If you are considering getting a new home, refinancing a home loan, thinking of a home improvement, or need a mortgage, you can consider using a VA loan as an active member of the military service, a veteran, or even a surviving spouse of a veteran or service member.
VA loans have provided support for active and retired service members in the United States since 1944 and continue to do so. This guide provides detailed information on what you need to know about VA loans, what it really is, and what qualifies you for one.
What Is a VA Loan?
A VA loan is a federal government-backed mortgage loan by the U.S. Department of Veterans Affairs (VA). While the government doesn’t issue these loans itself (except the Native American Direct Loan (NADL) program), it partners with financial institutions and private lenders through the VA loan program to provide benefits for U.S veterans service members. The VA guarantees a portion of the mortgage loans, making the loan applicant access more favorable borrowing terms.
The program was established to help veterans access affordable mortgages and get assistance in buying a home.
How Do VA Loans Work?
If you want to purchase a home through the VA home loan program, you would need to work with a private lender such as a bank, credit union, or mortgage lender that provides VA loans.
The VA sets some standard requirements to all mortgage lenders, but it’s important to note that different lenders may have different requirements, so make sure to check around and see which lending terms are more favorable.
VA home loans usually do not require a down payment, but you need to confirm with the specific VA mortgage lender you decide to use as lending situations may vary for each borrower.
You will need a Certificate of Eligibility (COE), after which the VA home lender would request a VA assessment and appraisal of the home to estimate the market value of the house you would like to purchase.
If the mortgage lender is satisfied with your credit and other financial requirements, then they may go ahead and provide a VA home loan and assistance to close on your property.
Financial institutions provide different types of VA loans, depending on mortgage period, size, and rate. Loan type could include fixed-rate VA loans, adjustable-rate mortgage VA loans, or Jumbo VA loans.
Types of Loans by the U.S Department of Veterans Affairs
Through the U.S Department of Veterans Affairs, you may be eligible for different home purchase programs asides the traditional VA loans.
The VA purchase loan :
This is the VA-backed home loan program through private lenders. This loan is gotten through third party financial institutions that offer mortgage loans through the VA program. The U.S Department of Veterans Affairs ensures this loan.
Native American Direct Loan (NADL) program:
This program differs from the VA purchase loan. The U.S Department of Veterans Affairs directly provides the home loans gotten through this program to eligible Native American Veterans or a Veterans married to a Native American.
Interest Rate Reduction Refinance Loan (IRRRL):
The Interest rate reduction refinances loan provides a means for eligible veterans, service members, and spouses of veterans or service members to refinance existing VA home loans for better rates and terms.
Cash-out Refinance loan:
This program targets those who need to replace their current non-VA loan with a VA loan or those who need cash out of their home equity for personal finance needs.
Am I Eligible for a VA Loan?
The eligibility for VA loans is quite straightforward. To qualify for a VA loan, you need to be a service member, a veteran, or a surviving spouse of a service member or a veteran. In addition to this, according to the VA department, your eligibility for a VA loan would depend on your service commitment or length of service, as well as your character of service and duty status. You can see a detailed eligibility requirement on the VA website.
Other standard VA loan requirements include:
- meet satisfactory credit standards by the VA and private lenders
- qualify for and get a valid Certificate of Eligibility
- meet sufficient income standards
- and others
A VA loan can only be accessed for a home you would live in, your primary residence, and not a vacation home or some form of investment property.
What Is a Certificate of Eligibility for VA Loans?
The certificate of eligibility (COE) shows proof to a mortgage lender that you qualify for a VA home loan. This document is gotten through the U.S Department of Veterans Affairs and confirms your VA home entitlement and eligibility.
If you want to buy a home through the VA home loan program, the first step is to apply for a COE to show that you are eligible. You can apply for a COE online, by mail, or through your lender using the Web LGY system.
Depending on if you are a veteran, service member, National Guard or Reserve member and your status (current or discharged), the documents you need to apply for a COE would defer and may include:
- A copy of your discharge or separation papers
- A signed statement of service
- A report of Separation
- A record of Service
- Your Retirement Points Statement
- A proof of the character of service
- A copy of your latest annual retirement points,
- A proof of your honorable service
If you are applying as a surviving spouse of a veteran, you would need the veteran’s discharge documents as well as other supporting documents depending on if you are receiving Dependency & Indemnity Compensation (DIC) or not.
What Type of Properties Can I Purchase With VA Loans?
You can use a VA loan to purchase properties and home projects such as:
- Single-family home
- VA approved condos
- Home improvement and changes
- Housing lot
- Manufactured or newly built homes
What Are the Credit Score Requirements for a VA Loan?
The U.S. Department of Veterans Affairs doesn’t require you to have a specific minimum credit score to qualify for a VA loan; they only indicate that you need satisfactory credit. It’s the mortgage lenders or banks that decide on their credit score requirements in other to grant a VA loan.
It’s recommended to have a good credit score for a VA mortgage loan application to access more favorable interest rates and terms from financial institutions. Loan limits and amounts may vary by lender and depend on other factors such as your monthly income, financial status, available debt, amongst others.
Is Private Mortgage Insurance(PMI) Required for VA Loans?
If you want to buy a home through the VA loan program, you would not require private mortgage insurance.
Private mortgage insurance (PMI) protects lenders from outright losses when borrowers cannot make mortgage payments and are mostly required on mortgage loans with less than 20% down payment.
Since the U.S. Department of Veterans Affairs guarantees a portion of VA home loans, this already provides insurance to the VA mortgage lenders. In the event of a foreclosure, when you are no longer able to cover your home’s monthly payments, this guarantee makes it possible for VA mortgage lenders to minimize or avoid any losses.
