For every home buyer, there’s a “right” mortgage program. For active-duty military, veterans, and some other associated groups, a VA home loan may just be your golden ticket to homeownership.
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VA loans set themselves apart from the competition in many ways. If you qualify, this unique product can enable you to buy a home at an affordable cost. So read on to find out more about VA home loans and whether they are right for you.
What Is a VA Loan?
A VA loan is a mortgage backed by the U.S. Department of Veterans Affairs – the VA. They’re one of the only mortgage products on the market that allow you to buy a home with no money down.
This by itself is a good reason to explore this option when you’re in the market to buy a home. You may think that the VA itself loans money to veterans based solely on the name, but that’s not true.
The VA doesn’t shell out money to qualified service members. Instead, the home buyers get a mortgage from another institution such as credit union, bank, or mortgage company.
What Does the VA Do?
Then, the VA backs the loan. They do this by:
- Guaranteeing the loan – The VA will provide a loan guarantee to lenders. This guarantee determines how much is paid to the lender in the form of insurance against potential losses if you don’t pay the mortgage back and default on your loan.
- Setting guidelines – The VA helps to create the rules for mortgage products available to you. These guidelines also help to determine what kind of residence you can buy, such as a condo, house, apartment, etc. Lenders then follow the guidelines set by the VA and either accept or reject applications based on them.
What this gives you, the potential homeowner, is the ability to borrow money at lower interest rates than other mortgage products. It also eliminates your need to make a down payment.
All you need to do is pay an upfront funding fee. That means you will need to put some money down, but it’s often far less than with other mortgage programs.
History Of VA Loans
In 1944, President Roosevelt signed the Servicemen’s Readjustment Act, which you probably know by another name – the GI Bill. It was created to help compensate vets for their service during the war.
The legislation provided several benefits to veterans, such as:
- Unemployment compensation
- Low-interest rate business loans
- Education tuition and living expenses
- Low-cost mortgages
It’s that last benefit that has brought us together today. Now let’s find out more about VA loans!
Eligibility for VA Loans
If you’re under the impression that VA loans are only for veterans or those who have served in combat, think again. VA loans are actually available to many more people than that.
In fact, the VA can help veterans, surviving spouses, service members, and active military personnel become homeowners. Here’s a quick look at who may be eligible. All you need is to fit one of these criteria to qualify:
- Served more than six years in the National Guard or Reserves
- Are an active member of the military
- Served 181 days of active service in peacetime
- Served 90 consecutive active service days during wartime
- Are the spouse of a service member who died in the line of duty or has a service-related disability
To get a VA loan, you must meet two requirements. These are documentation of both your ability to repay the loan and of your military service.
The form that proves you meet the military service requirements is called a Certificate of Eligibility (COE). The COE is issued by the VA and helps confirm to lenders that you have been or are currently a member of the United States military.
If you have been discharged, it must have been honorably. Also, for any qualifying peacetime or wartime period, there are specific active duty requirements that must be met to obtain a COE.
To qualify for a COE you must meet these eligibility requirements:
- Active duty servicemember who has served the minimum required period
- Veteran who has met the length of service requirements
- Member of the National Guard or Reserve
- Spouse of a deceased veteran
In addition to the COE, you also must meet some requirements that are fairly standard for a mortgage approval process.
The underwriting process in VA loans covers the basics that anyone must meet in order to qualify for a mortgage. The only difference is that for VA loans, the underwriting is a bit more forgiving.
VA Loan Criteria
In order to get a VA loan, you need to meet certain criteria. After all, the VA needs to hedge their downside. In order to qualify, your financial profile will be reviewed, including:
This basically proves to the lender that you have a sufficient amount of income to make your monthly mortgage payment. You must provide proof of employment over a two-year period and disclose any other income you get from rentals, alimony, interest, or dividends.
You need to disclose your debts as well so they can calculate your debt-to-income ratio to ensure you can afford what you want to borrow. After all, someone has to pick up the tab if you don’t make good on your payments.
Your credit history is also reviewed during the underwriting process. The VA itself doesn’t set a minimum credit score, but lenders have standards they follow.
Their minimum credit score is usually in the range of 620 to 640. Also, your credit score will be used to determine how much money you can borrow for your mortgage.
