Rates Are Rising, How Does this Affect VA Loans?

how does interest rate affect va loans

Rising interest rates have been all over the news in the last few months, and you might be asking yourself, “How does interest rate affect VA loans?” For veterans, active service members, and surviving spouses this is a perfectly valid question, especially if you’re trying to buy a home in the current real estate market.

The two are closely tied, as interest rates are a large part of calculating how big of a loan you qualify for. This article will help you understand exactly how the two are connected, how this impacts you, and what you should do with that information.

Why Are Interest Rates Rising?

Let’s start with why rates are currently on the rise. The Federal Reserve, often referred to as the Fed, controls the rate at which banks can lend money to one another overnight. The Fed is also responsible for making sure that consumer prices stay somewhat stable.

One of the primary ways that the Federal Reserve combats inflation is by raising the federal funds rate, or the rate at which banks can lend to each other. The thought process goes that if money is more expensive to borrow, then people will be more inclined to save rather than spend, helping drive prices down.

The inverse is also true. The Fed has set historically low interest rates over the last few years in an effort to boost the economy during the turmoil of the Covid-19 pandemic. Making money cheap to borrow incentivizes more people to borrow and spend, introducing more cash into circulation.

At the moment, however, troubling inflationary numbers have spurred the Fed into increasing the federal funds rate. This has a cascade effect on people seeking a home loan.

How Do Higher Interest Rates Affect VA Loan Rates?

The unfortunate truth is that higher interes rates for banks result in higher interest rates for homebuyers, including VA loan rates. It’s important to note, however, that higher rates do not make buying a home impossible. You’ll just need to know what you qualify for and adjust your homebuying accordingly.

Because interest rates are factored into your monthly mortgage payments, they do impact how large of a loan you might qualify for. Higher payments represent a larger portion of your income, meaning that a bank will likely offer you a smaller amount. This is true for both conventional mortgage rates and VA mortgage rates.

When calculating the size of a loan that you qualify for, banks typically determine your debt ratio. This is essentially your monthly debts divided by your monthly income. Your monthly debts include any loan payments you need to make (car loans, student loans, credit card payments, etc.) and your mortgage, which includes your principal and interest. Therefore, a higher interest rate increases your debt ratio, making you less likely to qualify for a larger loan amount.

VA Home Loans vs Conventional Loans – What Are the Differences?

The Department of Veterans Affairs offers loans to help those who have served purchase a home. But just because you qualify for a VA loan doesn’t mean that you have to use one. Conventional loans are still available to you, making it important to understand the differences to choose the right option for your specific situation.

The Pros of VA Loans

VA loans typically have a lower interest rate. This is a particularly important pro for VA loans at the moment. Even a fraction of a percentage point, when spread over a 15 or 30 year timeframe, can make a big difference to how much you pay for your home in total.

VA loans do not require a down payment. Nearly all conventional loans will require a down payment, but not a VA loan. You can close on your home with 0% down. This can be a major help to first time homebuyers who haven’t had time to grow a large savings account.

VA loans do not require private mortgage insurance. Commonly called PMI, this insurance is often required by banks when your down payment is less than 20%. Because the VA will guarantee up to 25% of your loan, PMI is not necessary.

VA loans have lower credit score requirements. Most conventional loans have a minimum requirement of a 620 credit score. VA loans, on the other hand, technically have no minimum and are often awarded to people with lower scores.

VA loans can have lower closing costs. Another way that a VA loan can save you money is by capping the origination fee at 1%. This is a fee that lenders charge for the processing and underwriting of your loan. When working with a VA loan, this fee can only equal up to 1% of the loan.

The Cons of VA Loans

VA loans require a funding fee. This fee is based on the size of your down payment and whether or not you’ve received a VA loan in the past. The rates for the fee vary between 1.4% and 3.6% of the total cost of the loan. The VA funding fee can be rolled into your monthly payment and is not necessarily due up front.

VA loans require a home inspection. There’s nothing inherently wrong with a home inspection. In fact, many experts recommend always getting an inspection before purchasing a home. The downside, however, is that it can make your offer less appealing in a hot real estate market. With other potential buyers willing to waive an inspection, you’ll be fighting an uphill battle.

VA loans can only be used for primary residences. If you’re interested in a vacation home or an investment property, a conventional loan might be your only option. VA loans are only available to people purchasing a home that is owner occupied.

When Is the Right Time to Buy?

It’s very difficult to determine when the exact right time to purchase a home is. With so many variables in the mix, the right time to buy is usually a personal decision based on your specific financial position. With the added layer of a PCS, you might find yourself looking for a home regardless of the state of the market.

The upside, however, is that there are professionals and programs available to you to help you determine the best way to move forward. Desert Heroes has years of experience working with military families. Our team members are even military affiliated themselves, giving them a better understanding of the complexities that you’re facing.

If you are relocating to Luke Airforce Base or Davis Monthan Airforce Base, we would be happy to help you navigate this process. We have a wide range of available homes in the Phoenix and Tucson areas and our lenders can help you with any financing questions you might have.

Start the Process With the Desert Heroes Team

If you’re still asking yourself how does interest rate affect VA mortgage, give us a call today at (860) 858-4376! We’d be happy to help. The Desert Heroes team is standing by to make sure that you feel understood and cared for during this exciting transition.

Ready to get started? You can begin your prequalification application here or check out available listings in your desired community here. We look forward to serving you!

Posted in

Leave a Comment

Your email address will not be published. Required fields are marked *