One of the most widely used benefits available to veterans is the VA home loan. Active duty service members can also avail themselves of this loan.
Since 1944, VA home loans guaranteed by the Department of Veterans have served more than 20 million servicemen. We will present you with a definitive guide to VA home loans that will help you understand how they work.
What is a VA Home Loan?
A VA home loan benefit can open doors for you. This home loan offers zero-down payment options to help servicemen returning from World War II re-enter civilian life. It was part of the original GI bill signed by President Franklin D. Roosevelt.
It is a loan available to active-duty service members and veterans who have any discharge other than dishonorable.
These service members include any of those who served in virtually any uniformed service like:
- U.S. Army
- U.S. Navy
- U.S. Marine Corps
- U.S. Air Force
- U.S. Coast Guard
- U.S. Space Force
- Army National Guard and Air National Guard
- Reserve members of any military branch
- Cadets in the U.S. Military Academies
Quick facts about this loan that you should know:
- The program has a lower foreclosure rate overall, compared to other types of mortgage.
- The rates are competitive, and can often be lower than conventional and Federal Housing Administration (FHA) loans.
- Even when you live in the highest cost areas, you don’t need to pay a down payment
- No need to pay private mortgage insurance (PMI)
A VA-guaranteed home loan can be used to:
- Buy a home as a primary residence which can either be an existing structure or new construction.
- Other real estate transactions like refinancing an existing loan.
How Does a VA Home Loan work?
The government doesn’t make VA home loans, The Department of Veterans Affairs is the institution that provides a partial guarantee in the form of insurance for each loan. Similar to how the FHA and USDA loans work, the VA home loan is a government-backed loan from a mortgage lender. It is not a home loan offered directly by the government.
Hence, lenders like Veterans United are backed by the government giving them the confidence to extend financing together with some significant financial benefits. You can get benefits from a VA home loan that you cannot get anywhere else. These benefits are unmatched by any other lending option.
Here’s the typical process you will have to go through to get a VA home loan:
1. Determine your eligibility
Before you can apply for a VA loan with a lender, you will have to establish your VA loan eligibility. If you have honorably served in any branch, you will most likely be qualified for a VA home loan.
2. Apply for a Certificate of Eligibility online through the VA website
You will be required to apply for a Certificate of Eligibility (COE) from the Department of Veterans Affairs.
Without this, your lender will not be able to verify if you truly served as uniformed personnel and that you are eligible for the loan.
Prepare the following documents when you apply for a COE:
- NGB Form 22
3. Choose a VA home loan lender
Look for a trustworthy VA home lender once you have your COE issued by the VA. There are many institutions offering VA home loans, like major banks, credit unions, and other mortgage lenders.
Research on how each of these institutions offers a VA home loan including their requirements and conditions. Make sure you know their references and ratings with the Better Business Bureau (BBB) and the Consumer Financial Protection Bureau. Your lender should also be qualified to participate in the VA Lender Appraisal Processing Program (LAPP). You should be able to verify which category of VA lender they are.
4. Get preapproved for a loan
When you know you can trust your lender, prepare to get preapproved for a loan.
This process involves these steps:
- Your loan offices will evaluate your credit to determine if you are “a satisfactory credit risk”.
- Identification of your maximum mortgage. You can use an online mortgage calculator to know how much you can afford to loan and the best type of loan you should apply for.
5. Submit an offer once you find a home
Work with a real estate agent to look for a home. This may need looking at several showings and offers so that you are sure that the house you will purchase is what you need and what you can afford.
Work hard on this decision and do not rush when you are hunting for your perfect home.
6. Begin the appraisal and underwriting process and (possibly) obtain a termite report
When your bid is accepted, you will begin the appraisal and underwriting process. This requires that your home be inspected by an appraiser to determine if your mortgage amount matches the home value.
You may also be required to submit a termite report. Underwriters will likewise examine your financial paperwork to make sure you can afford the house you plan to purchase. You will be asked to submit or provide copies of your tax returns, pay stubs, and bank statements.
Once your home meets appraisal requirements and the underwriters and appraisers are satisfied, you will be cleared to close your home.
During closing, these steps will be done:
- Paying any remaining costs not paid by the seller
- Signing all the paperwork required by the local government and your lender
- Receiving the keys to your new property
VA Home Loan Benefits
The main goal of a VA home loan is to help service members, veterans, and eligible surviving spouses to buy, build, repair, retain, or adapt a home that they can occupy.
