5 Tips for Getting the Best VA Loan Rate

The home loan program run by the U.S. Department of Veterans Affairs is a key benefit for veterans and members of the military. However, don't take it as a given that you will automatically be offered the lowest mortgage rate just because you qualify for the program. Getting the best deal on your VA loan involves doing your due diligence and learning how to navigate the system.

For purchase loans, the VA program offers favorable terms like no down payment and no private mortgage insurance (PMI) to those who qualify, but the loans themselves are still issued through private financial institutions, just like any other mortgage. While it’s true VA loan rates are generally lower than conventional mortgages, the actual amount a borrower pays is influenced by market conditions and creditworthiness.

With that in mind, here are a few tips to make sure you are getting the most out of your benefit.

1. Understand VA loan types

The Department of Veterans Affairs offers home purchase and refinance loans for those who meet the service requirements and have their certificate of eligibility (COE).

Like other mortgages, your VA loan rate will depend on the specifics of your loan, including the length and whether it’s a fixed or adjustable-rate mortgage.

If you opt to repay your mortgage over a short period, with a 10- or 15-year mortgage, these terms often have a lower interest rate and overall cost. However, shorter term loans have higher monthly payments.

Meanwhile, a traditional 30-year loan will have lower monthly installments — but the overall cost and interest rate will be higher because the bank is taking on more risk.

Like other home loan programs, refinance rates for VA loans generally tend to be a bit higher than purchase loans.

There are two main options in the VA loan program. An Interest Rate Reduction Refinance Loan (IRRRL) is a streamline refinance that can be used to get a lower interest rate on a VA loan if the mortgage landscape changes.

The other type is a cash-out refinance, which allows you to borrow against your home equity and use the cash to fulfill other financial goals. A cash-out refinance replaces your current VA loan with a new term and rate.

Lastly, the VA has several other mortgage-related programs that may be of interest to veterans. Make sure to ask your lender about rates on the following items if you are interested and believe you qualify:

• Energy Efficient Mortgage: Allows qualified borrowers to bundle the cost of acceptable home energy improvements into their VA loan.
• Native American Direct Loan: If you’re a veteran and you or your spouse is Native American, you can get this low-rate loan to buy, build or improve a home on federal trust land.
• VA construction loan: Borrowers can use this type of loan to get favorable terms and competitive interest rates to finance home construction or renovation.

2. Lower your debt-to-income ratio

To calculate your VA loan rate, lenders will take a holistic look at your monthly expenses to determine your ability to repay a mortgage.

VA loans feature lower interest rates when compared to conventional loans, but your credit is still important.

Lenders look closely at your debt-to-income (DTI) ratio, which is your total debt divided by your gross income. This generally includes major installment debts such as mortgages, student loans, credit card debt and car loans pulled from your credit report.

As a rule of thumb, the VA recommends a debt-to-income ratio of at most 41%, including your mortgage. However, lenders set their own maximum and may be willing to accept a higher debt-to-income ratio in exchange for a higher interest rate. They may also have some guidelines in terms of credit scores they are willing to accept.

Lowering your debt-to-income ratio falls under the category of something that’s easy to say, but harder to pull off: You may need to stick to a strict budget for an extended period of time to make a big enough dent in your debts. As always, start by paying off high-interest debt, like credit cards.

3. Determine whether you should make a down payment

Eligible borrowers with full entitlement do not have to provide a down payment on VA loans, which is one of the major benefits. (VA entitlement refers to the U.S. Department of Veterans Affairs guaranteeing your loan. Your Certificate of Eligibility will show if you have full entitlement, which is the maximum guarantee, or only “remaining entitlement.”)

In the case of default, the VA provides a federal guarantee that will reimburse the lender — 25% of the entire loan amount for those with full entitlement. This reduces risk for lenders, which makes it possible for them to offer loans without down payments.

However, there are several circumstances in which a VA loan borrower without full entitlement would be required to make a down payment; for example, if a home’s cost exceeds the loan limit. Veterans can read about down payment requirements for “remaining entitlement” on the VA website.

Even if it's not required by the lender, a down payment can be a critical help in getting the property and loan terms you want. It can lower your interest rate because a down payment is a signal to the lender of financial strength and means you’ll either have equity or be closer to having equity. Making a down payment can also help you stand out to home sellers in a competitive market by making it clear you’re serious.

Finally, making a down payment can reduce your VA funding fee. VA-backed loans require first-time homebuyers to pay a funding fee between 1.25% and 2.15%. If you’re a second-time homebuyer, your VA funding fee could be up to 3.30% of the loan amount. With a larger down payment, you’ll pay a lower funding fee.

4. Consider applying for state loan programs for veterans

In addition to the federal assistance available, eligible veterans may also be able to take advantage of special home buying assistance programs in their state. These programs can provide rate discounts as well as down payment or closing cost assistance.

One example, Florida’s Salute Our Soldiers Military Loan Program, offers qualifying veterans or active military members 30-year fixed rate mortgages below market rate. The program also offers several down payment or closing cost assistance options worth up to $10,000.

Most states and counties provide similar state-run veteran home loan programs to help eligible VA borrowers purchase a home at an affordable rate.

5. Compare lender rates before settling on a VA home loan

A mortgage is one of the most expensive financial commitments you’ll make in your life. As such, it’s important to compare VA loan lenders and consider all options in order to get the best deal.

Before you begin shopping for rates, you should know the type of loan and length of term you want. You should also know the loan amount, the rate type (fixed or adjustable) you prefer and if you are going to offer a down payment.

The next step is to contact several lenders you are considering and request a loan estimate. For a mortgage loan, requesting a preapproval letter from three or more lenders will give you a realistic idea of what a lender is willing to give you based on a thorough credit check.

Preapproval letters are generally valid for 30 to 60 days and include information regarding the type of loan, purchase price, qualified interest rate and loan amount you would get. Keep in mind that interest rates can fluctuate after your preapproval, unless you lock the rate in.

When shopping for a mortgage, multiple credit inquiries within a 14- to 45-day period will be reported as one single hard credit check on your credit report.

To narrow down your search, make sure to take into consideration the estimated upfront costs, including origination fees and closing costs, plus the interest rate, loan terms and the lender’s eligibility requirements.