When buying a home, you'll find that financing isn't standardized. The current state of a buyer's finances, financial history, and housing market fluctuations all affect the options available for a home purchase.
Taking the time to learn the lingo, determining wants vs. needs, and exploring the options available before settling on a home loan can help ensure buyers get the most out of their investment. Here's what to know about home financing options for both veteran and military homebuyers.
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Get Familiar with Common Home Financing Terms
Before diving into how to choose a loan and home financing options, it's important to clarify the terminology.
Must-Know Home Financing Terms
Mortgage: Debt secured by the collateral of specified real estate property that the borrower must pay back with a predetermined set of payments.
Mortgage Interest: The interest charged on a loan used to purchase a residence. Mortgage interest is due on primary and secondary loans, home equity loans, lines of credit, and as long as the residence is used to secure the loan. This interest is deductible on taxes.
Mortgage Rates: The percentage of the loan principal that the lender charges for borrowing the money.
Mortgage Insurance: An insurance policy that protects a mortgage lender or titleholder if the borrower defaults on payments, dies, or otherwise cannot meet the contractual obligations of the mortgage.
Private Mortgage Insurance: Private Mortgage Insurance (PMI) is a special type of insurance policy, provided by private insurers, to protect a lender against loss if a borrower defaults. Most lenders require PMI when a home buyer makes a down payment of less than 20% of the home's purchase price—or, in mortgage-speak, the mortgage's loan-to-value (LTV) ratio is over 80% (the higher the LTV ratio, the higher the risk profile of the mortgage).
Mortgage Prequalification: An initial estimate of how much money a lender can loan a buyer to purchase a house. A mortgage prequalification isn't based on verified information and should not be the basis for setting a home-buying budget.
Mortgage Preapproval: A lender’s written agreement to loan a buyer a specific dollar amount based on verified financial documents.
Wondering if you should pursue mortgage preapproval or prequalification? It’s crucial to understand that a prequalification doesn't mean you'll be pre-approved for that amount. A mortgage preapproval in hand tells the seller that you’re a serious buyer and can afford to buy their house.
Adjustable-Rate Mortgage (ARM): With an adjustable-rate mortgage, the interest rate on the remaining balance changes periodically. Normally, the initial interest rate is fixed for a period, after which it resets periodically, often every year or even monthly. The interest rate resets based on a benchmark or index plus an additional spread, called an ARM margin.
ARM Margin: A fixed percentage rate that is added to an indexed rate to determine the fully indexed interest rate of an adjustable-rate mortgage (ARM). Adjustable-rate mortgages are one of the most common variable-rate credit products offered in the primary lending market.
Fixed-Rate Mortgage: A mortgage loan that has a fixed interest rate for the entire term of the loan. Generally, lenders can offer either fixed, variable, or adjustable-rate mortgage loans with fixed-rate monthly installment loans being one of the most popular mortgage product offerings.
Annual Percentage Rate (APR): The annual rate charged for borrowing or earned through an investment, expressed as a percentage that represents the actual yearly cost of funds over the term of a loan.
Home Equity: The value of the homeowner’s interest in their home. In other words, it is the real property’s current market value less any liens that are attached to that property. Over time, this value shifts due to mortgage payments and the impact of market forces on the property's present value.
Learn what documents you'll need for home financing.
Define Your Home Financing Requirements
Knowing your financial needs and borrowing power is key to choosing the appropriate home loan.
Your Credit Score
Ensure that your credit is in order so you can open the door to better financing options. However, there are financing options available if your credit score isn’t shining its brightest. (See the financing options below.)
Budget
It's time to assess your financial capacity for homeownership. A mortgage preapproval will help set parameters for your house-hunting budget. And if you’re active-duty military, your BAH (Basic Allowance for Housing) will as well.
Review your BAH rates and decide how much of that you’re willing to put toward a mortgage. If you plan to rent the property when you PCS, ensure that you can afford to list it at a competitive price for potential tenants.
Down Payment
If you’re looking for homes within a specific financial bracket, decide how much you’re willing and able to put into a down payment. Then ask yourself how long you want to make payments on the house and if you want a fixed-rate or an adjustable-rate mortgage.
After you've determined your preferred mortgage terms, you can begin exploring home loan options to identify the one that best fits your current financial situation.
