VA Mortgage Loans
VA mortgage loans come in several varieties to suit different needs, just like conventional mortgages. The big difference is that the VA sets more lenient requirements for loan approval than what most lenders follow when approving conventional mortgage loans.
Lenders are not required to follow the VA’s guidelines, and are free to impose stricter requirements than those set by the VA. Most, however, are willing to follow the looser guidelines because of the VA’s backing.
You can get a new VA mortgage loan to purchase a home, or you can refinance a current loan, either a VA loan or a conventional mortgage, with a VA mortgage loan. Whether purchasing or refinancing, you have several options.
Traditional VA Fixed Rate Loans
The fixed rate loan is the simplest loan to understand. The interest rate and monthly payments are determined at the start, based in part on your credit, current market conditions and the length of the loan. They then remain the same throughout the life of the loan, regardless of what happens to market interest rates.
Because all terms remain the same, you always know how much of each monthly payment is going toward paying off principle.
Traditional VA Adjustable Rate Mortgage (ARM)
ARMs are often attractive because the initial interest rate tends to be lower than the market rate. This might be tempting, but be careful and consider what might happen if interest rates rise sharply over the next year. While the VA does limit how much rates can rise annually (usually 1%), you could still face an unwelcome surprise if your income does not keep pace. The VA also places a lifetime cap of 5% on interest rate rises.
With an ARM your interest rate and monthly payments are adjusted annually. The initial interest rate is set for 12-18 months after closing. The first change date is set in the terms of the ARM, and future adjustments occur on the same date each year.
Hybrid VA Adjustable Rate Mortgage (HARM)
With a HARM, the initial fixed-rate period is longer than one year, usually either three or five years. After that, interest rates are adjusted annually, just like with a traditional ARM.
Adjustments are also capped on HARMs, but, depending on the length of your initial fixed-rate period, the initial adjustment may be as much as 2%, with a lifetime cap up to 6%.
Graduated Payment VA Mortgage (GPM)
If you cannot afford your anticipated mortgage payments now, but expect your income to rise within a few years, you may be able to opt for a GPM. With this type of VA loan, you defer a portion of the interest that would be due each month, resulting in initial payments that are smaller than normal. The deferred interest is added to the loan principle.
Your payments rise slowly over the first few years (usually 5) of the loan, stabilizing at larger-than-normal payments for the remainder of the loan.
One potential drawback to this loan is that because you are actually adding to the total loan amount for the first few years, you will need to make a down payment. This is because the VA will only guarantee loans up to a home’s assessed value or the purchase price, whichever is less. A down payment will ensure your loan total does not grow beyond this limit.
In addition, if your income does not rise as expected, you may not be able to afford the larger payments in the future.
Growing Equity Mortgage (GEM)
With a GEM, your monthly payments increase annually, with the increase going toward paying off additional principle. The increases are either fixed amounts or variable amounts tied to an index. Either way, with a GEM, you could pay off a 30-year mortgage in as little as 15 years. GEMs are not available in all areas.
Your lender can help you decide which type of VA mortgage loan is right for you.