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By Gabriella Cruz-Martínez
June 17, 2021
Military Badge With A House Icon In The Center
Jose Velez / Money

VA loans are a great benefit for eligible veterans, active duty service members, and their spouses. However, don't take it as a given that you will be automatically offered the lowest 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.

Although the VA loan program offers favorable terms like no down payment and no private mortgage insurance (PMI) to those who qualify, the loans themselves are still issued through private financial institutions, just like any other mortgage. And while it is true VA loan rates are generally low compared to conventional mortgages, they will still fluctuate depending on your personal info and changes in the market.

With that in mind, here are a few tips to make sure you are saving money and making the most out of your well-deserved VA loan benefit.

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1. Understand VA loan types

The VA benefit includes several loan options available for purchase, refinance or home improvements for those who meet the service requirements and have their certificate eligibility (COE).

Interest rates for VA loans can vary significantly depending on the type of loan you choose. That’s because most lenders have different eligibility requirements tied to fixed and adjustable rate loan products.

Like other home loan programs, refinance rates for VA loans generally tend to be higher than purchase loans. Your mortgage term, or the length of time you have to repay the loan, also influences your interest rate.

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 may have lower monthly installments — but the overall cost and interest rate will be higher because the bank is taking on more risk.

Additionally, the VA has several other programs that may prove a better deal. 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 purchase, refinancing or VA streamline refi.
  • Native American Direct Loan: If you or your spouse is Native American, you can get a loan to buy, build, or improve a home on federal trust land.
  • Cash-Out Refinance: With a cash-out refi, you can replace your current VA loan with a new term and rate. You can also borrow against your home equity and use the cash to fulfill other financial goals.
  • Interest Rate Reduction Refinance (IRRRL): An IRRRL requires less paperwork than a cash-out refinance, and often doesn’t require an appraisal. This can save you underwriting fees and time, hence it being regularly referred to as a “streamline refinance.”

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. Unlike other home loan programs, the VA considers your residual income, or your monthly income after taxes and debts are paid off.

Similarly, lenders in the VA home loan program also look at your debt-to-income ratio, which is your total debt divided by your gross income. Your DTI 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 for DTI on VA loans and may be willing to accept a higher DTI in exchange for a higher interest rate. They may also have some guidelines in terms of credit scores they are willing to accept.

To lower your DTI, you can start by paying off debts such as your credit cards and minimizing expenses.

You can work on your credit by evaluating your credit report from the three major credit bureaus -- Experian, TransUnion and Equifax. You can obtain a free copy of each bureau’s credit report annually at AnnualCreditReport.com. (Due to the COVID-19 pandemic, free reports will be available weekly until April 2022.) Having your credit report on hand can help you identify any errors or negative marks you can change and repair your credit, if need be.

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3. Determine whether or not you should make a down payment

VA-backed loans don’t require a down payment. However, there are circumstances in which a down payment may be necessary or worthwhile.

  1. Lower your interest rate: A down payment could reduce your interest rate and save you money over the life of your loan. Subsequently, a lower interest rate will lessen your monthly mortgage payments.
  2. Reduce your VA funding fee: VA-backed loans require first-time home buyers to pay a funding fee between 1.4% and 2.3%. If you’re a second-time homebuyer, your VA funding fee could be up to 3.6% of the loan amount. Providing a downpayment can encourage your lender to reduce your funding fee amount.
  3. Start building home equity from day one: By making a down payment, you’ll start building home equity right off the bat. This can be a worthwhile investment if you’re interested in funding other financial goals through a cash-out refinance or home equity line of credit down in the future.
  4. Stand out in a competitive market: A down payment can let sellers know that you’re a serious buyer, and strengthen your offer. This can be an advantage worth having in a competitive housing market.
  5. Your lender requires it: You may have to offer a down payment if your home’s cost exceeds its appraised value, you didn’t get full entitlement, the home costs more than the conforming limit or you don’t qualify for a large enough loan.

Whether this is your first or subsequent time purchasing a home, your COE will show if you have full or remaining entitlement. Your VA entitlement is the amount the U.S. Department of Veterans Affairs guarantees on your loan, it will also determine if you need to provide a down payment.

Eligible borrowers with full entitlement no longer have to provide a down payment on loans over $144,000. 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.

Borrowers that have less than full entitlement are subject to the conforming loan limits in their county. The VA guarantees 25% of the county loan limit for those with remaining entitlement as long as they purchase within the conforming loan limit for their county. However, if borrowers with less than full entitlement borrow above the county's loan limit, they must provide a down payment.

4. Consider applying for state loan programs for veterans

In addition to the federal assistance available for eligible veterans to purchase homes, borrowers can apply to special home buying assistance programs in their state. These programs can provide rate discounts, 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 mortgage loans below market rate. The program includes several down payment assistance options that are available in all 67 counties throughout the state of Florida. These could include up to $10,000 in down payment or closing cost assistance.

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 investments 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 pre approval letter from three or more lenders will give you a realistic report on what a lender is willing to loan you based on a thorough credit check and information regarding your finances.

Pre approval 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.

For a pre approval letter, you’ll need to provide the following information to your loan officer:

  • Your name
  • Your social security number (to be submitted for a credit check)
  • Your income (W-2 or 1099)
  • Proof of employment
  • Tax returns
  • Bank statements or assets
  • Monthly debts (or other court mandated payments, such as alimony or child support)
  • Bankruptcy discharge documents (VA loans are available two years after a Chapter 7 bankruptcy or foreclosure, and one year after filing for a Chapter 13)
  • The address of the property you plan to purchase
  • The property’s sale price
  • The loan amount you want

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 upfront costs, origination fees, closing costs, interest rates, loan terms, eligibility requirements, and any products or discounts they may provide.

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Summary of Money’s 5 Tips for Getting the Best VA Loan Rates

VA loans feature lower interest rates and flexible credit requirements when compared to conventional loans. Here are Money’s main takeaways on how to get the best VA loan rate:

  1. Familiarize yourself with the types of VA loans available and their respective eligibility requirements
  2. Your credit score won’t dictate whether or not you’re approved for a VA loan, but a good score could still translate into a more favorable rate. Lowering your DTI and minimizing your debts can also improve your mortgage application.
  3. You can further lower your interest rate and closing expenses by offering a down payment on a VA loan.
  4. There are state programs that provide exclusive rate discounts and closing cost assistance to eligible veterans, military members and surviving spouses.
  5. VA loans are issued by private lenders. Like other home loan programs, it’s best to compare mortgage rates and shop around before settling on a lender.

To learn more about VA loans, check out Money’s 7 tips for getting a VA home loan