Probably the most significant benefit a VA loan affords eligible borrowers is that it does not require a down payment. Many borrowers, however, tend to think it is too good to be true or that there is a catch.
Here is an explanation why the VA loan program, offered by different mortgage companies like Primary Residential Mortgage, Inc., could afford to offer 0% down payment.
The VA Loan Guaranty
Lenders and banks approved by the Veterans Affairs offer VA loans, with each loan they approve being backed by the government. This means that provided that borrowers comply with the VA guidelines, their mortgage would be guarded by a safety net provided the government. If the borrower defaults on his or her mortgage, the government would shoulder some of the loss and reimburse the lender. This is called the VA Loan Guaranty.
Lenders of conventional mortgages require borrowers to give a down payment as their safety net, so they have something to hold onto if borrowers default. With VA loans, the VA Loan Guaranty replaces the down payment, so a down payment is not needed. Take note, however, that this guaranty has a limit that differs from one location to another.
Why a 0% down payment is very helpful
Getting a conventional loan could be difficult for borrowers mainly because of the usual 20% down payment requirement. Conventional loans, likewise, require private mortgage insurance, which borrowers would need to pay monthly, adding to the overall cost of their mortgage payments.
The bottom line is that eligible military borrowers are fortunate enough to take advantage of the 0% down payment benefit, with the bonus of not paying for mortgage insurance. When combined, these could save military home buyers a ton of cash that they could use for other purposes.