What Determines Your VA Home Loan Rates?

VA home loan rates tend to be lower than the average private loan quote. However, the rates are still set by individual lenders, so they vary significantly from borrower to borrower. While the VA offers to guarantee loans to qualified veterans, it does not make the loans nor set the rates itself. Instead, it imposes certain regulations on the lender and borrower in order for the guarantee to go through. If you are considering taking a VA loan, you will benefit from these regulations, but you will still be at the mercy of the private lender when it comes to your exact interest rate.

Purpose

The purpose of a VA loan is to make home ownership more affordable for veterans. Historically, veterans have had difficulty owning homes because of their damaged credit. Credit can suffer due to military involvement for many reasons. Namely, veterans are disengaged from the credit system while in the military, giving them insufficient opportunities to build a positive credit rating. The VA assists with this problem by offering insurance on loans taken by an active duty member or veteran of the armed forces.

Structure

A VA loan operates similarly to an FHA or USDA home loan. The borrower goes to a private lender to secure a loan. If the private lender determines that the borrower qualifies but needs additional assistance meeting down payment requirements or securing a low interest rate, the borrower may elect to secure federal assistance. The borrower applies for a VA home loan guarantee. This guarantee is a form of public insurance on the debt backed by the federal government. In exchange for this high degree of security, the lender will accept a lower interest rate and lower down payment and forego private mortgage insurance requirements.

Process

While it is possible to get a private loan first and then attempt to secure a VA guarantee, it is typically favorable to get the guarantee first. With a guarantee, you will decrease your down payment requirement, often making it as low as 3.5 percent through federal assistance. You will also discover the loan limits the VA is willing to underwrite for you. This can help you narrow down your home search before applying for a loan. To determine your eligibility, fill out VA Form 26-1880. You can do this online or send it in by mail. You will need a copy of your military ID or your discharge papers in order to qualify. The VA will respond within weeks to inform you if you qualify and detail your loan limits and down payment requirements.

Take your VA home guarantee with you when you apply for a loan. The lender will take this strong security into account when quoting your loan terms. All VA home loans must be set with fixed rates. After you receive your pre-approval, you can search for a home. After you have found your home, the VA will perform a private inspection to assure it meets the VA's requirements for a living space. Finally, you can sign your mortgage.

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