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What Is a VA Loan and How Do They Work?

TLDR

What You Need To Know

  • VA home loans are government-backed, 0%-down mortgages for veteran and military borrowers
  • The VA will make sure that you pay a fair price for your new home
  • You can get multiple VA home loans throughout your life

Contents

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Whether you’ve served on a ship, on an overseas base or in the field, if you’re a military veteran, you’ve probably spent a lot of time away from home. Maybe that’s why more than 75% of veteran households are homeowners, compared to just over 60% of the general population.[1]

Despite this, many eligible military borrowers haven’t used their VA home loan benefits, either because they thought the process would be too complicated or simply didn’t know about the benefit.[2] However, changes to the VA lending program in 2019 have helped spur greater use of the program, especially among younger home buyers.[3]

If you’re a veteran or service member, and you’re ready to learn about the benefits of the largest government-backed lending program for military homeowners, we’re here to help you find the VA home loan option that’s right for you.

What Is a VA Loan: Basic Training

VA home loans are mortgages backed by the Department of Veterans Affairs. Getting a VA loan is just like a conventional mortgage, and you’re still borrowing from a bank or mortgage lender. However, when compared to traditional mortgages, these loans are often made available to veterans with better terms (such as no down payment required).

The key difference is that the VA underwrites your home loan. And because you’re a veteran, you’re eligible for terms that wouldn’t be available to a civilian borrower.

How Do I Qualify for a VA Loan: Know Your Loadout

If you’re a military veteran, you’ll probably qualify for a VA loan. That’s not a guarantee, though. 

Meet veteran status criteria

To qualify for a VA mortgage loan, you need to meet at least one of the following criteria:[5]

  • At least 181 active service days during peacetime
  • Completed at least 90 consecutive active service days during wartime
  • Served with the National Guard or Reserves for at least 6 years – or 90 days under Title 32 rules (with at least 30 consecutive days in the mix)
  • Married to a service member who died in the line of duty or from complications of a service-related disability (Note: If you are remarried, you might not be able to qualify.)

To prove that you meet these requirements, you’ll need a Certificate of Eligibility (COE). This certificate proves you’re eligible for a VA home loan.

Gather your documents

You’ll need a few different documents to get a COE. Depending on your eligibility criteria, these could include:[6]

  • Discharge or separation papers
  • Statement of service
  • NGB Form 22 or 23 if you served in the National Guard
  • Proof of honorable service
  • A completed VA Form 26-1817, if you’re a surviving spouse

Start the VA mortgage process

Once you can demonstrate that you’re eligible for a VA home loan, you can then get started with the VA mortgage process. It’s pretty similar to getting a conventional mortgage, but there are a few key differences.

  • Find an acceptable property: You can finance a single-family home, a VA-approved condo,[7] a new build, a modular unit or a multiunit property. Some lenders also finance manufactured homes.
  • Check your credit score: There’s no minimum score requirement for a VA loan, but lenders will have their own credit score requirements. Typically, you’ll find it hard to qualify for most loans if you have a credit score under 580.[8]
  • Sources of income: You need to earn enough to pay your mortgage and your other bills. Your income doesn’t have to come from only full-time employment – and VA disability benefits can help.
  • Meet lender down payment standards: While 0% down payment loans are available, if your credit score is too low or you can’t demonstrate income, you may need to make a down payment to get approved.
  • Provide proof that you can make payments: It’s possible and common to buy a home without a down payment using a VA loan. But under certain circumstances, you may have to prove you have the cash reserves to make your loan payments.

What Are the Pros and Cons of VA Loans: Know the Terrain

VA loans help make it easier for veterans to achieve the dream of homeownership. However, before deciding whether a VA loan will be right for you, it is important to compare the pros and cons.

PROS of VA Loans👍

Lower interest rates

A VA home loan can offer lower interest rates than conventional loans.

