First, you may be wondering, how does VA loans work? The federal government doesn’t lend money with VA loans, but it does offer a guarantee. You borrow from a private lender, and the government guarantees payment for a portion of your mortgage. If you default on your loan, the government will pay back the lender.
With this type of guarantee, lenders may offer more favorable terms for VA loans compared with conventional mortgages because they are guaranteed repayment. For example, you may be able to take out a loan with no down payment.
You can use a VA loan to construct a home, make energy efficient improvements on your home or refinance a mortgage. However, you can only use a VA loan for your primary residence. This program is not available for a vacation or investment property. You don’t have to be a first-time homebuyer to use a VA loan and you can use this program more than once because it’s a lifetime benefit.
Who is eligible?
The VA loan program is available to active-duty members of the military, veterans, past and present members of the National Guard or reserves, and surviving spouses of services members who died in combat. However, if the surviving spouse remarried they are not eligible. Also, veterans with dishonorable discharged are not eligible. To be eligible, applicants must meet a minimum length of service:
- 181 days of active service during peacetime
- 90 days of active duty during wartime
- Less than 90 days of active duty if discharged for a service related disability
- Six years in the reserves or the National Guard
When you apply for a VA loan, you will need to present a certificate of eligibility, COE, from the VA lender to show you qualify for the program. You can apply for the COE online through the VA website or click here to apply. Your lender may also pull up your COE when you apply for a loan. Watch the video below to see what happens when you click the link above.
In addition to military service requirements, the lender’s income, credit score and other requirements to qualify for the mortgage. While the VA has no minimum credit score, lenders do: typically a minimum of 620. The lender will also consider your debt-to-income ratio, which is your monthly debt payments compared with your income. Most prefer a DTI of 43% or lower.
Are there loan limits?
The VA does not set a limit on how much you can borrow, but it does limit how much of the loan it will guarantee. This can determine if you will need to make a down payment. If your loan exceeds the ceiling limit of VA loan, you may be required to make up the difference with a down payment.
So what are the advantages of a VA Loan?
- No money down
- No mortgage insurance
- You can qualify with fair credit
- Sellers can help with closing cost
- The VA funding fee can be financed
- Cash is available for energy-efficient upgrades
- There are no prepayment penalties
- You can get support from the VA
So what are the disadvantages of a VA Loan?
- You’ll pay a VA funding fee
- They’re only available for primary residences
- You can’t buy a fixer-upper in major disrepair
How do you apply for a VA Loan?
Applying for a VA loan is similar to a conventional loan. However, the two additional documents you will need is your COE and your DD-214. The lender will also schedule an appraisal of the property from a VA-certified appraiser. The appraiser will inspect the property to make sure it meets the VA’s minimum property requirements and is acceptable for a loan. If the property does not meet the requirements, the appraiser will point-out what needs to be repaired before you can take out a VA loan. You will need to negotiate repairs with the seller and schedule another inspection with the appraiser after the repairs are completed.
What are the different types of VA Loan Programs?
The VA offers various programs, in addition to the standard VA home loan program. If you have a home loan, you may be able to refinance with the VA for a better interest rate or to cash out the equity in your home. Native American and disabled veterans can receive additional benefits. To find out what the additional benefits are, contact your state VA offices and they will provide access to other benefits. Below is a list and a brief description of the different VA Loan Programs:
- Interest Rate Reduction Refinance Loan – also known as the VA Streamline Refinance loan, can refinance your existing VA home loan. With the IRRRL program, you can replace your current VA loan with a new one with different terms. This program is not automatic, you need to apply for it through a lender.
- VA Cash-out Refinance Home Loan – this program allows you to borrow against the equity of your home to make renovations, payoff credit cards or buy a new car. The VA will add the amount you cash out to your outstanding home loan.
- Native American Direct Loan – Native American veterans who want to live on federal trust land – such as lands in tribal trusts, Alaskan Native corporate villages and Pacific island territories can use this program. If you’re eligible, you can use this loan to purchase, improve or build a home on federal trust land. You can also use this program to refinance an existing VA loan.
