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VA Home Loans: Your Complete Mortgage Guide for Veterans

VA Home Loans: Your Complete Mortgage Guide for Veterans

March 05, 2022 by X2 Mortgage

The VA home loan program is a government-backed loan that allows eligible veterans and service members to purchase a home with no down payment and much lower interest rates. The GI Bill of Rights established the program in 1944 to assist veterans in reintegrating into civilian life following World War II.

Since then, millions of veterans, service members, and military families have been able to realize their dream of homeownership through this historic benefit program. Today, VA loans are one of the most popular mortgage products on the market.

The VA loan has numerous advantages over a traditional mortgage. If you meet the requirements, you may be able to purchase or refinance an existing mortgage with a $0 down payment at great rates.

This guide will teach you everything you need to know about VA Loan Programs.


What is a VA Loan?

A VA loan is a mortgage guaranteed and backed by the United States Department of Veterans Affairs (VA). It can be used to finance a home with no down payment, no mortgage insurance, and no minimum credit requirements for current service members, veterans, and eligible surviving spouses. VA Home Loans are provided by private lenders, such as mortgage companies, banks and most importantly: Brokers!

When applying for a VA home loan, the term "veteran" refers to members of the National Guard, Reserves, active duty service members, and specific categories of spouses. A veteran must use a VA-approved lender to apply for a loan.


Who is Eligible for a VA loan?

There are four primary categories of people that are qualified for the VA home loan: Active-duty personnel, reserve members, national guard members, and spouses of military personnel.

These individuals must also meet the Department of Veterans Affairs (VA) minimum service requirements, possess a valid Certificate of Eligibility (COE), and meet the lender's credit and income requirements.


Requirements for a VA Home Loan

Military Service Requirements

To be eligible for a VA mortgage, you must have served in the military for at least one year (except for surviving spouses). The general qualifying service period is:

- 90 days of active wartime service, OR

- 181 days of active wartime service, OR

- 6 years of service in the National Guard or Reserves, OR

- The applicant is the surviving spouse of a service member who died in the line of duty or was disabled due to a service-related injury

Once you've met the minimum service requirement, you can reach out to a lender for them to obtain your Certificate of Eligibility automatically. If your certificate does not populate automatically, then you might need the following documents to obtain your Certificate of Eligibility:

- A DD Form 214. A DD Form 214 is a certificate that confirms your discharge from the military. You can request your DD Form 214 online using the eVetRecs filing system.

- An active-duty service member will need a current statement of service signed by a unit commander, personnel officer, or other authority. The statement of service must contain; Your full legal name, social security number, and birthdate.

- If you're a discharged Selected Reserve member, you'll need a copy of your annual Retirement Points Statement. You'll also need proof of honorable discharge and service.

- VA form 26-1817 is required for surviving spouses who receive dependency benefits. The form is available for free download on the VA benefits website.

- Surviving spouses who do not receive dependency benefits can get a certificate of eligibility if they have their spouse's DD Form 214, marriage license, and death certificate. They'll also need to print and fill out VA form 21P-534-ARE, which can be found on the VA's website.

What if I don’t meet the minimum service requirements?

You may still be eligible for a certificate of eligibility if you were discharged for one of the following reasons:

- Hardship

- Government Convenience (you must have served at least 20 months of a 2-year enlistment)

- Early out (you must have served 21 months of a 2-year enlistment)

- Reduction in Force, Certain Medical conditions

- A Service-Connected Disability (a disability-related to your military service)


Property Requirements

For a property to qualify for a VA loan, you must live on it as your primary residence. A VA loan cannot be used to purchase a vacation or investment property, but it can purchase a one-to-four-family home if the eligible member intends to live there full-time.

Also, the house will be appraised and inspected by a VA-approved contractor. VA appraisals may be slightly more stringent than other appraisals.


Credit Score Requirements

The VA does not provide a minimum credit score requirement for obtaining a loan. However, VA mortgage lenders are free to set their own minimum credit score requirements. Most lenders require VA borrowers to have a credit score of at least 620 to meet a lender's minimum credit score requirement. Good news is that X2 Mortgage allows for VA credit scores to go as low as 500!


