For those home buyers fortunate enough to be eligible for a VA home loan, it’s an excellent option. The program offers flexible credit and qualifying terms and remains a popular choice for buyers in and around Charleston.
The VA mortgage also permits unlimited loan limits for first-time users. Loan limits will still apply in 2023 to veterans who have more than one active VA loan or have defaulted on a previous loan.
There are several attractive features but perhaps the most important one is the availability of 100% financing. VA is a true zero-down home loan program and as a plus, there are no monthly mortgage insurance (PMI) payments like other loan programs with a low or zero down payment.
In addition to veterans, active duty personnel can also be eligible if they have at least 181 days of service. National Guard and Armed Forces Reserve members with six years of service. So too are unmarried, surviving spouses of those who have died while serving or as a result of a service-related injury.
Without a doubt the most popular VA loan choice is the standard, 30 year fixed rate loan. Stretching out the loan term over 30 years keeps the payments lower compared to shorter terms. However, lenders also offer loan terms of 10, 15, 20 and 25 years. You’ll want to work with your loan officer to decide which term is best for your situation. A shorter term will yield higher monthly payments but much less in long-term interest compared to a longer-term loan. The second most popular fixed rate term is for 15 years.
Another option for a VA loan is an adjustable rate mortgage or ARM. An ARM is a loan that can and will have the rate adjusted based upon predetermined factors. Popular VA ARM choices are either a six month ARM or a one-year ARM. As the name implies a six month ARM can adjust every six months while the one-year ARM can adjust once per year. ARMs are calculated by adding a margin to a preselected index.
A popular index for a VA ARM is the 1-year Constant Maturity Treasury or CMT. The most common margin is 2.00 or 2.25. If the CMT today was 2.50 and the margin 2.00, upon adjustment time the new rate would be 2.00 + 2.50 = 4.50 and would remain at that rate until time for the next adjustment.
However, when borrowers select a VA ARM, it’s rarely a six-month or one-year ARM but a hybrid. A hybrid is a cross between a fixed and an ARM because the initial rate is fixed for a specified period. A 5/1 ARM will have a rate that is fixed for five years before turning into a loan that can adjust once per year. The 5/1 is the most popular choice although there are other available terms such as a 3/1, 7/1 and even a 10/1. The hybrid loan is a popular choice for those seeking a lower rate compared to prevailing fixed rate loans.
In addition, when it does come to adjustment time after the initial fixed term, there are limits on how much the rate can adjust. These limits are called rate caps. Caps can vary based upon the type of loan but a common cap for the initial adjustment is 2.00 percent with an annual cap after that of 1.00 or 2.00 percent. There are also loans that can have an initial cap as high as 5.00 percent. Your loan officer can help provide you with all the details.
Finally, even though the VA loan is a popular choice, it’s not always the best choice. For someone that has a down payment of say 20 percent or more, it might be wise to select a conventional loan. VA loans come with a guarantee to the lender should the loan ever go into default.
This guarantee is 25 percent of the loan balance and is financed by what is known as the Funding Fee. This fee varies based upon usage, term and other factors but all VA loans do come with a funding fee that is added to the loan amount. But for someone wanting to come to the closing table with as little cash as possible, the VA loan is going to be the ideal choice for those who are eligible.