Ask any financial advisor about the most powerful mortgage options for active service members, as well as veterans. They will point out the VA loan program as the best option.
Quite simply, a VA home loan has multiple advantages over a conventional loan, and millions of veterans have benefited from it.
Here, we discuss what is a VA home loan and how can you apply for it.
What is a VA Home Loan?
A VA loan is backed by the U.S. Department of Veteran Affairs (VA). The origin of the loan program can be traced back to the 1944 GI Bill of Rights. It was signed into law to help veterans enter civilian life after World War II. Since then, the department has backed over 24 million VA home loans.
The purpose of a VA home loan is to make homeownership easier for those who have served. A VA loan has multiple advantages that make it the safest loan option on the market. Here are a few of them.
- Probably, the biggest advantage of a VA loan is that it allows you to buy a home with a 0% down payment. In comparison, the average home buyer has to make a 6% upfront payment.
- In addition, VA loans do not require you to pay monthly private mortgage insurance (PMI). For conventional loans, borrowers need to pay this amount if they can’t make the necessary downpayment.
- The average interest rate on VA loans is lower than the market. Not only does this lead to more savings, but it also qualifies veterans for a larger loan amount.
- In general, VA loans have lower credit score requirements than other loans. Likewise, the cutoff for the debt-to-income ratio is more forgiving. This makes it a more flexible option.
- There is a limit on the various fees that the lender can charge as VA loan closing costs. These include attorney fees and mortgage origination fees.
- Borrowers can pay off their VA loan at any point without having to worry about prepayment penalties.
How Does a VA Home Loan Work
Veterans and active service members can use the VA loan for buying, building, or improving a house. The VA does not directly provide the majority of the home loans. Private lenders like mortgage companies, credit unions, or banks backed by the VA provide the loans.
If you have full entitlement, then there are no limits on a VA loan. The lender will know that in case of a default on a loan, the VA will pay them up to 25% of the loan. This allows the lender to recover some of the loan amount, in case of a loan foreclosure.
Coming to the eligibility criteria, you will need a Certificate of Eligibility (COE) to prove your eligibility for the loan. You can submit your service-related documentation and get the certificate from the VA website.
During processing, the lender requests a VA appraisal of the house to estimate its market value. This report and your credit and income information are evaluated to determine if you can repay the loan.
Here’s a closer look at VA home loan requirements for eligibility.
- Firstly, you need to meet the length-of-service requirements. This is 90 continuous days of active duty for service members. For veterans, the minimum service requirement depends on the service time. Those who have served in the National Guard or Reserve for at least six years are also eligible.
- Surviving spouses of service members who have died on active duty or due to a service-connected disability are eligible, provided they have not re-married before December 16, 2003.
- While the VA has no required credit score limit, you need to meet the minimum standard set by the lenders.
- The property you wish to buy should be your primary residence and meet all the building codes, as well as safety standards.
- If your discharge was other than honorable, or due to bad conduct or dishonorable, you are not eligible.
A big plus of a VA loan is that it is not a one-time benefit. You can use it more than once and it is even possible to have multiple VA loans going at a time. However, the amount you can borrow will be limited by the partial or reduced entitlement you may have.
Understanding the Types of VA Home Loans
The two main types of VA home loans are the VA direct home loan and the VA-backed home loan, For a direct loan, the VA loans the amount directly to you and manages the loan. In a VA-backed home loan, the loan is provided by a private lender, while the VA guarantees a portion of it.
Listed below are some of the other VA loan options.
VA Renovation Loan
You can use this form of the VA loan to renovate and repair your home. These loans can also supplement a standard VA loan for property purchases. Note, that the renovation should not be for aesthetic purposes. Technically, it should improve the “livability, use, and safety” of your primary residence.
Native American Direct Loan
The Native American Direct Loan (NADL) is a VA-direct home loan available to Native American Veterans or a Veteran married to a Native American. The loan can be used to buy, build, or improve a primary residence. The NADL offers all the benefits of a typical VA home loan, including zero down payment and reduced closing costs.
Interest Rate Reduction Refinance Loan (IRRRL)
This is a great option for those already having a VA-backed home loan and looking to reduce their monthly mortgage payments. The loan can help you lower the interest rates on the existing loan or shift to a fixed-rate interest plan. This is not a VA-direct loan and you will have to approach a private bank, or a mortgage company for it.
Cash-out Refinance Loan
This VA-backed loan option can replace your existing loan with a new one with different conditions. Commonly, it is used to convert a non-VA loan into a VA-backed loan. Besides, with this loan, you can use your home equity to meet other expenses like paying off debt, paying for school, and more. To be eligible, you need to possess a Certificate of Eligibility and meet the financial standards set by the lender.
How to Apply for a VA Home Loan
Typically, the application process for a VA loan is similar to other loan types. Even so, a clear understanding of the process will help you to make the most of the benefits offered by a VA home loan.
Here is a quick breakdown of the VA loan application process.
- The first step is to find out if you are eligible for a VA loan and understand the requirements.
- Next, look around for the right lender approved by the U.S. Department of Veterans Affairs. Picking a lender who deals exclusively in VA loan programs can make the process easier. Shopping around for the right lender is a good way to save money on any mortgage or a VA loan.
- The lender will go through your credit and financial history before preapproving the loan. Then you can apply for the Certificate of Eligibility (COE). Approved lenders can access this document for preapproval checking.
- Once the loan is pre-approved, you can start hunting for a house. It is best to pick a veteran-friendly real estate agent who can help you get the most benefits from a VA loan. To maximize your savings, pick an American Realty Council (ARC)-affiliated agent to save money from the ARC Realtor Rebate program.
- After a property is finalized, you can make an offer in consultation with the agent and your loan officer. Once the offer gets accepted, it’s time to sign a purchase agreement. Make sure to discuss the VA loan closing costs with your loan officer at this stage. You can also ask the lender for a mortgage rebate.
- With the contract signed, it is time for the VA appraisal to ensure that the property meets the VA minimum property requirements. At the same time, you will need to submit the necessary documents to the lender. After the appraisal is complete, the loan is ready for closing.
- Finally, you will need to sign the closing disclosure documents to complete the legal transfer of the property to you.
Final Thoughts
Without a doubt, a VA loan has some key advantages that make it one of the best options for veterans and service holders. No wonder the volume of VA loans has increased significantly in the last decade.
That said, VA loans come with some closing costs that you have to cover. One of the best ways to offset these costs is to choose the ARC realtor rebate program through an approved real estate agent. Through this program, you can save a considerable amount based on the purchase price. The best part is, that with higher transaction value, the rebate gets larger.
Moreover, while moving to a new home, you can save money through the ARC relocation Replacement USAA Movers Advantage program. The program offers great rebates for your move to the new home. Plus, ARc specializes in assisting veterans and military families with their moves.
Want to learn more? Discover more about our amazing realtor rebate program and maximize your savings.
FAQs
How many times can you use a VA home loan?
There are no limits on the number of times you can use a VA home loan. However, the amount you can borrow without making a downpayment depends on your remaining entitlement.
Why is it called the VA?
It is called a VA loan since the loan program is managed by the Department of Veterans Affairs (VA).
Why is a VA loan better?
A VA loan has multiple advantages including zero down payment and no mortgage insurance requirements. It also offers better flexibility in terms of credit score and debt load, compared to a conventional loan.
How much are closing costs in VA?
The closing costs for VA loans include multiple fees like the origination fee, funding fee, appraisal fee, VA funding fee, etc. The average closing costs can range between 1 to 6 percent of the loan amount.