Debt-to-Income Ratio Requirements

The VA does not set DTI limits. However lenders prefer a debt-to-income ratio (DTI) of no more than 55%. Borrowers with higher DTI ratios may be approved if they have sufficient "residual income," which is another factor lenders consider when evaluating mortgage applications. Residual income is money left over to cover basic living expenses like food and clothing after paying debts, housing, and other obligations.


Down Payment Requirement

The VA does not require a minimum down payment, and you can get a home loan with no money down. This is a unique advantage of VA loans for veterans.

However, you can choose to make a down payment to save money, thus paying lower interest on the smaller principal balance after the down payment. In addition, if the home's purchase price exceeds its appraised value, you may be required to pay at least a portion of the difference. Down payment will also be required if you are subject to VA loan limits and the home price exceeds the loan limit OR if you’re applying with a non-spousal co borrower who is not VA eligible.


How to Apply for VA Loans

You can apply for a VA loan through a bank, mortgage company, or brokerage that offers them. The process is similar to applying for other types of mortgages:

1. Find a Lender

The first step in obtaining a VA loan for a purchase or refinance is to contact an approved VA lender to begin the application process. Some of the best rates on VA loans are given by mortgage brokers opposed to the big banks. The Department of Veterans Affairs does not make direct loans to individuals (except for NADL). As a result, having a VA-approved lender is critical for getting guidance throughout the process. 

2. Secure VA Eligibility Certificate

The Certificate of Eligibility (COE) is a document that verifies your eligibility for a VA home loan to your mortgage lender. It also informs your lender of your VA home loan eligibility. For more information on how to obtain your COE, talk to your chosen lender.

3. Obtain a Loan Pre-Approval

A pre-approval for a VA loan is a crucial step. Your pre-approval letter will show you how much money you can spend. It also demonstrates to home sellers and their real estate agents that you're a serious buyer capable of making a competitive offer and completing the transaction.

4. Find a Home

The VA home loan is a specialized loan option, and some properties may suit the option better than others. Find a suitable home that complies with VA requirements and will serve as your primary residence. It's critical to find a well-versed real estate agent in VA loans.

5. Sign a Purchase Contract

Once you've found a home in your price range that you like, make an offer to purchase it. A strong offer can be crafted with the help of your loan officer and a reputable real estate agent. To help you determine a starting point for a purchase price, your agent will look at recent comparable home sales in the area. Pricing and negotiation strategies can vary depending on the real estate market, the particular home, and much more.

6. Processing Your VA Loan

Once you have your contract, you'll go through the VA loan application and underwriting process. Your lender's underwriters will assess your financial health, including your income, assets, credit, and debts, to see if you're a reliable borrower.

The lender will also place an order with the Department of Veterans Affairs for a VA appraisal. The VA appoints a third-party appraiser to determine the property's worth and condition. The appraisal serves two purposes: it establishes the home's appraised value and ensures that it complies with the minimum property requirements. The use of an appraised value confirms that the house is being sold at "fair market value." Thanks to the VA appraisal, you can rest assured that your home was purchased at a fair price.

7. Closing

Once the VA appraiser says the property meets the requirements, you will receive a closing disclosure from your lender shortly before your scheduled loan closing. You can finalize your application, sign the necessary paperwork, get your loan, and move into your new home!

Don’t forget that you’ll typically have to pay the closing costs when you’re signing the final paperwork for your home mortgage process.


Types of VA Loans

Veterans can use their VA loan benefits to purchase a home. Not only that, but a VA home loan can also be used to take equity out of your home, make energy-efficient upgrades, and refinance into a lower interest rate. The following are the most common types of VA loans:

- VA Purchase Loan: The most common type of financing for veterans. This type of loan is used to buy a home.

- VA Interest Rate Reduction Refinance Loan (IRRRL): Also known as the Streamline Refinance Loan. It replaces an existing VA loan with a new VA loan to lower interest rates or refinance from an adjustable to a fixed rate.

- Cash-Out Refinance Loan: Cash-out refinances loans allow you to access funds from your home equity to address issues such as debt repayment, school funding, or home improvements. This option is also available to veterans who want to refinance non-VA mortgages.

