If there’s one thing most borrowers worry about when taking out a home loan, it’s the interest rates. Usually, they want the lowest rate available. Where do VA loans stack up in this race for the lowest rate?
Generally speaking, yes VA rates are lower than most other loan programs’ interest rates. We have the government’s guarantee to thank for this benefit. The VA guarantees 25% of every loan they approve. This means if you default on your VA loan, the VA will pay the lender 25% of the amount they lost. Because of this, VA lenders have more leniency when it comes to charging specific interest rates.
It’s All About the Risk
Now just because VA interest rates should be lower than the rates of other home loans doesn’t mean they always will be. The base rate might be lower, but it’s your personal qualifying factors that help determine the actual rate you get.
Even though the VA doesn’t require lenders to focus on things like the credit score and debt ratio, you can bet they will make a difference in the rate the lender charges you. Basically, the lower your credit score and the higher your debt ratio are, the higher your risk. A higher risk means a higher interest rate.
Just what credit score and debt ratio does the VA require? In general, they want a 620 credit score and a maximum 43% debt ratio. This doesn’t mean that if you have a 605 credit score you won’t get approved. It depends on your other qualifying factors. Lenders look at the big picture. They want to know your overall risk by looking at your credit score, debt ratio, and amount of disposable income all together.
It Depends on the Lender
We are going to complicate this even more, now. Even if you have the perfect situation, you will likely find different interest rates from lender to lender. Each lender has their own threshold for risk. They also have their own base rates that they use. You might find that one lender will charge you as much as 0.5% to 1% more than another lender.
We recommend checking with at least 3 different lenders before determining which lender has the lowest interest rates. You may find a lender that really thinks you are a good risk and gives you a lower rate than another lender that considers your credit score and debt ratio too risky.
Don’t Focus on the Interest Rates Alone
As tempting as it is to focus only on the interest rates, they are not the only factor that determines how much a loan costs you. You have to consider the closing costs too. These play a large role in the overall cost of the loan.
A good way to tell what a loan will cost you is to look at the APR. This is the total cost of the loan over its entirety. A higher APR means the loan costs you more in the long run. A lower APR means you found a good loan that will save you some money.
The perfect loan for you is the one with the lowest interest rates and closing costs combined. You might end up paying a 0.25% higher interest rate, but secure a loan with much lower closing costs. It depends on what you want. Do you want more upfront costs or would you prefer to pay more upfront and save money on a monthly basis? Again, check with different lenders to figure out what works the best for you.