Everything You Need to Know About VA Loans
Navigating the realm of home loans can be complex, especially for veterans seeking a path to homeownership. Enter the VA loan, a powerful tool backed by the U.S. Department of Veterans Affairs. These loans are available to eligible veterans, active-duty military personnel, and their surviving spouses. The purpose of the VA home loan program is to help this segment of the population achieve home ownership under more favorable terms than conventional loans.
Conventional mortgages usually come with down payment requirements, mortgage insurance premiums, and higher interest rates. These criteria often price veterans and their spouses out of the housing market, making it more difficult for them to buy property. VA loans are meant to help curb some of the difficulties veterans face when attempting to obtain a home.
Wondering if you qualify for the VA loan program? Keep on reading.
What is a VA home loan?
A VA loan is a mortgage guaranteed by the U.S. Department of Veterans Affairs. Essentially, the Department of Veteran Affairs commits to paying back a portion of the loan if the borrower were to default, which is often referred to as VA loan entitlement. This makes it easier for veterans to qualify for a mortgage, as they do not need to abide by the same requirements as they would for conventional loans.
When looking into a VA loan, it’s important to find both a lender and real estate agent who has experience working with VA borrowers. They'll help you understand eligibility requirements, find a VA-approved property, and walk you through the application process. Not all real estate professionals know how VA loans work, so make sure to ask before hiring.
VA loan benefits
For a little bit of background, the first VA home loan benefit program was originally introduced in 1944 through the GI Bill of Rights. The goal of the program was to support veterans as they transitioned from military service into civilian life after World War II.
This initiative still stands today and provides veterans with all of the following benefits:
No down payment: Few loans exist allowing homebuyers to acquire a mortgage with a 0% down payment.
No minimum credit score: Most private lenders require a credit score of 620 or higher. For those with low credit scores pursuing a traditional home loan, their dreams of homeownership can be put on hold until they're able to boost their credit score.
Lower closing costs: Closing costs typically run homebuyers 3-6% of their loan amounts. The Department of Veterans Affairs limits closing costs to no more than 1% of the total mortgage loan amount.
Lower interest rates: VA loans come with lower interest rates than conventional mortgages.
VA loans can be assumed: When selling your home in the future, you can offer the new buyer to assume your existing mortgage. This can be a major selling point if your interest rate is lower than the average mortgage rate at the time, which is usually the case with VA loans.
What kind of VA home loans exist?
You may be surprised to learn that VA loans are not just for home purchases. Borrowers can take out a VA-backed loan to buy, build, renovate, and even refinance loans on a home. As long as the home in question is the primary residence of the borrower, qualifying homeowners and homebuyers have access to all of the following types of VA home loans:
VA purchase loans: Offered by lenders at competitive interest rates, these mortgages include fixed-rate mortgages, adjustable-rate mortgages (ARMs), and jumbo loans.
VA construction loans: A type of loan that helps you pay for the construction of a brand new home. Payments are released as the home is being built. It’s important to note that this loan is not offered by all lenders.
VA cash-out refinance loan: This kind of loan can help you tap into your home equity to renovate your property, pay off debt, or take care of other financial needs.
Native American Direct Loan (NADL) program: This kind of loan exists to specifically help Native American veterans achieve homeownership. Native American veterans and veterans married to Native Americans may be eligible for a loan to buy, build, or improve a home on trust land. The VA issues these loans directly to borrowers whose tribal government has an agreement with the VA.
Interest Rate Reduction Refinance Loan (IRRRL): If you have an active VA loan and want to lower your monthly mortgage payments, an IRRRL or VA streamlined refinance might be a good option for you.
Who qualifies for a VA loan?
The US Department of Veterans Affairs sets the eligibility requirements for VA home loan programs. You can request your Certificate of Eligibility (COE) on the Department of Veteran Affairs website. This certificate verifies that you are eligible for a VA loan based on your service history and duty status. You’ll need to present your COE to your lender when applying for a VA loan.
It’s important to make the distinction that the VA backs your VA loan — it doesn't provide the loan. The mortgage lender issues the loan and not all lenders work with VA loans, so you’ll need to shop around for a compatible lender. This is why working with an experienced real estate agent is so important.
To be eligible for a VA home loan, you must meet certain minimum active-duty service requirements. The military service requirements vary depending on when you served; however, most veterans qualify if they served at least 90 days. If you don't meet the minimum service requirements, you may still be eligible for a VA home loan if you were discharged for hardship, reduction in force, or a service-connected disability.
In addition to meeting the Department of Veterans Affairs' eligibility requirements, you’ll need to meet the lender’s requirements. Since lenders are independent businesses, their requirements differ from one lender to the next. We break down VA loan eligibility and typical lender requirements in detail below:
Determining eligibility with the Department of Veterans Affairs
The VA considers all of the following when determining borrower eligibility for VA loans:
- 90 continuous days of service for active duty service members.
- Veterans must meet a service minimum that varies depending on whether they served during a war or in a time of peace.
- For those with a service-related disability, less than 90 or 181 days of service is required, depending on the period during which they served.
