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As a homebuyer considering the various ways to finance a house, you’ll realize that the VA loan is one of the best options for active duty military and veterans. Millions have benefited from the favorable terms of the VA loan since it began in 1944, and the program remains popular as it removes many barriers typical home buyers face, especially first-time home buyers.
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The Department of Veterans Affairs home loan program is a mainstay for service members seeking a simpler path to homeownership:
“The VA helps Servicemembers, Veterans, and eligible surviving spouses become homeowners. As part of our mission to serve you, we provide a home loan guaranty benefit and other housing-related programs to help you buy, build, repair, retain, or adapt a home for your own personal occupancy.”
You’ll want to ask your real estate agent and mortgage lender to further explain the deep details of the VA loan, but the following are the major points to become familiar with in order to have a solid understanding of what the VA loan is, and who is eligible for the benefit.
Related: Mortgage 101: Your Basic Questions Answered
Why does the VA home loan exist?
In 1944, The U.S. Department of Veterans Affairs created the VA loan as part of the Servicemen’s Readjustment Act to assist World War II veterans with establishing homeownership. President Roosevelt signed the act with hope that service members would come home and begin to establish new lifestyles after sacrificing so much during the war effort.
Since then, more than 25 million VA loans have been guaranteed by the government and the program remains one of the most powerful for helping veterans achieve homeownership.
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Who is eligible for a VA loan?
Military members and veterans are required to meet certain criteria in order to qualify for a VA loan. In short, your time of service, duty status, and character of service determines your eligibility for specific VA home loan benefits. Here is what the VA directs:
“You must have satisfactory credit, sufficient income, and a valid Certificate of Eligibility (COE) to be eligible for a VA-guaranteed home loan. The home must be for your own personal occupancy.”
VA home loans can be used to:
- Buy a home or a condominium unit in a VA-approved project
- Build a home
- Simultaneously purchase and improve a home
- Improve a home by installing energy-related features or making energy efficient improvements
- Buy a manufactured home and/or lot
- Refinance an existing VA-guaranteed or direct loan for the purpose of a lower interest rate
- Refinance an existing mortgage loan or other indebtedness secured by a lien of record on a residence owned and occupied by the veteran as a home.
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Your VA loan eligibility also depends on your length of time in service. Veterans, current active duty, National Guard, Reserves, and those who served 90 days active duty during wartime (see the VA site for the definition of this), as well as surviving spouses are eligible. For further reference, the VA loan home website has the exact details. Your real estate agent and/or lender will know more as well.
Obtaining the COE is probably easier than you think. The majority of lenders have access to the VA’s Loan Guaranty System (LGY). This app quickly verifies eligibility, but the crucial information comes directly from VA. Note that, if you don’t have complete information filed with the VA, there could be a hindrance to access. Active duty members typically do not have problems accessing a quick verification of a COE. Veterans and surviving spouses who weren’t immediately qualified can file for the COE online or through the mail.
Learn about more options for utilizing your VA loan benefit, including home renovations and new construction homes.
What are the benefits of a VA home loan?
VA Loans Are Guaranteed
It's a common misconception that the U.S. government funds the money for the VA loan. They do not. They do however, guarantee about 25% of the loan (provided by private lenders), which equates to a very safe transaction in the eyes of the lending bank. The VA also provides several options to help loan holders avoid foreclosure and stay in their homes if financial difficulties occur.
Learn more:
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What are VA Loan interest rates?
An added benefit of a VA loan’s guarantee is that the service member automatically becomes less of a risk, and lenders offer better interest rates to borrowers with limited liability. Even a small difference in percentage saves thousands over the life of the loan.
For example:
- $300,000 purchase price
- 30 year loan at 3.0% equals $455,332 repayment
- 30 year loan at 2.8% equals $443,766 repayment
- This a savings of almost $12,000 with just a .2 percent difference.
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Your Credit Score Doesn't Have to Be Perfect
Due to federal government backing of the VA home loan, there's not a required credit score from the U.S. Department of Veterans Affairs. However, the private lenders issuing VA loans may have their own minimum credit score requirements, typically ranging from 580 to 660.
Conventional loans can be more difficult to obtain, with a 670 score needed to achieve a competitive interest rate.
