How it Works
A VA mortgage is a loan specifically designed to provide homeownership access to veterans, service members, and their spouses. These loans are backed by the federal government and approved by the U.S. Department of Veterans Affairs. VA loans provide significant benefits to eligible borrowers and typically come with lower interest rates, no out-of-pocket costs, and don't require a down payment.
While the VA dictates the terms and conditions of VA loans, they don't provide the actual financing. Traditional and private mortgage lenders and banks provide the funds for the loan once they've been provided with proof of the borrowers' eligibility. You may qualify for a VA mortgage if you meet the requirements of past and current service as defined by the Department of Veterans Affairs.
If deemed eligible, you will be given a Certificate of Eligibility (COE) by the VA. This certificate is essential to show your lender upon applying for the VA loan to prove you meet the service, credit, and income requirements.
To be eligible, you (or your spouse) must have served:
- 181 days during peacetime
- 90 consecutive days during wartime (unless discharged or separated from a previous qualifying period of active duty service)
- 6 years in the National Guard or Reserves
Disclaimer: Serving may not automatically qualify you for a VA loan. Applicants must provide documentation to prove they meet the qualifications including their debt-to-income ratio, to be issued a Certificate of Eligibility for the loan.
Pros
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No down payment (for qualified borrowers)
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No mortgage insurance (for qualified borrowers)
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Low interest rates
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No prepayment penalties
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Closing costs can be absorbed by or shared with the seller
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Refinancing up to 100% of your home's value
Cons
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Funding fees
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VA loans can only be put toward primary residences
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Less buying power
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Come without mortgage insurance fees
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Come without mortgage insurance fees
What You Need to Know
The process is not as straightforward as applying for a loan and getting the funds directly from the VA. Instead, you will have to find a VA-approved lender to apply for the actual loan. This is because the VA does not directly issue these loans; instead, they determine who qualifies for these loans that the government insures.
Once approved, the VA will provide the borrower with the necessary Certificate of Eligibility (COE) to submit to the VA lender of choice.
Use a VA mortgage as often as you'd like and feel comfortable doing so. The VA proactively monitors its loans to ensure foreclosure avoidance. In addition, should you have problems with making payments, the VA can help by creating a more affordable repayment plan.
Keep in mind that most fees are avoidable with a VA loan. Although, there is a funding fee that is applied. The funding fee proceeds go directly to the VA and help cover losses on the few loans that go into default. Additional benefits would be available to you if you experienced a service-connected disability.
Vets who are rated at least 10% disabled:
- Can be exempt from the VA funding fee
- May not need to meet a minimum service requirement
- May be eligible to receive Specially Adaptive Housing (SAH) grants for home modifications
An "escape clause" is required with all new home purchases as a safety margin for the VA loan applicant. This clause protects the buyer from being obligated to a VA mortgage loan when the home's appraised value doesn't match the selling price.
And with refinances, you have options. For example, in choosing a streamlined Interest Rate Reduction Refinance Loan (IRRRL) you can reduce monthly payments by lowering your rate. In addition, closing costs can roll into the loan, and you can enjoy a speedy process because of little paperwork and potentially not needing an appraisal.
Or, you can choose a cash-out option to use home equity to take out funds for any purpose: paying off high-interest debt, making home improvements, covering emergency expenses, etc.
How to Qualify for a VA Loan
And with refinances, you have options. For example, in choosing a streamlined Interest Rate Reduction Refinance Loan (IRRRL) you can reduce monthly payments by lowering your rate. In addition, closing costs can roll into the loan, and you can enjoy a speedy process because of little paperwork and potentially not needing an appraisal.
