When my wife and I purchased a home a few months ago, we decided to use a VA Loan, which is a benefit available to US military veterans. VA Loans make it easier for military veterans to purchase a home and they have a variety of benefits. There are also a few misconceptions about VA Loans, including the misconception that it is a “free” loan. Nothing could be further from the truth – people using a VA Loan are still required to repay every cent they borrow! This article is a brief overview of the VA Loan – what it is, its advantages, how to qualify for it, and more. VA Loans can be somewhat complicated, so if you qualify for it, then I recommend using a Realtor and/or lender with VA Loan experience, or call your regional VA center for assistance – having an experienced professional guide you makes the home buying process much smoother!
What is the VA Loan?
A VA Loan is a home loan that is guaranteed by the US Department of Veterans Affairs. The program began in 1944 as a way to help WWII veterans purchase their own home after returning from fighting overseas. The program has continued to this day and continues to be one of the most popular military benefits available.
Advantages of a VA Loan
No down payment required. The biggest, and most well known advantage of a VA Loan is that it doesn’t require the buyer to make a down payment, allowing the buyer to finance 100% of the purchase price of the home (buyers can actually finance up to 103% of the home value, with the final 3% being used to cover the VA Lending fees which the VA charges to process the loan). Borrowing 100% of the purchase price was a fairly common practice during the height of the mortgage craze a few years ago, but it is virtually unheard of in today’s tighter lending environment.
No PMI. VA Loans are guaranteed by the VA, which means buyers aren’t requited to purchase private mortgage insurance (PMI), which is required by most lenders if the owner has less than 20% equity in the home. PMI can easily run more than $100 per month, so this is a big savings for home buyers who don’t put down more than 20% of the purchase price.
Competitive interest rates. VA Loan interest rates are often very competitive to conventional mortgage interest rates. In fact, my wife and I had a 20% down payment ready for a conventional mortgage and only decided to use our VA Loan because the interest rate was slightly lower than the traditional mortgage rate. We checked interest rates at Quicken Loans, VA Mortgage Center, USAA and a few other places. In all instances the VA Loan rate was slightly lower, so we went for it. I highly recommend running the numbers for both conventional loans and VA Loans before making the final decision, as market rates fluctuate.
Low closing costs and funding fees. The VA has rules which restrict the number and amount of VA Loan closing costs. You should also be aware of the VA Loan funding fee, which is assessed by the VA to cover the costs of funding the loan. However, this expense can be reduced or eliminated under some circumstances. For example, those with a service connected disability may be able to have the fee waived, and you may be able to decrease the funding fee by making a down payment. This article more fully explains VA Home Loan funding fees.
Easier to qualify for a home loan based on credit score. The VA takes your credit score into consideration, but not necessarily to the same extent that other lenders might. The VA does, however, examine the past 12 months on your credit report and they take your debt to income ratio, and income into consideration. As with any loan, a good credit score is beneficial.
VA Home Loan Requirements
To qualify for a VA Loan, a home buyer must be a military veteran, currently serve on active duty, or be on Guard/Reserve status with minimum service requirements. Additionally, surviving spouses and those who serve in other uniformed services may be eligible. Visit the VA website for full eligibility rules.
Before you apply for a VA Loan, you will first need to obtain a certificate of eligibility, which is required before your loan application will be approved. The next step is to contact a VA approved lender (many banks and financial institutions qualify, just check their website, or contact their customer service department). Your lender will most likely want to pre-qualify you for a loan amount, which means they will need your personal and financial information to check your credit score, debt to income ratio, employment history, etc. Once you are pre-qualified you will need to find your home, submit your supporting documents, then go through the home buying process. Overall it is a fairly painless process.
Check out VA Loan rates: When I shopped for VA Loan rates I visited Quicken Loans, VA Mortgage Center, USAA, and more. The rates were comparable to conventional loans, but may vary depending on market conditions. It pays to shop around.
What can you use your VA Loan for?
A VA Loan can be used for several types of properties and upgrades. In general, the property must be deemed by the VA as housing credit shortage areas, which usually means rural areas and small towns. However, the recent housing bubble and subsequent mortgage crisis has opened the door to a wider variety of properties which qualify for the VA Loan, to include more urban areas.
Your VA Loan is designed to purchase a home for you to live in, so it can’t be used to purchase a rental property, unimproved land, or commercial property. But as long as you are buying the home for yourself, you have several options to use your VA Loan. You can use it to buy or build a home, buy a condo, buy a manufactured home, or even a duplex if you plan on living in one side of it (you can rent out the other side). A VA Loan can be used to make improvements to your home under certain circumstances. Finally, you can use a VA Loan to refinance your existing home loan with a VA Streamline Refinance, which makes it easy and inexpensive to refinance your home.
How much can you borrow with a VA Loan?
In most cases you can borrow up to 100% of the home value, up to $417,000. The upper limit is $625,000 in select locations, such as urban areas and Alaska and Hawaii. You can borrow up to 90% of the appraised value for a refinance loan. That said, it’s important to realize these numbers represent the upper limits of the loans, but that doesn’t mean everyone can qualify to buy a house at these prices. You must still be able to qualify for the loan before you can buy the house.
photo credit: cheryl.dudley.
Disclaimer: We have a business relationship with VAMC.