- Adapted Housing Grants for Disabled Veterans – the VA offers three grants to help veterans with certain disabilities create an adapted home to accommodate disabilities. These grants pay out different amount and have different eligibility requirements. These are grants, not loans, so you don’t have to pay them back. They are as follows:
- Specially Adapted Housing gran (SAH)t;
- Special Housing Adaptation grant (SHA); and the
- Home Improvements and Structural Alterations (HISA) grant.
- State Resources – Your state may offer additional benefits for veterans. Many states, including Florida, New York and Virginia, offer an exemption from property taxes for eligible veterans.
My personal experience
In the spirit of full disclosure, my first home was bought with a conventional loan from a small local bank. That said, my younger brother, who retired from the Army in 2018, purchased his first home with a VA loan. My brother and I are very close and he was willing to share his personal experience with the VA home loan process. The following exchange is the result of my brief conversation with my brother:
Ron: So, thank you for taking the time to help out fellow veterans.
Marvin: No problem.
Ron: If you had to rank your overall experience with the VA home loan, how would you rank it from a scale of 1 to 5; 1 being the lowest score and 5 being the highest score?
Marvin: I would definitely give them a 5. My mortgage broker spoke directly with the VA, so to me dealing with the VA was all done behind the scene, if you will. I never had to speak with the VA directly.
Ron: When the mortgage broker asked for the COE and your DD-214, you provided that directly to your mortgage broker?
Ron: What was the best part of the process?
Marvin: I can’t point to one specific thing. The entire process seemed painless. I will say that I was pre-approved for a VA loan for almost $400,000. I was shocked, but I knew what my house payments needed to be, so I told them I only needed $100,000. The look on my realtor’s face was priceless, she wanted to show me houses in a “better” neighborhood but I declined. You see, I was going through a divorce at the time and I knew I couldn’t afford anything too extravagant.
Ron: That was smart. Would you get another VA home loan?
Ron: What was the worst part of the process?
Marvin: I can’t say there was a bad part of the process.
Ron: Did your appraisal come-in at the seller’s price?
Marvin: My appraisal came in more than loan amount. So I had instant equity coming into the house. That was an awesome feeling.
Ron: If you remember, how long did the entire process take? For me, using a conventional loan, it took a little short of 30 days from approval of the seller’s offer to closing of the loan.
Marvin: Mine took about 30 days, but my ex-wife made my life miserable towards the end because she wouldn’t sign the Quit Claim Deed.
Ron: For those of you who don’t know, the Quit Claim Deed is used between a husband and a wife who are terminating their relationship. The intent is for one party to retain the property while the other party will no longer be responsible for any aspect of property ownership.
Marvin: Right! Because my ex-wife decided to drag her feet, the first lender backed out of the deal which meant I had to rent my new house to the seller for two weeks while my mortgage broker looked for another lender who was willing to close on the property. Luckily, PennyMac stepped-up and here I am.
Ron: Just to be clear, did the VA get involved when you ex-wife wouldn’t sign the Quit Claim Deed?
Marvin: Not really, again I never had to speak to them, they just guaranteed the loan. To me it appeared that the VA didn’t care who lent me the money, or if my ex-wife signed the document.
Ron: Okay, hey thanks for answering these questions.
Marvin: No problem.
Applying for any home loan can be a complicated process, and VA loans are no different. I hope this post was helpful in guiding you to the most common questions. The most important thing I want you to remember is that the government doesn’t make home loans. The VA only guarantees the lender that they will get their money back. Look at it as a form of insurance, for each loan. Therefore, look at VA loans as a government-backed loan from a mortgage lender, not a home loan directly from the government. So, here are the steps for getting a VA loan:
Five Steps To A VA Loan
- Apply for a Certificate of Eligibility
- Apply to a mortgage lender for the loan
- Decide on a home and sign a mortgage agreement
- Order an appraisal from the VA
- Close the loan and move-in
If you have any questions, please feel free to comment below. If you had a different experience using the VA home loan program please share it in the comment section below. More importantly, if this post answered any of your questions, share it with other veterans within your social media site above.