No down payments

Lenders usually prefer that you put 20% down to qualify for a mortgage. With a VA home loan, you may be able to pay 0% down.[8]

No mortgage insurance

Normally, if you don’t have a 20% down payment, lenders may ask you to pay extra each month for private mortgage insurance (PMI). With a VA loan, PMI isn’t required.

Easy to refinance

If you want to move or swap your VA-backed mortgage for a lower interest mortgage down the road, you won’t need any equity to do it, and there are special programs that streamline the process.

Lower credit score requirements

The VA doesn’t set a minimum credit score requirement.[8] However, many lenders require a credit score of 580 or higher, which is still lower than the 620 required for most conventional loans.[9]

Relaxed borrowing requirements

You can qualify for a VA loan, even if your debt-to-income (DTI) ratio is high.

Disabled veteran-friendly benefits

If you’re disabled, you may be able to have the VA loan funding fee waived, get a property tax exemption or an adaptation grant for your home rolled into your VA loan.

Lower or capped closing costs

VA loans generally have lower closing costs than traditional mortgages, and sellers can pay most closing costs.

Can be used again

You can apply for multiple VA loans throughout your life.

CONS of VA Loans👎

VA Funding Fee

The VA funding fee is a closing cost you’ll often need to pay when getting a VA home loan.

Can’t be used on investment properties

VA home loans can only be used to finance your primary residence, meaning you won’t be able to use them for an investment property. However, you can use a VA loan to purchase a multi-family property, if you plan to live in one of the units.

Sellers may not be open to VA offers

Some sellers are averse to working with VA-backed borrowers due to potential delays and other complications.

VA loans take longer

There are multiple steps in the VA home loan closing process, which might delay your move-in date.

Additional requirements from the lender

Though your odds of approval won’t go down, lenders will typically need some additional paperwork when you’re applying for a VA home loan.

Real estate agents unfamiliar with VA loans

Not all real estate agents understand the VA system, which could potentially cause additional delays.

You may have less equity in your home

A lower down payment is certainly nice, but this will decrease the portion of the home you own (in equity).

What Is a VA Loan Funding Fee: Rules of Engagement

As suggested, one of the most common concerns about the VA loan program is the VA loan funding fee.

VA loans may require that you pay a one-time VA funding fee at closing. Funding fees vary from about 1.4% – 3.6%. The exact amount you will be required to pay will depend on the size of your down payment and whether you have ever used the VA loan program before.

Those with large down payments and first-time access will pay less. Those with smaller (or no) down payments who have used the program before will pay more. Disabled veterans are usually exempt from the VA loan funding fee.[10]

Down Payment SizeFirst Time UsersSubsequent Users
No Down Payment2.3%3.6%
5% Down Payment1.65%1.65%
10% Down Payment (or more)1.4%1.4%

The VA loan funding fee is essential to keeping the VA home loan program running. It also helps make it possible for people with limited experience to qualify for financing. This is comparable to PMI, which is required for conventional home loan home buyers that make an initial down payment of less than 20%.

Buying A Home with a VA Home Loan: The Mission Brief

Looking to get a VA home loan? Here’s what you’ll need to do:

Get preapproved

Once you have your COE in hand and your finances organized, you’ll want to get preapproved for a mortgage. Many sellers will require a preapproval letter before you can make an offer. The preapproval is also helpful because it gives you a sense of what kind of mortgage terms lenders will offer you.

Find a home

Finding a home requires careful recon. Start researching your area to find the right neighborhood. Attend open houses and make sure to check the housing market.

Need an assist? Work with a real estate agent and ask about their experience with VA loans. You can also look for real estate agents who are military veterans.

Put in an offer

You found your dream home, and your mission is a go! Now, it’s time to put in an offer.

Your mortgage should include the following language in the purchase agreement: “VA escape clause” or “VA option clause.” This lets the owner know that if the home doesn’t meet VA standards, you have a legal option to back out of the deal.

Pass inspection and appraisal

You’ve faced inspections from your drill instructor, but now it’s the home’s turn.

