8 things you need to know about VA loan
VA loan, In the United States, the average household has more than $130,000 in debt, and the number of people living paycheck-to-paycheck is on the rise. With this kind of financial burden, it can be hard to save up for a down payment, let alone qualify for a VA home loan with traditional underwriting guidelines.
Fortunately, there are many options available to help you purchase your first home! VA home loans work by using your military service as collateral instead of credit scores or money down payment.
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A VA loan is a mortgage option issued by private lenders and partially backed, or guaranteed, by the Department of Veterans Affairs. For the vast majority of military borrowers, VA loans represent the most powerful lending program on the market.
These flexible, $0-down payment mortgages have helped more than 24 million service members become homeowners since 1944. Here we dive into what a VA loan is and how the program works.
What is a VA Loan?
The Department of Veterans Affairs (VA) offers veterans, active-duty military, reservists, and their family members no-down-payment issued by private lenders and partially backed, or guaranteed, by the Department of Veterans Affairs (VA). Eligible borrowers can use a VA loan to purchase a property as their primary residence or refinance an existing mortgage.
Most members of the Army, Air Force, Navy, Marine Corps, and Coast Guard are eligible to apply. Others who qualify include veterans, reservists, the National Guard, and spouses of military members who died while on active duty or as a result of a service-connected disability.
Active-duty military personal is usually able to apply for VA loan benefits after six months of service. Reservists and those in the National Guard need to wait six years to apply unless they are called on active duty before that, in which case they are eligible after 181 days of service.
How Does a VA Loan Work?
VA loans work a bit differently than conventional mortgages. The Department of Veterans Affairs (VA) does not make or originate loans but backs a portion of each loan against default. This backing, or guarantee, is what gives private lenders the confidence to extend $0 down financing and advantageous rates and terms.
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However, from a process perspective, VA loans work fairly similar to most other mortgage options, but with a few caveats. A typical VA loan process works something like this:
The first thing you’re going to want to do when buying a home through the VA Program is to find a participating lender. You also need to get pre-qualified to determine how big of a loan you can afford just as you would with a standard mortgage. Next, you’ll need to obtain a Certificate of Eligibility which verifies that you meet all the requirements for a VA loan. You’ll then work with a real estate agent to help you find a home and negotiate a purchase agreement. They will also ensure that both your purchase and sales agreement contain a “VA Option Clause” as well as an option to escape from the contract if, for some reason, you can’t get a VA loan.
Once you have your lender and mortgage program in place, you’ll apply for your VA loan. Your lender will work with you to gather all the necessary documents and order a VA appraisal. Once everything has been approved, all that’s left to do is move into your new home.
How hard is it to get a VA loan?
For eligible Veterans, VA loans are relatively easy to qualify for due to their relaxed credit score requirements, no down payment, and no maximum loan limit.
8 Things you Need to Know About VA Loans
While how the VA loan works can be summed up in a handful of steps, there are many things about VA mortgages that potential borrowers and agents don’t often know.
- They’re reusable. You can use your full VA entitlement over and over again as long as you pay off the loan each time. But you may be able to obtain another VA loan even if you’ve lost one to foreclosure or currently have one.
- They’re for primary residences only. Don’t bother trying to use your VA loan benefits to buy an investment property or a vacation home in the Poconos. VA loans are for primary residences, although you can use this benefit to buy a duplex or another multiunit property, provided you live in one of the units. The VA does offer exceptions, though lenders also have standards that might affect occupancy requirements.
- They’re not issued by the VA. The VA isn’t in the business of issuing home loans. Instead, the agency provides a guaranty on each qualified mortgage loan. But they’re guaranteed by the government. If you have a VA entitlement, the agency typically guarantees up to a quarter of the loan amount. The guaranty gives lenders confidence and helps service members secure great terms and rates.
- They’re available despite foreclosure or bankruptcy. Service members with a history of bankruptcy or foreclosure can secure a VA loan. Even borrowers who have had a VA loan foreclosed on can still utilize their VA loan benefit.
- They don’t have mortgage insurance. Mortgage insurance is a monthly fee you pay with other programs when you’re not putting at least 20 percent down. The VA’s guaranty eliminates the need for any mortgage insurance or mortgage insurance premium, helping borrowers save even more money each month.
- They come with a mandatory fee. There’s no mortgage insurance with VA loans, but there is the VA Funding Fee. This fee helps the VA keep the program going and is required on both purchase and refinance loans. It can be rolled into the loan amount and waived entirely for those with service-connected disabilities.
- There’s no limit to how much you can borrow. With the VA loan benefit, qualified veterans can borrow as much as a lender is willing to give them, all without the need for a down payment. That’s a huge benefit. Conventional loans often require at least 5 percent down, but down payments on larger loans can easily reach 15 to 20 percent. A 20 percent down payment on a $400,000 house is $80,000.
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But what about the VA’s loan limits? These aren’t a cap on how much you can borrow. Instead, lenders and the VA use these county-level limits to determine what kind of down payment might be needed for Veterans without their full VA loan entitlement. Buyers with their full entitlement don’t have to worry about these limits or the need for a down payment.
- They don’t have a prepayment penalty. You can make extra payments any time you want, saving you a boatload in interest over the life of your loan. You can even structure your payments to automatically deduct a little extra every month. Just an extra $100 per month can shave years and tens of thousands of dollars from the balance.