Zero Down Payment
The VA loan has many benefits, but the zero down payment feature continues to be one of the strongest selling points for choosing the VA loan. For many years, the baseline loan guarantee limit was $424,100 for much of the country, although for expensive areas, such as Washington, D.C., it was guaranteed up to $679,650. Home buyers wishing to purchase beyond these prices had to come up with a 25% down payment.
However, as of January 2020, this down payment requirement changed. Service members no longer have to make a down payment on any Ioan size, helping to increase their chances for acquiring homes with large price tags.
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From the VA:
“Eligible Veterans, service members, and survivors with full entitlement no longer have limits on loans over $144,000. This means you won’t have to pay a down payment, and we guarantee to your lender that if you default on a loan that’s over $144,000, we’ll pay them up to 25% of the loan amount.
You have full entitlement if you meet either of the requirements listed below.
At least one of these must be true. You’ve:
• Never used your home loan benefit, or
• Paid a previous VA loan in full and sold the property (in this case, you’d have your full entitlement restored), or
• Used your home loan benefit, but had a foreclosure or compromise claim (also called a short sale) and repaid us in full.
Note: You may have heard the terms additional entitlement, bonus entitlement, or tier 2 entitlement. We use these terms when we communicate with lenders about VA-backed loans over $144,000. You won’t need to use these terms when applying for a loan.”
Private Mortgage Insurance Is Not Required
In order to qualify for many loan products, civilian borrowers typically have to pay for private mortgage insurance (PMI) if they don’t have a substantial down payment. PMI protects the lender’s investment in your ability to make mortgage payments and helps to pay their loan back if the home goes into foreclosure.
A VA loan does not require borrowers to pay for PMI, which is a substantial savings. Remember, the government secures a portion of the loan.
Reduced Closing Costs
In keeping with the original concept of affordable homeownership for service members, the VA restricts the amount of money spent on fees during a VA loan transaction. Disabled and active duty service members normally pay the lowest amount of funding fees. These savings can be extended by asking the seller to pay for loan related closing costs and concessions.
Note that, even with these reductions, borrowers should ensure they have 5-10% of the home’s purchase price to pay for remaining closing costs and earnest money. This money may also pay for the VA funding fee if you prefer not to put into the loan amount. The funding fee is a way for the VA to maintain the home loan program, so future military members have the financing available when they need it.
The VA loan funding fee is waived for classes of veterans who have disabilities related to their service, such as:
- If the veteran receives VA compensation for a service-connected disability.
- If the veteran who is entitled to receive compensation for a service-connected disability did not receive retirement or active duty pay.
- A surviving spouse of a veteran who died in service or from a service-connected disability.
No Pre-Payment or Early Payoff Fees
Sometimes, it makes financial sense to pay off a home loan early, but not if early payment fees or penalties suck up any potential savings. The VA loan allows borrowers to pay their loans faster than the original expected life of the mortgage without incurring costly fees, as VA loans have no prepayment penalties.
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Can you reuse your VA home loan benefit?
Yes, you can reuse your loan benefit—multiple times, actually. Yes, you can apply for a VA loan before another VA loan is paid in full, in certain circumstances. Even service members who have faced foreclosure or bankruptcy could be eligible for a VA loan. Do note that the VA loan is designed to purchase a primary residence. Borrowers cannot use funds for investment property vacation homes or to purchase property internationally.
Our article, Have a VA Loan? Take a Second!, explains further details and examines the circumstances when it makes financial sense to look into another VA Loan.
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How do I start the VA loan process?
Military past and present have a powerful benefit in the VA loan. You’ll be hard pressed to find other loan products that have the savings options and extended capabilities to buy homes as the VA loan. However, not every lender is proficient in the VA loan process.
It’s necessary to interview multiple lenders to ensure they have the knowledge to accurately deal with the government. This is especially true for those who want to apply for a second VA loan, as this is a special skill set that many lenders do not have. Start with referrals from family and friends, and add in suggestions from your real estate agent before interviewing potential lenders.
Your lender will ask for stacks of documents. Here are the Most Common Documents Needed for Home Financing.
Home buyers have many questions, and if VA loan financing is an option, your real estate agent should be well versed with the details of a loan, simply to guide you through the general home buying process and how a VA loan affects housing hunting. An agent with the Military Relocation Professional (MRP) Certification will have a wealth of knowledge.
MilitaryByOwner is packed with information about buying and financing a home. Not only are VA loans discussed in articles and blogs, but so are conventional loans and other federal programs such as the FHA loan. Click below to find out more!