From a hefty down payment to covering mortgage insurance, closing costs and other fees, the path to homeownership can be daunting. But if you’re a veteran or military homebuyer, VA home loan programs may be a major advantage to help you secure the keys to your family’s new home.
VA home loans are one of the most unique loan programs in the country, and the incentives are substantial, including no down payment, better terms, lower interest rates, and more. If you’re a veteran looking into VA loans, here’s your step-by-step guide answering your key questions to get better acquainted with the home loans program designed specifically to help you.
What are VA Loans?
VA home loan programs are offered by the U.S. Department of Veterans Affairs and help veterans buy, build, or improve a home or refinance current home loans.
The program was established in 1944 after World War II to help returning service members buy homes without the added pressure of a down payment and high credit score. The program is a major success story: recent figures suggest it has guaranteed more than 24 million VA loans, helping U.S. veterans and active military staff who may have faced difficulty in securing a mortgage buy the homes of their dreams.
Essentially, VA loans are backed by the government department, acting as a guarantor on your mortgage. A common misunderstanding is the government issues home loans. To be clear, the majority of the time it doesn’t – it simply guarantees loans issued by private lenders, such as banks and mortgage lenders. Veterans and military homebuyers need to show their eligibility for the VA loan to lenders, then the government appraises the property they’re hoping to buy along with other financial requirements. If it’s satisfied with the risk involved, the government will guarantee the lender against any loss of principal.
Because of this government backing, there’s decreased risk for the lender. In turn, they’re more likely to hand out loans under much better terms. The Department of Veterans Affairs says nearly 90 percent of all VA-backed home loans are extended without a down payment. This is a sizeable benefit for those who can make use of the loan – these days, conventional loans require a down payment of at least 5 to 10 percent. For instance, a 5 percent down payment on a $350,000 home is $17,500; a 20 percent down payment on the same home is $70,000.
Are There Different VA Loans for Different Circumstances?
Yes, there are four VA-backed loan types and while they’re all backed by the government, they each come with distinct purposes to help you finance your home. They include:
Purchase loans: These are the most common of VA loans and allow you to buy a single-family home, buy a condo in a VA-approved project, build a new home, buy a home and improve it, or buy a manufactured home or lot. You can even use this loan to add energy efficient features to your home.
Native American direct loans: If you’re a veteran, and either you or your spouse is Native American, the NADL program helps you buy, build or improve a loan on Federal Trust Land.
Interest rate reduction refinance loan: These loans are for those with existing VA-backed home loans who want to reduce their monthly mortgage payments by getting a lower interest rate, or make monthly payments more stable by moving to a fixed interest rate.
Cash-out refinance loans: These loans help you refinance a non-VA loan into a VA-backed loan. You can also use this loan to take cash out of your home equity to pay off debts or cover other financial needs.
In addition to the VA loan guaranty program, there are a few instances of “direct VA loans,” which is when Veterans Affairs acts as the mortgage lender and makes loans directly to specific veteran populations. These include veterans living in rural areas, veterans living with certain disabilities, or for veterans who have defaulted on guaranteed loans in the past due to circumstances. The NADL is a direct VA loan, too.
How do VA Loans Compare to Traditional Mortgages?
Where do we begin? If you qualify for a VA home loan, here are the main ways your route to getting a home loan may be significantly easier compared to the conventional mortgage:
No Down Payment
90 percent of VA loans come with a 0 percent down payment – one of the last 0 percent down home loans left. On the other end, traditional loans require at least 5 percent – and up to up to 20 percent – down. This takes years of discipline and saving for traditional homebuyers.
No Private Mortgage Insurance
There is no requirement for you to buy private mortgage insurance (PMI) with any VA loan because you’re already guaranteed by the government. With traditional mortgages, lenders need homebuyers to pay for PMI if they’re financing more than 80 percent of their home’s value. This advantage saves you hundreds of dollars each month.
Qualifying and Securing Lower Interest Rates
With VA loans backed by the government, lenders can extend much lower interest rates compared to non-VA loans. You’re seen as much less of a risk to gamble on because of your guarantor, so the strict qualifications procedures most homeowner hopefuls have to consider don’t apply to you. How much lower could interest rates fall? Most websites suggest you’ll snag about 0.5 percent to 1 percent lower than conventional interest rates, but this could vary according to each lender, so it’s worth shopping around to compare rates.
Am I Eligible for a VA Home Loan?
This great vehicle to secure a low-interest, down payment-free home loan is set aside for a key segment of the U.S. population: U.S. veterans, active duty service members, National Guard members and reservists.
The full list of eligibility requirements for veterans and service members are listed on the government website, but here’s a quick summary (you must meet at least one condition to qualify):
- If you have served at least 90 days of active service during wartime, including WWII, the Korean War, the Vietnam War, the Gulf War, or if you’re on active duty now
- If you have served 181 days of active service during peacetime, including post-WWII, post Korean War, or post-Vietnam War
- If you served for 24 continuous months or the full period for which you were called to active duty between September 1980 and August 1990, or between 1981 and 1990 if you served as an officer
- If you served more than six years in the National Guard or the Reserves during any time period (but you must have been discharged honorably, placed on the retiree list or transferred to the Standby Reserve
If you don’t fit these immediate criteria, don’t fret. The Veteran Affairs website lists other routes to securing a VA home loan. If you were discharged for other reasons, including hardship, reduction in force, medical conditions or a service-connected disability, you may still be eligible. Read the full guidelines on eligibility here.