With most conventional loans, you need two things to collateralize a loan: equity and the property itself. That’s why down payments are usually required since they help to create equity from the get-go.
For VA loans, there’s no equity required, so the property is the only collateral the lender relies on.
When you find a home you’re interested in, a VA-approved appraiser will estimate what the home is worth and decide if it meets VA guidelines to satisfy the collateral criteria.
VA Home Loan Inspections
During this inspection, a VA representative will check the home to ensure it meets strict health and safety standards. While these essentially mirror HUD’s minimum housing standards, they are not to be taken lightly.
After all, the goal is to ensure the property is in a habitable condition and is structurally sound. The VA is guaranteeing the loan, so their downside must be hedged from shoddy maintenance.
VA loans don’t require you to make a down payment, but they do require you to pay a funding fee. This fee is 2.15 percent of the loan amount if you are a first-time borrower.
The fee goes up to 3.3 percent if you’ve previously used your VA benefit. If you’re a veteran receiving disability, then you are exempt from the funding fee.
VA Loan Limits
With VA loans, there is a max loan size for the type of dwelling you want to purchase. Where the home is located also plays a role in limits of the loan, which is why you may find that VA loan limits tend to vary by city and county.
Max loan amounts are set with the assumption that the borrower (you) are doing these things:
- Putting no money down
- Are eligible for the full VA loan benefit
- Have credit that ranges from good to excellent
Does VA Limit How Much You Can Borrow?
Now, hunker down a bit as we get into how VA loan limits are set, because it can get a little wonky. The VA doesn’t place a cap on how much you can borrow.
Instead, they cap loan guaranty (a form of insurance) at 25 percent of the total loan amount. This means that even though they don’t cap the loan amount.
Instead, the cap they place on their guaranty will impact how much a private lender is willing to lend. Don’t worry about that too much, though, because private lenders are big fans of the VA loan guarantee since it helps to reduce their risk of losing money if you default.
Max VA Loan Amounts
As far as the max loan amount (for 2019) is concerned, what you can typically expect if you have good credit and a solid debt-to-income ratio is:
- $484,350 with no down payment in most places in the country
- $726,525 with no down payment in high-cost metro areas or counties
You can expand these numbers if you pay the difference with a down payment.
It’s also important to note that VA loans can be used to buy several different types of dwellings. They can be used for single-family homes, town homes, and condos.
You can also use loans to build a home or make improvements to an existing home to make it more energy efficient. Just understand that this must be a home that you, the borrower.
Plan to live in. You cannot rent it out or use the loan to purchase an office building or apartment building.
VA Loan Programs
There’s not just one type of VA loan – there are several. These different loan programs cover specific financing situations.
The VA loan benefits work to serve everyone from existing homeowners who want to refinance to first-time homebuyers to disabled vets who want their home to be more handicap accessible. You can use a VA loan to:
- Build a home
- Buy a home
- Refinance a home
- Improve, repair, or alter a home
- Make a home more energy efficient
- Buy a home and make improvements to it all at once
VA Purchase Loans
This is the most popular type of VA loan program. With it, you can purchase a home for no money down, which isn’t an arrangement that you can find anywhere else.
VA loans also do not require the borrower to get mortgage insurance. Other loans, such as conventional or FHA, require that you get mortgage insurance in case you default.
To do this, you have to pay a monthly premium until you build up at least 20 percent equity in your home. But with a VA loan, the government takes care of that aspect for you, so you don’t have to worry about it.
VA Loan Terms
VA purchase loans are very straight-forward, fixed rate mortgages. You can choose to have a loan term of 15 or 30 years, which is typical on conventional loans. A few more notable features include:
- You are eligible for more than one VA loan in your lifetime
- VA loans can be used even if it’s not your first home
- Sellers are allowed to pay closing costs
- The loans are assumable, which means it can be transferred to someone else
VA Hybrid Adjustable Rate Mortgage
Adjustable-rate mortgages (ARMs) were very popular before the mortgage crisis in 2008. People loved them because they essentially allowed them to borrow a large amount with lower monthly payments than fixed-rate mortgages.
Basically, you could buy a bigger house but not pay a lot more per month for it. Sounds good, huh? Well, there is a catch.