- VA Energy Efficient Mortgage (EEM): VA EEMs are a mortgage option for veterans who want to save money on their utilities. Investing in energy-efficient upgrades when you buy a house can help you save money on heating, cooling, and other energy-related costs in the long run.

- NADL Programs: Veterans who are Native Americans or have a Native American spouse are eligible for a special loan program from the VA called Native Americans Direct Loan. The US Department of Veterans Affairs will serve as the lender for veterans who belong to this category.


Are There Any Special Fees I Should Expect to Pay?

Yes! It is important to know that "no down payment" does not equal "zero cost." There are some fees associated with VA loans, which are commonly referred to as closing costs. Some are paid at the closing table and some are rolled into your new VA mortgage (even if you put down 0% of your loan sum). Here's a glance at a few of them.

The VA Funding Fee

The VA funding fee is a one-time payment that you will make on a VA home loan. The US government and aids mandate this fee in lowering the cost of the loan for US taxpayers.

The fee is determined by the type of service you provide, the size of your down payment, whether you're getting a VA loan for the first time, and whether you're buying or refinancing the property. The VA funding fee is between 2.3% and 3.6% of the total loan amount. However, if you put down a 10% deposit or more, your funding fee will be drastically reduced.

The VA funding fee can be paid in various ways and does not have to be paid in full when you close on your VA loan. You have the option of rolling the VA funding fee into the total loan amount or paying it in full at closing.

Disabled veterans are exempted from the VA funding fee, so they don’t have to pay the VA funding fee during closing. Also exempted from the VA funding fee are surviving spouses and Purple Heart recipients serving in an active-duty capacity. To qualify for the exemption, you must be receiving some form of disability benefits.

VA Origination Fee

Most lenders will charge you anywhere from 0.5% to 1% of the loan amount in the form of an origination fee to process your loan (X2 Mortgage charges $0).


VA Appraisal Fee

Also included in your closing cost is a VA appraisal fee, which ranges from $425–$875 depending on the area and type of home you’re purchasing.


General Closing Costs

The amount you pay in VA loan closing costs will vary depending on the home you choose and the terms of your loan. However, you should expect to pay closing costs ranging from 2% to 4% of the loan's total value.

In addition, the lender or seller may agree to concede a portion of the closing costs. A seller's concession is limited to 4% of the home's sales price. If a house sells for $200,000, the seller can only cover $8,000 of the buyer's expenses.


What is the VA Guarantee?

Although VA is a government program, the government does not directly give loans to qualified borrowers. Instead, the loan is financed by private lenders, while the Department of Veteran Affairs guarantees a portion of the loan to the lender. The guarantee protects the lender up to the amount guaranteed and allows a veteran to get better financing terms.

A veteran's basic entitlement is $36,000, but for loans over $144,000, additional entitlement is available. Entitlement mainly comes into play when a Veteran is buying a subsequent home with a VA loan. For first time VA uses, the VA does not have a maximum loan amount.

The Veterans Administration mortgage program is not a one-time benefit either. Veterans who qualify for a VA loan can use this program as many times as they want, and the benefit never expires. You do not have to repay your VA loan in full to use your benefit again.

It is also possible to have multiple VA loans, though this is uncommon. If the veteran has a second-tier entitlement, the VA will usually allow the purchase of a second home up to the remaining entitlement amount. This is frequently used when active-duty personnel are transferred and want to buy a home without selling their current one.


Pros and Cons of a VA loan


- There is no requirement for a down payment.

- There is no private mortgage insurance.

- Interest rates are incredibly competitive.

- Much easier to qualify for.

- You can pay off your mortgage early without penalty.

- Due to temporary financial difficulties, veteran borrowers in default are eligible for VA assistance.


- A VA loan cannot be used to purchase an investment property or a vacation home.

- The loan has an additional cost known as "funding fees."


Bottom Line

The VA loan program is a valuable benefit to our servicemen and women. Even if you have had credit problems in the past, you can still get a great interest rate with no money down if you qualify for the VA loan. Contact a local loan expert today to get started on your path to homeownership.

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