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Explore Financing Options
So, what home financing options are available for military and veteran homebuyers? The short answer is, there are many. Once you know what you’re looking for, it becomes much easier to compare different options and determine which is best for you.
VA Home Loan
The VA Loan is known for its competitive rates and the no down payment option for veteran and military home buyers and some family members.
VA Loan Eligibility
- Active-duty military members with a statement of service
- Veterans with a Certificate of Release or Discharge from Active Duty Form DD214
- Spouses of military members who’ve died on active duty or because of a service-connected disability
VA Loan Pros
- Offers 100% financing
- The Department of Veterans Affairs backs the loans, so there are no PMI fees
- Lower mortgage rates
VA Loan Cons
- Lower limits on loan size
- Loan must be for primary residence only
USDA Loan
A USDA loan is a great option for homebuyers looking for a primary residence in rural and some suburban areas. Low- to moderate-income borrowers can use the loan, which offers affordable options with little to no down payment.
USDA Loan Eligibility
- You must fall within a set financial bracket for the area
- Must be able to repay debt
- Property within a predefined eligibility zone
- The home must be used as a primary residence
The lender determines the loan amount for qualifying applicants case-by-case, based on their ability to repay.
USDA Loan Pros
- Options for no down payment
- Closing costs may be covered by gift funds, seller concessions, or rolled into the loan in some circumstances
- The loan interest rate is based on current market rates at loan approval or loan closing, whichever is lower
- USDA Direct Loans may offer reduced interest rates for qualifying low- and very low-income borrowers through payment assistance
- Home buyers using a USDA Direct loan can have up to 33 years to pay back the loan. It may be extended to 38 years for qualifying applicants
- No pre-payment penalty
USDA Loan Cons
- Limits on location of property
- Income limits on eligibility
- A USDA loan cannot be used to purchase an investment property
- USDA Direct Loans can have longer processing times than conventional financing
- USDA loans include guarantee fees
FHA Loan
The Federal Housing Administration is part of HUD and helps qualifying home buyers get a great deal when it comes to buying a home, especially first-time home buyers.
FHA Loan Eligibility
Depending on the lender, a minimum credit score of 580 or more could qualify buyers for a 3.5% down payment, while a score of 500 to 579 might allow for a 10% down payment. Borrowers must also:
- Demonstrate the ability to repay the loan
- Be purchasing the home as a primary residence
- Meet FHA loan limits for their area
FHA Loan Pros
- Buyers can include the cost of energy-efficient updates under an FHA Energy-Efficient Mortgage
- Gifted funds can help cover closing costs
- Offers financing options for mobile and manufactured homes
- Low down payments
- Relaxed credit requirements
- No early payment fees
FHA Loan Cons
- Doesn't offer 100% financing.
- Borrowers must pay both an upfront mortgage insurance premium (UFMIP) and monthly mortgage insurance premiums (MIP)
- For those putting down less than 10%, monthly mortgage insurance typically lasts for the life of the loan
- This loan is often less flexible than conventional home loans
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Conventional Home Loans
The government doesn't back conventional home loans, so it usually requires a higher down payment accompanied by private mortgage insurance. A conventional loan works best for borrowers with strong credit, stable income, and lower debt levels.
Conventional Home Loan Eligibility
- Credit and income requirements vary by lender, but a stronger credit score means better rates and terms
- Buyers must meet loan limits for conforming conventional loans
- Down payment requirements vary, with some programs allowing as little as 3% down for qualified buyers
Conventional Home Loan Pros
- With a higher down payment required upfront, the home builds equity faster
- More freedom to negotiate terms and conditions than a government-backed loan
- Fewer restrictions on property and eligibility requirements
- Typically offered in 15- or 30-year notes and have lower interest rates
- Buyers who are able to put 20% down can avoid PMI altogether
- Can be used for second homes and investment properties and is not limited to primary residences
Conventional Home Loan Cons
- Higher down payment requirement
- Interest is higher than VA home loan rates and often requires larger down payments
- Private mortgage insurance is typically required for down payments below 20%
A conventional loan benefits buyer who can pay off the loan within a shorter time frame, which means spending less on interest.
As you move forward into buying a home, use these steps to guide you in the right direction. Next, speak with a military-friendly lending expert to determine the best home financing for your situation and secure a mortgage preapproval.
Some popular military-friendly lenders:
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