What is a Certificate of Eligibility (COE)?
A Certificate of Eligibility (COE) is the key to getting your VA home loan. It shows your lender you qualify for a VA-backed loan and allows you to reap the benefits of the program.
In order to apply for a COE, you’ll need a copy of your discharge or separation papers (DD214) if you’re a veteran, current or former activated National Guard of Reserve Member.
Active-duty service members will need a statement of service, signed by your commander, adjutant, or personnel officer showing your full name, social security number, date of birth, the date you entered duty, duration of any lost time, and the name of the command providing information.
You can apply for your COE online, through a Web LGY system (facilitated through your lender), or by mail.
It’s worth noting surviving spouses of veterans or a spouse of a veteran who is missing in action or being held as a Prisoner of War may also apply for a COE.
What About My Financial Requirements?
While the majority of veterans and service members who are eligible for a VA loan are off the hook when it comes to a down payment, they still need to meet certain financial requirements to make the cut.
For the most part, these measures aren’t just an added insurance for your lenders and the government backing you, they’re a good set of parameters to keep your finances in check during the home buying process and with paying off your home loan.
Your budget will be scrutinized because you need to show your income is sufficient to cover your fixed expenses, such as your mortgage and monthly costs, with income leftover. The residual income shows lenders and your guarantor you have enough of a financial cushion to afford other expenses, such as emergency costs, household expenses and transportation.
This precaution is a major reason why the VA home loan program has resulted in one of the lowest foreclosure rates of all major lending options.
Beyond being financially responsible for your loan repayment, monthly expenses and other costs, your lender may check your outstanding debts, debt-to-income ratio and your credit score.
Do I have to Account for Any Other Fees and Expenses?
There is no hard and fast rule on how much the Funding Fee is – this depends on each borrower’s financial circumstances, their military category, and the type of loan they’re applying for. As a general rule of thumb, the average veteran applying for a VA home loan for the first time will typically pay a fee of roughly 2.15 percent of the purchase of the home. If he or she moves and turns to a VA loan again, the fee could increase to about 3.3 percent.
Some veterans don’t have to pay the fee, such as those facing a service-connected disability, or surviving spouses of veterans who died in service.
You can find the latest breakdown on Funding Fee rates here.
Other fees stem from your lender. They could be interest, closing fees, or other charges. The Department for Veterans Affairs notes the lender, not VA, sets the interest rate, discount points and closing costs. These rates vary from lender to lender, so it’s important to shop around and compare what’s on offer in the mortgage market.
There are also the conventional fees, such as the VA appraisal, the fee for pulling your credit report, state and local taxes, and recording fees. These may fall on the new homeowner, the seller or a combination of both.
How Much can I Borrow with a VA Loan?
For the most part, the VA loan program offers veterans a loan of up to $484,350 for a single unit home without any down payment. In 2019, these limits were increased in high-cost areas of the United States. The loan limits are outlined here.
Do I Need to Shop Around for Lenders?
One of the key steps in the VA loans process is choosing a VA-approved lender to facilitate your VA-backed home loan. Shop around because lenders each have their own interest rates, closing fees, and other costs to consider. VA loans rates are not set by the government so they’ll fluctuate from lender to lender.
Some lenders also focus primary on the VA loan program, catering specifically to military clients. This could be your best bet, as VA-specialty lenders are much more comfortable with the VA process compared to lenders who aren’t as familiar with the program.
What About the Rest of the Homebuying Process?
Now that you have a lender and your COE, you can pre-qualify for your loan, which is an important step to help you determine how much debt you can feasibly take on. In the pre-qualifying stages, you’ll work with the lender, going over your income, credit history, employment, and other factors to calculate a ballpark figure of how much your loan will be. You’ll also tease out any issues, such as your credit rating or your debt-to-income ratio before you get to the stages of underwriting. With a prequalification amount in hand, you can start house hunting.
In the house hunting process, whether you’re buying a new build or customizing a new home, make a wish list of everything you’re looking for in your family’s ideal home – the location, the number of bedrooms, bathrooms and common spaces, and your ideal outdoor area. If you’re constructing a new home or using your VA-loan to upgrade your existing home, work closely with your builders to execute your vision.
Finally, once you’ve got a signed purchase agreement, your lender can ask for a VA appraisal. In this step, VA evaluates the home being considered for financing, inspects the space to make sure it meets the requirements and, ultimately, determines if it’s an investment worthy of backing. After this, it’s time to close and move!
Don’t sweat this stage; according to some estimates, 73 percent of VA loans close compared to 67.9 percent of conventional loans.
Carmen Chai is an award-winning Canadian journalist who has lived and reported from major cities such as Vancouver, Toronto, London and Paris. She started her career in journalism writing about crime and local news for the Toronto Star, Canada’s largest daily newspaper. After that, she covered a variety of subjects from federal politics in Ottawa to the 2015 attacks in Paris. She has also worked as senior health reporter for Global News and as now the Parliamentary Affairs Manager for UK Research and Innovation. For NewHomeSource, Carmen covers a variety of topics, including insurance, mortgages, and more.