It might surprise you to learn that the VA doesn’t set VA loan interest rates. The VA plays a very removed role in your loan process. They guarantee the loan for lenders, but they don’t play a role in underwriting, funding, or even the interest rates.
So who sets the rates? It’s up to the lender. All lenders start with a ‘base rate’ based on the market. But from there, they adjust individual interest rates based on a variety of factors. Keep reading to learn the factors that affect your VA loan interest rate.
Your Credit Score
The VA doesn’t put a lot of emphasis on credit scores. In fact, they don’t have a published minimum credit score that they require. Lenders typically do, though. In general, you need at least a 620 to get a VA loan. But a 620 credit score won’t get you the lowest interest rate possible.
Lenders use your credit score to determine your level of financial responsibility. A low credit score could signify that you are financially irresponsible. Lenders will look closely at your credit history to see why you have a low score. They look for the following:
- Late payments
- Defaulted loans
- Overextended credit
- Multiple inquiries
All of these factors put you at risk for default and make the lender adjust your interest rate accordingly. How much a lender increases your interest rate due to a low credit score varies by lender, though.
Your Debt Ratio
Again, the VA doesn’t have strict requirements for debt ratios, but they don’t want you financially overextended. Your total debt ratio should be equal to or less than 41% to get a VA loan, but a lower debt ratio will have a better impact on your interest rate.
Your debt ratio tells lenders how much of your monthly income has a job already. If you overextend yourself financially, you increase your risk of default. That’s why borrowers with a lower debt ratio typically get lower interest rates than those with higher debt ratios.
There’s no magic number that will get you the lowest interest rate, but if you want to stick to conventional loan guidelines, a housing ratio near 28% and a total debt ratio near 36% will yield the best results.
Lenders like it when you have the same job for a while – typically at least two years. This shows them stability and consistency. If you did change jobs within the last two years, a lender may increase your interest rate accordingly.
There are exceptions to this rule, though. If you change jobs but stay within the same industry, lenders look at it as a lateral move and don’t discount the consistency of your employment. If, however, you completely change industries, such as moving from being a banker to a teacher, there may be some inconsistency. Lenders like to see a history at the same type of job to determine your likelihood of succeeding.
It all comes down to how likely you are to make your mortgage payments on time. A new job could be risky, especially if you started it rather recently. If a VA lender decides to give you a loan, they will likely hike up the interest rate to make up for the risk.
A Down Payment
If you know anything abbot VA loans, it’s probably that they don’t require a down payment. That’s the pull that makes many veterans opt for this loan program. But, that doesn’t mean that you cannot make a down payment if you want to and can do so.
Putting money down on the home lessens the lender’s risk of default. It gives you ‘skin in the game.’ In other words, you have a vested interest in the home. If your income became unstable, chances are that you would do whatever you could to keep making your mortgage payments because you don’t want to lose your investment. If you didn’t make a down payment, you have less to lose since a majority of your monthly payments go to interest rather than principal for the first few years.
If you make a down payment, lenders will be more willing to lower your interest rate because of the lower risk of default. The lender has to put less money out for you to buy the home and there’s instantly equity in the home, should it be needed down the road.
Your VA interest rate is a combination of the state of the market and what the lender feels comfortable giving you. Doing your part and maximizing, your qualifying ratios can help you get the lowest VA interest rate possible.