If you’re like many people, you qualify for a loan backed by the U.S. Veterans Administration – but how do you use a VA loan to buy a home in Nashville, Brentwood, Franklin or another city in Middle Tennessee? This guide explains.
How Do You Use a VA Loan to Buy a Home in Tennessee?
VA loans are for veterans of the U.S. armed forces, their qualifying dependents and a handful of others who qualify. If you’re a veteran or current service member in any branch (including the reserve components), you may be eligible for a VA loan. You’ll have to obtain a Certificate of Eligibility, or CoE, from the U.S. Veterans Administration.
After you have your CoE in-hand, take it to your lender. Your lender will explain your loan options.
How Does a VA Loan Work?
A VA loan doesn’t actually come from the VA. Instead, the Veterans Administration backs it; that means the VA guarantees some or all of the loan. Your lender gets a guarantee from the VA that if you default on your payments, the VA will help cover its losses.
Because the U.S. government is backing the loan, lenders are comfortable giving you more favorable terms and conditions than you may get if you were buying without government backing.
VA loans are just like many other mortgage products, but they come with specific benefits that make them attractive to many veterans. You can use a VA loan to buy a house, a condo, a duplex or another type of property as long as you intend to live in it as your primary residence. You can even use it to buy a farm property, provided that the farm property has a house on it and that you’re not using the loan to pay the costs of running a farm business.
VA Loan Benefits
VA loans come with a wide range of benefits that make them attractive for many veterans, including:
- No down payment required
- No private mortgage insurance
- No minimum credit score
- No prepayment penalty
- Limited closing costs
Here’s a closer look at each.
Benefit #1 to Using a VA Loan: No Down Payment Required
You don’t have to come up with a down payment if you use a VA loan – you can be approved with nothing down. However, you should talk to a financial adviser if you’re planning to buy a home with a VA loan (or any other mortgage product), because even a small down payment can make a major impact on your monthly payments over the life of your loan.
Benefit #2 to Using a VA Loan: No Private Mortgage Insurance
The VA prohibits lenders from forcing you to buy private mortgage insurance, or PMI. Private mortgage insurance is a form of insurance that protects the lender (not you), and most lenders require it when you put down less than 20 percent of a home’s purchase price as a down payment. This insurance can be expensive – it may add thousands of dollars to your mortgage costs each year. But because these loans are backed by the VA, lenders don’t need you to buy separate insurance.
Benefit #3 to Using a VA Loan: No Minimum Credit Score
The VA doesn’t let lenders determine your loan eligibility based solely on your credit score. Instead, it requires lenders to look at your entire financial picture before determining whether to lend you money to buy a house. That means even if you have less-than-perfect credit, you’ll still likely be eligible for competitive interest rates and favorable terms. However, you need to know that individual lenders may have minimum credit score requirements.
Benefit #4 to Using a VA Loan: No Prepayment Penalty
The VA prohibits lenders from charging you a prepayment penalty if you pay off your loan early. That means if you have a 30-year mortgage and you want to pay off your loan ten years in, your lender can’t charge you a fee for doing so. It must allow you to pay off your loan.
Benefit #5 to Using a VA Loan: Limited Closing Costs
The VA limits the amount of money your lender can charge you for closing costs. It also allows sellers to pay some or all of your closing costs, which saves you money on closing day. You may also have the option of rolling your closing costs into your mortgage, which means you won’t have to pay for all your closing costs up-front.
What is a VA Funding Fee?
The VA charges a funding fee that you’re supposed to pay as part of your closing costs. You may have the option to roll your closing costs into your mortgage; that means you don’t have to pay it all up-front and your costs will be spread out over the life of your loan.
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