Takeaways
- VA loans are for U.S. veterans and active-duty members of the military.
- VA loans are offered through the U.S. Department of Veteran Affairs program.
- VA loans can help eligible members buy, build, improve, or refinance their homes.
- VA loans are for primary residences only and not for investment funds.
- VA loans are complicated to apply for but offer tremendous incentives to those eligible.
What is a VA Home Loan?
A VA home loan is a unique type of mortgage loan available to United States veterans, active-duty service members, and certain members of the National Guard and Reserves. Established by the U.S. Department of Veterans Affairs, this program aims to help those who have served our country to become homeowners. Unlike conventional loans, VA loans offer several unique benefits.
VA loans are known for their more flexible credit requirements compared to traditional mortgages. This means you can still qualify for a home loan even if you have less-than-perfect credit. VA loans also do not require private mortgage insurance (PMI), a common expense associated with low down payment home purchases. Not having to pay PMI can lead to significant savings over the life of your loan. Essentially, VA home loans are designed to offer financial support and an accessible path to homeownership for those who have served our nation.
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How Does a VA Home Loan Work?
VA home loans work differently from traditional mortgages. As a service member, veteran, or eligible family member, you receive backing from the Department of Veterans Affairs. This federal backing allows lenders to offer you more favorable terms than a standard mortgage. Here is how it typically works:
Eligibility Certificate
First, you need a Certificate of Eligibility (COE) from the VA, proving your service meets the requirements for a VA loan.
Finding a Lender
You then approach a VA-approved lender. These lenders have the freedom to set their interest rates and terms but often offer competitive rates thanks to the VA backing the loan. This is a huge financial win for veterans because it offers below-market incentives.
Loan Application
You apply for a loan just like any other mortgage but with the added benefit of your COE. The lender will check your credit, income, and other financial aspects to determine your loan eligibility.
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No Down Payment and No PMI
One of the significant benefits is the possibility of a 0% down payment. Over 90% of VA-backed loans are made with no down payment. This is opposed to conventional loans that often require a 20% down payment to avoid PMI. No, or low, down payments make the VA loan much more accessible.
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VA Funding Fee
Instead of PMI, there is a VA funding fee, a one-time charge that helps to lower the cost for taxpayers. The VA funding fee is a percentage of the loan amount. The fee percentage ranges from 1.25% to 3.3% depending on whether you are getting your first or second VA loan. Smaller percentages apply to first-time users of the program. You can pay this VA funding fee at the close or roll it into your total loan amount.
Closing the Loan
Once approved, you proceed to closing, where you finalize the loan agreement with your bank, credit union, or financial institution and pay closing fees (if applicable). Once you close on your home, you get to take ownership (and the keys) and move in.
Loan Repayment
You repay the mortgage over time, just like a conventional mortgage, but with the added benefits of lower interest rates, lower loan amounts, and better terms.
The VA loan program is designed to provide a stable and affordable way for service members or their surviving spouses to achieve homeownership. This economic benefit helps spur first-time home ownership within the veteran community.
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VA Loan Requirements
While the terms for a VA loan are typically more relaxed than conventional loans, the requirements to be eligible for a VA home loan can be quite specific and are set by the Department of Veterans Affairs.
Service Requirements
You must have served in the military, National Guard, or Reserves. Specific service durations apply. For example, as a service member, you must have 90 consecutive days of active service during wartime or 181 days during peacetime [1]. Six years of service is typically required for National Guard and Reserve members.
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Certificate of Eligibility (COE)
This certificate is crucial for proving to lenders that you meet the VA eligibility requirements. You can apply for a COE through the VA eBenefits website, or your lender can provide the eligibility form.
Credit Score
VA loans do not have a strict credit score requirement, but lenders usually prefer a score of 620 or higher. Some lenders may accept lower scores, but often with higher interest rates.
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Income Requirements
Lenders will assess your income and employment history to ensure you can repay the loan. This includes reviewing your debt-to-income ratio to ensure it is within acceptable limits.