To qualify for a VA loan, minimum requirements must be met to obtain a Certificate of Eligibility (COE). As discussed earlier, the minimum requirements include:
- 181 days during peacetime
- 90 consecutive days during wartime (unless discharged or separated from a previous qualifying period of active duty service)
- 6 years in the National Guard or Reserves
Even if you don't fit all of the requirements for eligibility, you might still be able to qualify in certain situations. For instance, if you have been discharged due to the following circumstances, you may still have a chance of getting qualified:
- Hardship or reduction in force
- Medical condition or disability related to or resulting from your service
- Served 21 months out of a 2-year enlistment but were discharged for early-out
While you may apply for a VA Loan without having your COE in hand, you will need it to be approved for the loan. You can obtain your COE in one of several ways:
- Apply through the mail with VA Form 26-1880
- Apply online through the VA eBenefits portal
- Apply through a VA approved lender
To receive the COE, a surviving spouse will need to verify a few things first, which may include:
- Proof of whether Dependency or Indemnity Compensation is being received
- A copy of the marriage license
- Veteran's death certificate
- Veteran's separation paperwork
While the Department of Veterans Affairs doesn't have a minimum credit score requirement, lenders will. In fact, VA lenders have their own set of requirements one must meet to be eligible for the loan:
- Proof of steady income
- Acceptable level of debt-to-income ratio
- Acceptable credit score
The VA will require that the borrower maintains their residual income, meaning there must be a specific amount of money left over every month after paying expenses. This measure helps ensure that the borrower can meet their financial obligations and pay the loan back while maintaining a comfortable cushion in emergencies.
In addition, a borrower's debt-to-income ratio will be taken into account to assess whether the borrower has the financial capacity to repay to loan.
Key Differences Between a VA Loan and a Conventional Mortgage
When comparing some of the most significant differences between VA and conventional loans, one that stands out is buying power. While VA loans come with a lower interest rate and don't require money down, they can often be less appealing to sellers when also approached with a conventional loan. This is because the VA loan comes without mortgage insurance costs, making a VA loan look riskier than traditional loans.
Often, conventional loans require a higher credit score than non-conventional. This credit score requirement frequently earns the borrower better interest rates and terms. Still, VA loans are generous because they offer the borrower the opportunity to achieve homeownership without having to put a significant amount forward as a down payment. On the other hand, down payments of up to 20% are typically needed for conventional loans.
Another significant difference between the two loan types is what the residence can be purchased for. For instance, the home being purchased can be used as a primary, secondary, vacation, or investment property with a conventional loan.
On the other hand, A VA loan must be used as the primary source of residence only. Additionally, VA loans come with funding fees ranging from 1.4% to 3.6% of the loan, while conventional loans do not come with program fees.
How to Apply for a VA Loan
When applying for a VA loan, you'll need to:
- Find a lender that is VA-approved
- Apply for a Certificate of Eligibility (COE)
- You can even get pre-qualified for your loan if you prefer to do this before the next step.
- Find an agent and go house hunting
- Sign a purchase agreement
- The lender will then process the application
- VA appraisal will be ordered and conducted
- Complete the mortgage underwriting process
- Complete closing process
If your goal is to get out of debt, the best thing to do is to eliminate it as soon as possible. Having smaller monthly payments may be suitable for some, but if the payment relief is not necessary, it may be better for your future to avoid long-term loans. Talk to one of our salary-based mortgage consultants now; they can help you make the best choice on mortgages and could eventually help prevent further debt from increasing.
Whatever your need, American Financing is a rising member of the VA's list of top 300 lenders and can help you make the most out of your VA loan benefits. Get started today. Call (800) 910-4055 or complete the online application.
FAQ
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Veterans, surviving spouses, and active military members stand much to gain from the benefits that accompany a VA loan.
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While FHA loans are like VA loans because they are meant to assist those with less money or lower credit scores to achieve homeownership, they are altogether different. FHA loans are federally insured, while VA loans are guaranteed by the government and are only accessible to active military service members, veterans, or spouses.
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There are closing costs associated with VA loans, but what if you can't afford them? While it is not always possible, you could ask your mortgage lender about VA sales concessions or seller-paid closing costs. However, keep in mind that this may not be prudent to request if you fear the seller may go with a more attractive offer from a buyer with a conventional loan.
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You can use your VA loan multiple times if you know you have remaining entitlement. The maximum amount guaranteed by the VA is 25% of the loan amount and is referred to as the remaining entitlement. In these situations, it is best to consult with your lender about what this amount is and your options regarding the remaining entitlement.