- For surviving spouses of a deceased soldier, one of the following scenarios is required to qualify: a spouse who went missing in action, died while in service, or died because of a service-related injury.
- A Certificate of Eligibility.
Meeting VA loan requirements with the lender
Once you’ve established eligibility for a VA loan with the Department of Veterans Affairs, you can start applying to lenders who work with such loans. Lender requirements differ, but they may require the following to approve your loan:
- No defaults on any federal debt.
- Two years of employment history.
- Maximum debt-to-income (DTI) ratio of 41%.
- Minimum residual income, which is cash left over after you pay your bills each month -- this varies according to where you live and your family size.
- VA home appraisal.
- Funding fee of 0.5% to 3.6% of the loan amount.
- The home you buy must be your primary residence.
How do you apply for a VA loan?
Now that you understand what the VA Department and VA loan lenders are looking for, here’s what you need to know about submitting a VA loan application and the VA loan process:
Obtain a Certificate of Eligibility (COE)
Before moving forward with any aspect of the application process, you’ll want to have your COE in hand. Without it, your attempts to secure a VA loan will be null. Even if you find a great property and a willing lender, funds cannot be disbursed without a COE. You can request a COE directly with the VA Department, or ask your lender to request one on your behalf.
Organize financial documents
In addition to your COE, you’ll want to compile the following financial documents for your VA loan application:
- DD 214 (discharge or separation paperwork).
- Leave and earnings statement if you're on active duty.
- Pay stubs from the past 30 days.
- Two years of W2s.
- 60 days of bank statements.
- Letters of explanation for any large deposits in asset accounts, gaps in employment, or credit issues.
Find a lender that works with VA loans
Once you have your COE and financial documents in hand, you’ll want to contact a real estate agent who has worked with VA loan lenders. They’ll help you find a VA-approved lender offering favorable terms and good customer service.
As mentioned before, all VA lenders have their own set of eligibility criteria. For example, certain VA lenders are willing to assess borrowers with lower credit scores, while others provide a wider array of VA loan types to choose from.
It’s best to seek pre-approval from multiple VA mortgage lenders in the same way you would with a traditional mortgage. The only difference is that part of your evaluation criteria will be their willingness to work with VA loans.
Find a home that qualifies for a VA loan
Once you’ve identified a list of possible lenders and have obtained a few pre-approvals, you’ll want to start looking for a home that fits the bill. It’s important to note that not all properties are eligible. Once you’ve selected a home with your agent, a VA-approved appraiser will assess the property to determine its value and ensure that it meets VA Department requirements.
Submit applications with multiple lenders
Just like lenders have different requirements for VA loan approvals, they also offer different VA loan products. In general, VA loan rates are more favorable than conventional loans. However, rates differ from one lender to another, so make sure you are carefully comparing and contrasting lender options.
VA loan rates can either be fixed, ensuring consistent payments throughout the loan term, or adjustable, allowing payments to fluctuate over time. It's important to know that adjustable-rate mortgages (ARMs) carry a degree of risk, as they can result in higher payments when interest rates increase. Keep this in mind before settling on a lender.
VA loan conditions
Before moving forward with a new VA loan, though, it's important to consider the conditions under which this loan is granted. The typical VA loan comes with a loan limit and funding fees, and it can only be used to finance a primary home. Take a closer look at the conditions listed below:
VA loans have certain limits
The VA loan limit is the maximum amount that eligible borrowers can borrow without making a down payment. As of 2023, the maximum amount is $726,200 for a single-family home in the average U.S. county. However, it can be as high as $1,089,300 in more expensive areas throughout the country. While it’s possible to get a VA loan for a home priced beyond these loan limits, the borrower would be required to make a down payment.
VA loans come with funding fees
VA loans don’t require borrowers to purchase private mortgage insurance (PMI). However, they do come with a VA funding fee, a one-time charge that is used to offset the risk of default.
The funding fee is set by the Department of Veterans Affairs (VA) and is based on several factors, including the borrower's down payment and whether it is their first VA loan. The funding fee can range from 0.5% to 3.3% of the loan amount, although most veterans end up paying 2.15%. Borrowers can either pay the funding fee upfront or roll it into the loan.
Purchase loans are only for primary homes
VA loans are not intended for investment or vacation properties. To be eligible for a VA loan, you must occupy the property as your primary residence within 60 days of purchase. If you fail to meet this requirement, you may be required to repay the loan in full. Multifamily properties of up to four units can be purchased as long as the borrower is living in one of the units.
The bottom line on VA loans
The VA loan benefit provides veterans a viable path to homeownership by minimizing the financial burdens associated with traditional mortgage loans. Since they're backed by the U.S. Department of Veterans Affairs, VA loans come with several benefits including lower interest rates, no down payment, and no minimum credit score. However, it's important borrowers also consider VA loan limits, funding fees, and property usage restrictions before making a decision. VA loans come with a ton of upside, and with the help of Azibo's VA loan guide, you can be confident that you're maximizing your benefits as a veteran.