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Primary Residence
VA loans are for primary residences only. You live in the home you are buying with the mortgage.
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Suitable Credit and Income
While the VA does not enforce a minimum credit score, lenders require that you have suitable credit, income, and assets to repay the loan.
It is important to note that just because you meet the basic requirements of a VA loan does not mean you are guaranteed approval. Meeting the basic requirements is a crucial first step in accessing the benefits of a VA home loan. Remember, each private lender may have additional criteria, so shop around to find the best option for you and your family.
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How to Apply for A VA Loan
Applying for a VA loan is a process that involves several steps. While it is like applying for a conventional mortgage, there are specific actions you need to take to take advantage of this veteran-focused program:
Obtain Your Certificate of Eligibility: Before you start, secure your COE from the VA. This document proves to lenders that you are eligible for a VA loan. You can apply for a COE through the VA’s eBenefits portal or your lender may assist you in obtaining it.
Shop for a VA-Approved Lender: Not all lenders offer VA loans, so you need to find one that does. Compare different lenders to see who offers the best rates and terms. Remember, while the VA backs these loans, lenders still set their rates and terms.
Get Pre-Approved: Pre-approval is an essential step in the home-buying process. It gives you an idea of how much you can borrow and shows sellers that you are a serious buyer. During pre-approval, the lender will check your credit, income, and other financial details.
Find a Home: Once pre-approved, you can start house hunting. Remember, the home must be your primary residence.
Complete a Full Application and Underwriting: After you find a home, complete the entire loan application. The lender will then process and underwrite your loan, which includes a home appraisal to assess the property value.
Close on the Loan: If your loan is approved, you will go to closing, where you will sign various documents, finalize the loan, and take ownership of your new home.
What is the VA Loan Limit?
The VA loan limit is a term you will encounter when exploring VA home loans. The VA has made significant changes to these limits, making it even more beneficial for veterans and service members like you. Previously, VA loan limits capped the amount the VA would guarantee without a down payment.
However, for those with full VA loan entitlement, there is no longer a maximum limit on the amount the VA will guarantee. This means you can borrow funds as needed if the lender remains willing to lend without requiring a down payment. The VA will only guarantee your loan up to the entitlement amount on your COE, though, and will pay up to [2].
Pros and Cons of VA Loans
Like with all types of mortgages, there are advantages and disadvantages to VA loans. Below are some to contemplate:
Advantages of VA Loans
No Down Payment Required: One of the most significant benefits is the ability to finance 100% of the home purchase price without requiring a much larger down payment, making homeownership far more accessible.
No Private Mortgage Insurance: Unlike conventional loans, VA loans do not require PMI, even with no down payment, which can result in significant monthly savings.
Competitive Interest Rates: VA loans will generally have slightly reduced interest rates compared to conventional loans, thanks to government backing.
Flexible Credit Requirements: The VA does not set a minimum credit score, and lenders often have more flexibility, making it easier for you to qualify.
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Disadvantages of VA Loans
VA Funding Fee: While there is no PMI, VA loans come with a funding fee that varies based on service type and down payment. This fee can be rolled into the loan but increases the overall amount.
Property Restrictions: VA loans require the home to be your primary residence and meet specific VA standards, which might limit your property choices.
Limited to Primary Residence: You cannot use a VA loan for investment properties or second homes.
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Smart Summary
Whether you are a first-time home buyer or a seasoned homeowner, securing the best type of mortgage is critical for long-term financial stability. Matching the best mortgage with your financial situation – current savings, amount of down payment, credit score, military service – can set you up for decades of wealth building. Owning your home is a great way to force savings and increase your net worth.
(1) U.S. Department of Veteran Affairs. Eligibility Requirements for VA Home Loan Programs. Last Accessed November 29, 2023.
(2) U.S. Department of Veteran Affairs. VA Home Loan Limits. Last Accessed November 29, 2023.