You can receive more favorable terms with a VA home loan along with these benefits:
1. No mortgage Insurance
VA loans also don’t have any kind of mortgage insurance, unlike FHA and USDA loans which need their own forms of mortgage insurance.
Most conventional lenders will require private mortgage insurance (PMI) unless you can make a 20 percent down payment.
However, VA loans typically come with a mandatory funding fee that goes directly to the VA.
This fee is used to help keep the program running for future generations of military homebuyers and the amount depends on these factors:
- Type of loan
- Nature of service
- Number of times the program was used
Most first-time VA buyers pay a funding fee of 2.3% which can be financed into the loan. Those with a service-connected disability are exempt from paying this fee.
2. No minimum credit score requirement
The VA loan program is more lenient and does not set a minimum credit score requirement. Lenders are the ones who decide whether to institute a credit score requirement.
VA lenders would usually look for a credit score of around 620 and would be considerate to borrowers who have experienced previous bankruptcy, foreclosure, or short sale.
3. Lower interest rates than conventional mortgage rates
Because the VA loan is government-backed, it has lower average interest rates compared to conventional mortgage rates. The VA loan can offer the most competitive, if not the lowest interest rates for qualified buyers.
The average VA loan rate falls to 0.5% to1% below the average conventional loan rate. This rate can greatly impact your monthly payment and make it substantially lower. The tremendous difference between VA loan rates and conventional mortgage rates is worth considering before choosing a mortgage and a lender.
4. Limited amount of closing costs
The VA loan allows the seller to pay all the buyer’s loan-related closing costs and up to 4% of the home’s purchase price in concessions, according to Veterans United. These loan-related closing costs include prepaid taxes, insurance, and buyer’s collections or judgments.
If you want to use a VA loan, you are allowed to use gift funds to make a down payment or to pay closing costs.
Gift funds should be from an acceptable source, like a family member or someone with a family-like relationship. It should also include a gift letter that includes information about the donor, the dollar amount of the gift, and a note that no repayment is expected.
5. No maximum limit
Homebuyers using a VA home loan are fully entitled to borrow as much as a lender is willing to lend, with no required down payment. Only county-level loan limits are used for veterans who have one or more active VA loans or who have lost one because of a foreclosure.
For these instances, the loan limits will tell how much can be borrowed before including a down payment. Loan limits will depend on the location of the borrower.
6. Can be assumable
VA loans can be assumable. This means that another person who is a veteran (or not) can take on the terms and payments of the borrower’s VA loan. Homeowners usually use this as a marketing tool when interest rates are steadily increasing.
VA Home Loan Requirements 2021
If you want to be approved for a VA home loan, you need to make sure that you are eligible. The government has service requirements for veterans, those on active duty, and for certain military spouses.
In general, the following are eligible for a VA loan:
- Veterans who meet service length requirements. Details on service requirements can be found on the government’s website.
- You are currently on active military duty
- You are a veteran who was honorably discharged after meeting the minimum service requirements
- You served at least 90 consecutive days during wartime
- You served at least 181 consecutive days of active service during peacetime
- You served for more than six years in the National Guard or Selective Reserve
- Certain surviving spouses of deceased veterans
Home Occupancy Requirements
The occupancy requirement for a VA loan is that you must live in the home that you will be purchasing through the loan. The property should be your primary home, and it cannot be used for real estate investment purposes or as a vacation home.
Lenders for VA loans have their own criteria for deciding whether a borrower is a “good risk” for a mortgage. But these are the key underwriting criteria from the Veterans Benefits Administration of the U.S. Department of Veteran Affairs :
- There is no maximum debt ratio. However, the lender must provide compensating factors if the total debt ratio is more than 41%.
- There is no maximum loan amount.
- VA’s residual income guidelines ensure Veteran borrowers can afford the loan and determine how much money a veteran must have left over after all debts and living expenses are considered.
- There is no minimum credit score requirement. Instead, VA requires a lender to review the entire loan profile.
With these requirements, a borrower should have enough income to make mortgage payments, should not have a huge debt load, and should make sure that they don’t have at least a 620 FICO score.
Own a home through a VA home loan without a down payment, private mortgage insurance, or a perfect credit score. Get the key to your next home by understanding this guide to VA home loans. A VA home loan could be your best option if you are eligible.