You may have heard that the VA home loan comes with a pretty exceptional interest rate, one of the most competitive on the market. But where does that number come from? Who sets it — the Department of Veteran Affairs or some mystery entity? Does it fluctuate? Or does everyone get the same rate, no matter what his or her financial circumstance may be?
First know that VA has nothing to do with setting interest rates, or financing your loan, for that matter. VA backs 25 percent of the loan amount to lessen the lender’s risk and, therefore, improve your chances of getting the most favorable terms.
The job of setting an interest rate, then, falls to each individual lender, who will take a look at market conditions, what other lenders are willing to offer (competition among lenders is a win for you!) and your own financial circumstances.
Say, a lender posts a rate of 3.625 percent for a 30-year fixed VA mortgage. That same lender may offer you a rate that’s even lower than that If you have stellar credit (760 or higher), plenty of money in reserves and DTI sitting in that sweet spot. Why? You don’t pose much risk. But even if you’re credit score is hovering around 620 and financials are so-so, you may still qualify for a VA loan although your interest rate may be higher than the posted rate.
Lender A may offer you a better deal than Lender B. And the only way to know that is to shop around for the best interest rate.
Before you get started, a word to the wise: The interest rate you see in an advertisement or online may not be exactly the one you get when you start making phone calls. And that’s pretty normal; rates can change from morning to afternoon as well as day to day when the market is going bonkers. And your credit score, income and the amount of money you put down will also have an impact.
So you’re comparing apples to apples, ask for rates from lenders on the same day, at the same time of day. Follow these steps to find a lender and an interest rate that works for you. And remember, the rate you’re quoted isn’t official until you have a Loan Estimate, a form created by the CFPB that outlines all the details of a loan. Your lender is required to give you this form within three business days of receiving your application. You can use these forms to easily compare interest rates, plus any fees and closing costs.
You found a cool lender who’s offered you a killer rate. You apply and get pre-approved for a VA loan. Now you’re ready to buy … and inform your lender that you’d like to lock in your interest rate. Locking protects you should changes in market conditions cause a hike in the VA mortgage rate.
Rate locks can range in time, from 30 to 60 days. Rate locks are not standard, so be sure to ask your lender about length of time allowed and any applicable charges for going outside of the official time frame. What if rates drop dramatically during the time you’ve locked a rate? You may be out of luck, unless you initially paid a fee for a “float down,” which allows you to take advantage of that new, lower rate.
Locking in a rate or letting the rate “float” until you’re ready to close is totally up to you and your risk tolerance. This is a time to rely on a trusted lender, who can help you weight the pros and cons and give you personalized advice based on market conditions.