Marcus Marion, CMA™ When using a VA loan to buy a house, you want to get the lowest mortgage rate possible. This can help reduce the size of your monthly payments as well as the total amount of interest paid over time. And we can all agree that those are worthwhile pursuits.
But how do you accomplish this goal? What steps can you take to get a lower mortgage rate on a VA loan, when buying a home?
How to Get a Low Rate on Your VA Loan
Let’s start with the good news.
In general, VA loans tend to offer lower interest rates than conventional mortgage loans. As a type of government-backed mortgage, VA loans reduce the amount of risk for the lenders that offer them. So lenders can offer more favorable terms and lower rates.
But there are some additional steps you can take to secure a lower mortgage rate on a VA loan. Here are four strategies worth considering.
1. Improve your credit score.
Did you know your credit score can directly influence the mortgage rate you receive when applying for a VA loan? It’s true. In fact, it’s one of the most important factors that can determine your interest rate. It has to do with risk.
Lenders assess the risk associated with lending money to a borrower. Credit scores, which are generated based on an individual’s credit history, provide a quick and standardized way for lenders to evaluate this risk. The higher the credit score, the lower the perceived risk for the lender.
A high credit score suggests that the borrower has a history of responsibly managing their debts and paying bills on time. This makes lenders more confident that the borrower will continue to make timely mortgage payments. As a result, borrowers with high credit scores are considered less risky, and lenders are more willing to offer them lower mortgage interest rates.
All of which begs the question: how can you improve your credit score?
The best way to do this is by paying all of your bills on time. Your “payment history” influences your score more than any other individual factor. And in this context, we’re talking about things like credit card bills, car loan payments, personal and student loans, etc.
You could also improve your credit score by reducing your credit card usage and balances. In addition to improving your financial situation overall, this will lead to a lower “utilization ratio” which in turn can boost your credit score.
Related: Can I still qualify with bad credit?
2. Use mortgage discount points.
When you use a VA loan to buy a house, you will probably have the option to pay “discount points.” Also known as “mortgage points,” this is a form of prepaid interest that can help you secure a lower interest rate on your loan.
Mortgage discount points are an upfront payment made to reduce the interest rate on a mortgage loan. Each point typically costs 1% of the total loan amount and reduces the rate by somewhere around 0.25% (though this can vary).
By purchasing points, borrowers can effectively “buy down” their interest rate, resulting in lower monthly mortgage payments.
If you stay in the home and keep the loan for a certain length of time, the amount of money you save (via the lower interest rate) will surpass the cost of the points. The timeframe where this occurs is commonly referred to as the break-even point.
If you think you will be staying in the home for more than a few years, discount points might work to your advantage. This is another way to get a lower mortgage rate on your VA home loan.
3. Put some money down.
VA-guaranteed mortgage loans do not require a down payment. That’s one of the unique benefits this program offers. It allows you to finance 100% of the purchase price when buying a home, thereby eliminating the need for a down payment.
But you might be able to secure a lower interest rate on a VA loan if you put some money down.
When you make a down payment, you are reducing the amount you need to borrow from a lender. You’re also reducing the risk for the lender, which could lead to more favorable terms including a lower interest rate.