ARM Loans Fluctuate
ARMs have an interest rate that is fluid and can fluctuate with the market. When rates go up, then monthly mortgage payments do too.
That means that you can establish payments at one interest rate, but when that increases you may find that you can no longer afford your monthly payment.
Traditionally, the interest rates associated with ARMs get adjusted every few years – it could be every year, it could be every other year, or it could be longer. The VA tries to help protect borrowers with more conservative ARM guidelines.
They limit the type of adjustable rate loans they’ll back with a guarantee. Instead of ARMs with interest rates that frequently change, the VA offers a hybrid called the VA 5/1 ARM.
Here’s how a hybrid ARM works:
- A fixed, lower interest rate is carried for five years, called the initial period
- On the fifth year, the loan’s interest rate coverts from a fixed to adjustable for a period of time where the interest rate can be raised or lowered
- Initially, the adjustment is 1 percent
- Each year after the fifth year, the rate can continue to change by up to 1 percent for as long as you hold the loan
- There is a lifetime cap that ensures your rate won’t increase by more than 5 percent over the lifetime of the loan
This hybrid ARM loan is kind of a like getting a regular ARM with training wheels. It helps protect you if interest rates unexpectedly spike, but your loan can still be hit with a 5 percent hike over its lifetime.
You really must consider if you can afford the monthly payments on your loan if it ever hits its lifetime cap.
VA Cash-Out Refinance
The cash-out refinance program run by the VA follows the same set of guidelines you see on their traditional loan. But in this case, you have an existing mortgage you wish to replace.
During this replacement, any equity you’ve built up can be converted into cash. For this loan program, you need an appraisal. Once that’s done, you can refinance your mortgage.
But the loan amount cannot exceed 100 percent of the home’s value – fees included. For every refinance, the VA assesses a funding fee. That adds to the cost of converting the equity in your home into cash.
While there are definitely situations where a cash-out refinance is a good idea (remodeling, buying another property that will produce an income, etc), it’s not something you should make a habit out of.
When you treat your home like a giant ATM machine and cash out its equity, then you’re not building an asset that’s worth anything – and that’s one of the main benefits to buying a home.
Interest Rate Reduction Refinance Loan (IRRRL)
This is one of the best loan programs offered by the VA, lovingly referred to as “Earl” (IRRRL – get it?). You may also hear this called a VA streamline refinance.
In this program, an existing VA loan is turned into a new VA loan with a different interest rate (usually lower) and term. You can convert a fixed rate loan into another fixed rate loan or convert an ARM into a fixed loan, whatever you need.
The only caveat is that the loan you’re looking to refinance must be a VA loan. Other notable aspects of this program include:
- No cash-out
- Avoid the appraisal requirement
- No credit report is required
- You do not need a new COE
- You may not need to pay any money out of pocket by including all associated costs in the new loan amount
If you can refinance to a lower interest rate and lower your monthly mortgage payment, then it makes sense to take advantage of this program.
VA Energy Efficient Mortgage (EEM)
This program helps to subsidize home improvements you want to make that reduce the monthly cost of heating and cooling your home.
You can get $3,000 to $6,000 to spend on things such as insulation, appliance replacement, and solar health and cooling systems.
This program is available for new home purchases or during a refinance. It requires you to submit proof of any projected cost savings on your utility bills if the improvements are made.
Native American Direct Loan Program (NADL)
Native American vets can apply for loans directly from the VA to purchase a new home, construct a home, or make home improvements.
There’s even a NADL program to help refinance existing NADL loans. If you think you may qualify for this, then contact your VA regional loan center for more information.
Applying for a VA Loan
You can apply online through the VA’s benefits website for a VA loan. If you already have a lender in mind, then you can apply through them as long as they have access to the WebLBY system, which most lenders do.
You can also apply by mail if you want to kick it old school by completing VA form 26-1880 and sending it to:
VA Atlanta Regional Loan Center
Attn: COE (262)
P.O. Box 100034
Decatur, GA 30031
Are VA Home Loans Right for You?
In many cases, veterans will get the best deal by taking advantage of a VA loan program. So explore what your service has afforded you and look at your eligibility for a VA loan program today!