Real Estate & Area News

VA Loans 101 - Advantages and Disadvantages

VA loans are an important tool for active-duty military members and veterans alike, but many Americans are confused by the program and how to participate. Orchestrated by the US Department of Veterans Affairs, VA loans provide a way for servicemen and women to buy a home without putting money down and without paying for expensive private mortgage insurance. Of course, the VA doesn't extend the loans itself, but rather sets guidelines for and insures the loans, empowering lenders to originate mortgages to borrowers who would otherwise not qualify.

Since the Great Recession, VA loans have steadily increased in popularity, surging from just 133,000 active VA loans in 2007 to a whopping 630,000 last year. That's an increase of more than 300 percent in just six years. The program began just after World War II and celebrated its 70th anniversary this spring. Housing insiders attribute the massive increase in demand for these loans to several factors, including a rise in the number of qualifying veterans, the less-than-bustling US economy and a tightening of credit standards for lenders that has made securing a home loan much more difficult.

VA loans provide access to thousands of veterans and active-duty personnel, particularly when the country is considered to be at war, as it has been since the Gulf War, more than 20 years ago. In peacetime, veterans have to have served 180 days of active duty to qualify for a VA loan, but that number is cut in half during times of war. Another major advantage of VA loans is that a much lower credit score is required than with traditional loans. According to statistics provided by mortgage insurer Fannie Mae, the average credit score required by lenders this year is 725, while the average credit score of VA loan borrowers this year is just 620. This is especially helpful for active-duty personnel because they often get more hits on their credit score because of how often they travel.

While VA loans represent the only option for many home buyers that qualify, experts recommend exploring a conventional mortgage before opting for a VA loan, particularly for those that can afford to make a 20 percent down payment. That's because conventional loans typically carry lower interest rates than VA loans, making them the less expensive option in the long run. Experts suggest speaking with several lenders before making a choice, as lenders are constantly adjusting their rates and may have different standards for lending than other lenders.

May 28, 2014