Are There Any VA Loan Fees or Extra Costs?
A VA home loan may require funding fees. These fees help support the VA loan programs; however, there may be some exceptions. According to information provided by the U.S Department of Veterans Affairs, exemptions from VA loan funding fees may apply if you belong to either of the categories below:
- you are receiving VA compensation for a service-connected disability,
- you are receiving retirement or active-duty pay instead and are eligible to receive VA compensation for a service-connected disability,
- you are the surviving spouse of a Veteran who died in service or from a service-connected disability, or who was totally disabled, and you’re receiving Dependency and Indemnity Compensation (DIC),
- you are a service member with a proposed or memorandum rating, before the loan closing date, saying you’re eligible to get compensation because of a pre-discharge claim,
- you are a service member on active duty who before or on the loan closing date provides evidence of having received the Purple Heart.
You have the option to either pay the total VA loan funding fee at the closing of your mortgage, or you can opt to finance it by including it in your loan and paying it over time. The fee goes directly to the Department of Veterans Affairs.
The total funding fee you may have to pay would depend on the amount of your loan, the type of loan you get, whether it’s your first time or not, using any VA loan, and any down payment amount provided.
VA funding fees can range from as little as 0.5% to as high as 3.6% of your total loan amount for members of National Guard and Reserve, Veterans, and active-duty service members.
The other costs you may incur on VA loans include interest rates, monthly mortgage principal amounts, and other required closing costs.
Is There a VA Loan Limit in 2021?
There is currently no limit imposed by the U.S Department of Veterans Affairs on the amount that can be borrowed through VA loans.
However, there is a limit on the home loan amount that can be guaranteed by the VA. This limit depends on your entitlement; you do not have a home loan limit with full entitlement and would not need to pay a down payment. Home loans over $144,000 are guaranteed up to 25% and up to $36,000 for loans under $144,000.
A full entitlement would mean at least one of the following:
- you have never used your home loan benefit, or
- even if you have used your home loan benefit, you have paid the VA loan in full and sold the property or
- you used your home loan benefit but had a foreclosure or compromise claim and repaid your loan in full
The size of the loan amount granted would be determined by the bank, credit union, or mortgage lender after carrying out their assessments.
On the other hand, your home loan guaranteed amount would be limited if you have remaining entitlement. This limit depends on your county loan limit, and if you default on your loan, the VA guarantees up to 25% of the county loan limit, minus the amount of your used entitlement.
You are considered to have a used entitlement if you meet any of the following:
- you have an active VA loan you’re still paying back,
- you have paid a previous VA loan in full and still own the home,
- you refinanced your VA loan into a non-VA loan and still own the home,
- you had a compromise claim (or short sale) on a previous VA loan and didn’t repay the VA in full,
- you had a deed in place of foreclosure on a previous VA loan,
- you had a foreclosure on a previous VA loan and didn’t repay the VA in full
You may be able to borrow outside of your VA home loan limit, but this would depend on if you have a down payment, any conforming loan limits, and if you have approval from the mortgage lender.
What are the VA Loans benefits?
VA loan benefits may include:
- No down payment (some conditions may apply)
- Less closing costs
- More favorable interest rates and lending terms
- No private mortgage insurance (PMI) or mortgage insurance premiums (MIP) required
- No prepayment penalty fees
You may use a VA loan to purchase your first home and take advantage of all these benefits that make it more affordable.
What Are the Cons of VA Loans?
Some downsides of VA loans are:
- You may be required to pay VA funding fees.
- There is a limit on the type of property you can purchase
- A loan guarantee is limited.
- May require a down payment if you need to get a higher loan amount.
- Veterans and those in military service have requirements to meet.
How Do VA Loans Compare With Conventional Loans?
VA loans differ from conventional loans in various ways. Here are a few things to note if you are considering both loan options.
VA loans are usually dubbed the ‘$0 downpayment home loan’. This is a benefit that doesn’t come with conventional loans. With conventional loans, you are usually required to make between 3-5% down payment on your loan amount and a private mortgage insurance (PMI) if required (Usually if you pay less than 20% down payment).
Although you do not have to pay a ‘VA funding fee’ for conventional loans, the PMI costs eventually add up.
Also, for conventional loans, most private lenders require a minimum credit score, but with VA loans, there is no imposed minimum credit score.
Refinancing a VA loan or making early repayments may be easier with a VA loan than a conventional, especially with the Interest Rate Reduction Refinance Loan program and the no repayment fee benefit.
Choosing the best option between a VA loan and a conventional loan will depend on whether you qualify for a VA loan. If you are eligible, your decision can be based on whether you have a good credit history to afford good home loan rates and terms or pay a 20% down payment to avoid any PMI or a VA funding fee associated with VA loans.
What Happens if You Can No Longer Make Your VA Home Loan Payments?
So what happens if you can no longer afford to make your mortgage payments on your VA home loan?
If you face financial hardship and fall behind on your mortgage payments, the VA can assist you. You would have access to financial counseling and help with your mortgage servicer through a VA loan technician.
If you cannot afford foreclosure and your loan closed on or after January 1, 1990, you’ll be faced with the burden of paying back your loan amount if there is any evidence of fraud or misrepresentation. If your loan closed before January 1, 1990, you would owe the government any money paid to your loan servicer on your behalf.
Through the U.S. Department of Veterans Affairs, VA loans offer many homeownership benefits for veterans, Servicemembers, National Guard or Reserve members, and their families. They may offer the best option in getting affordable home loans and favorable terms if you qualify.