Down Payment, PMI and Eligibility Explained

Home loans backed by the Department of Veterans Affairs have long been an affordable way for military members and their families to gain access to “the American Dream.”

But a new report from the banking institution, Navy Federal Credit Union, found that those eligible for a VA home loan have a number of misconceptions about how the program works.

In a statement to Military.com, Roger Strecker, residential lending expert at Navy Federal, said high out-of-pocket costs can be the biggest misunderstanding.

“A veteran may come into the home buying process thinking they need to put thousands of dollars down, only to learn that a VA loan may allow them to buy without a down payment or PMI (private mortgage insurance),” Strecker said. “Sometimes the biggest difference is simply helping a member see what’s available to them.”

Home Loan Report Reveals Misconceptions

According to Navy Federal’s Spotlight on VA Loans report, two-thirds of respondents believe a VA loan requires a down payment and more than 40% of current or former service members who have had a mortgage never used a VA home loan, despite their eligibility.

Among those who have used a VA loan, 91% said they would recommend it to a peer.

“VA loans can help make homeownership more attainable by reducing some of the financial barriers to buying a home,” Strecker explained. “Eligible borrowers can purchase without a down payment, avoid private mortgage insurance (PMI) and potentially secure a lower interest rate than with a conventional loan.”

The federal government backs VA home loans, which allows lenders to offer lower interest rates, among other benefits.

Navy Federal’s report found a VA loan rate beats a comparable conventional rate by about 0.25% to 0.5%, which compounds into thousands of dollars in savings over the life of the loan.

The VA also limits the amount and type of closing costs lenders can charge a borrower, which lowers what a buyer needs at the table.

Of course, the biggest benefit is a low or no down payment allowance and no private mortgage insurance.

PMI is a type of insurance that protects the lender if the borrower ends up not being able to pay the mortgage. It’s usually required on conventional loans if the down payment is less than 20% of the total mortgage amount.

Strecker said some private lenders that provide VA loans may require a small down payment for some borrowers, but the VA does not require a down payment directly.

“For a family preparing for a PCS move or buying their first home, not having to save for a traditional down payment can make a big difference,” Strecker noted. “That changes the conversation.”

Eligibility For VA Home Loans

While VA home loans are a popular option for service-connected first-time home buyers, subsequent home buyers are also eligible provided they sold their VA loan-backed home or paid it off in full.

Refinancing a VA home loan is also an option. Under the VA’s Interest Rate Reduction Refinance Loan, or IRRRL, a reduced-documentation, reduced-cost refinance is available to VA loan holders.

The program is designed for VA loan borrowers who purchased at a higher rate but want to take advantage of a lower interest rate that might be available.

“For families weighing a purchase in the new year, the more useful question is whether the monthly payment works today and whether there is a path to improve it,” according to Navy Federal’s report. “Anyone considering refinancing should know their current rate, compare it to what is available.”

On its website, the VA details who is eligible for a VA home loan. The list includes active-duty service members, veterans with discharges other than dishonorable, National Guard and Reserve service members, certain eligible spouses, and other uniformed service personnel under certain circumstances.

Navy Federal’s report found that many home buyers who are eligible for a VA loan don’t know it.

“That’s why we want veterans and service members to understand the benefits they’ve earned and feel confident using them,” Strecker said, adding that Navy Federal’s home-buying options can be a resource for service members, veterans and their families. “Buying and owning a home remains a goal for many of our active-duty and veteran members, and we continue to see that as more members choose us to help realize that goal.”