding fee for a VA loan that varies between 1.25% and 2.15% of the total loan amount you take out. The more down payment you have, the lower that fee will be for you.

If you’re a reservist/National Guard, the one-time funding fee you’ll pay varies between 1.5% and 2.4%.

There’s no minimum credit score requirement

However, there is one exception to this rule that’s important to note. Because the VA is not a direct lender, the private lenders they partner with do have their own internal lending standards. Generally that means they look for a score of 620. But the good news is that there is some flexibility on credit score with a VA loan. Unfortunately, the bad news is that you’ll likely pay a higher interest if you have a credit score that’s lower than 620.

If you’re suffering from poor credit, there are several surefire ways to get your credit healthy again. Follow these tips and you’ll be well on your way:

  • Always pay your bills on time and pay down the total amount you owe.
    (accounts for 35% of your score)
    If you forget all else after reading this, remember this one! This is the single most important rule for having a good credit score.
  •  Keep a low credit utilization rate.
    (accounts for 30% of your score)
    Let’s say you have a credit card with a $10,000 limit. If you’re carrying a balance month-to-month of $3,000, you’re only using 30% of the total limit. But if your credit limit is suddenly dropped to $3,000, then suddenly you’re using 100 percent of what’s available to you. That’s yet another reason to always pay down credit card debt as quickly as possible. You always want to stay at credit utilization of 30% or less.
  • When you pay off a credit card, don’t close the account.
    (accounts for 15% of your score)
    Doing so only reduces your available credit and drives your score down. You want to have between four to six lines of credit. Be sure to use them twice a year—even if it’s just for a dollar store purchase—and pay them off right away. That will keep them active in your credit mix.

    If you’re facing a huge new annual fee on a card that has a zero balance, try “leapfrogging.” Using the 45-day window you have before any new terms of service go into effect to shop around. So once you get notice about a new annual fee, start looking around for other no-fee credit cards. Submit your application and once you get your new no-fee card, then go ahead and shut down the original one that wanted to spring a fee on you.

The remaining 20% of your credit score is comprised of what types of credit make up your credit mix (10%) and how much new credit you have in your life and how quickly you took it on (10%).

No mortgage insurance is required

Unlike an FHA or conventional loan, a VA loan doesn’t require mortgage insurance. That means you won’t be penalized if you have less than 20% down.

In the civilian world, mortgage insurance (aka private mortgage insurance or PMI) is a tool that allows banks to make mortgage loans to people who have a down payment of less than 20% of their home’s value. Borrowers will less than 20% might otherwise be considered to be too risky to lend to. So PMI is basically insurance that is paid for by the consumer to cover the bank against the risk of default.

Not having to pay mortgage insurance that protects your lender in case you stop paying on your mortgage is big. This benefit alone can mean savings of $100 or more each month.

 

 

 

 

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