Before you can buy a house, you need to get it inspected and appraised by a VA-approved appraiser.

If the price for your chosen property doesn’t match its market value, you may be able to file a Reconsideration of Value dispute. You may also be able to renegotiate the sale price or pay the difference between your approved loan value and the sale price.

Go through underwriting

After every mission, you have to account for your gear, fill out after-action reports and justify your actions. Underwriting is a little like that, but you deal with a lender instead of a commanding officer.

As part of the underwriting process, you’ll need to provide detailed information about your finances and sign more paperwork. If you have questions, talk to your real estate agent and loan officer. It’s their job to have your back.

Close on your new home

After a few more sleepless nights, you’ll sign the final paperwork, collect the keys and officially become a homeowner.

Mission accomplished.

Should I Get a VA-Backed Loan To Buy a Home: Advance or Retreat

VA loans have lots of benefits, like lower interest rates and no down payment requirements. But they aren’t right for every home purchase.

VA loans are intended to assist veterans who want to buy a primary residence or starter home. If you’re looking to buy a home as an investment property or a vacation home, a VA loan can’t be used.

VA Loans: A Benefit Earned Through Service

The most important thing to remember about VA loans is they are a benefit exclusive to members of the military, and you’ve earned it through your service. If your goal is homeownership, a VA loan could be vital to the success of your mission.

  1. Housing Finance Policy Center. “The Impacts of US Military Service on Homeownership and Income.” Retrieved October 2021 from https://www.urban.org/sites/default/files/publication/101495/the_impacts_of_us_military_service_on_homeownership_and_income.pdf

  2. U.S. Department of Veterans Affairs. “Ten things most Veterans don’t know about VA home loans.” Retrieved October 2021 from https://blogs.va.gov/VAntage/31825/ten-things-veterans-dont-know-va-home-loans/

  3. Government Publishing Office. “BLUE WATER NAVY VIETNAM VETERANS ACT OF 2019.” Retrieved October 2021 from https://www.congress.gov/116/plaws/publ23/PLAW-116publ23.pdf

  4. U.S. Department of Veterans Affairs. “Legislative history of the VA home loan guaranty program.” Retrieved June 2022 from https://www.benefits.va.gov/homeloans/documents/docs/history.pdf

  5. U.S. Department of Veterans Affairs. “Eligibility Requirements For VA Home Loan Programs.” Retrieved June 2022 from https://www.va.gov/housing-assistance/home-loans/eligibility/

  6. U.S. Department of Veterans Affairs. “How to apply for a VA home loan Certificate of Eligibility.” Retrieved June 2022 from https://www.va.gov/housing-assistance/home-loans/how-to-apply/

  7. U.S. Department of Veterans Affairs. “Financing a Condo with a VA Home Loan.” Retrieved June 2022 from https://va.org/financing-a-condo-with-a-va-home-loan/

  8. U.S. Department of Veterans Affairs. “VA Guaranteed Loan.Retrieved June 2022 from https://www.benefits.va.gov/BENEFITS/factsheets/homeloans/VA_Guaranteed_Home_Loans.pdf

  9. Fannie Mae. “B3-5.1-01, General Requirements for Credit Scores (09/01/2021).” Retrieved June 2022 from https://selling-guide.fanniemae.com/Selling-Guide/Origination-thru-Closing/Subpart-B3-Underwriting-Borrowers/Chapter-B3-5-Credit-Assessment/Section-B3-5-1-Credit-Scores/1032996841/B3-5-1-01-General-Requirements-for-Credit-Scores-08-05-2020.htm

  10. U.S. Department of Veterans Affairs. “VA funding fee and loan closing costs.” Retrieved June 2022 from https://www.va.gov/housing-assistance/home-loans/funding-fee-and-closing-costs/

ICYMI

In Case You Missed It

  1. VA home loans offer some of the best interest rates out there

  2. You’ll need a COE to qualify for a VA loan

  3. You may need a higher credit score to qualify for a 0% down VA mortgage

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