Veterans Affairs (VA) Loans: A Guide
A VA loan is a mortgage supported by the Department of Veterans Affairs (VA) and offered by private mortgage lenders, with backing from the government. First offered in 1944, the goal of the VA mortgage program was to help first-time homebuyers returning from active duty, giving them access to a $0 down payment loan that didn’t require a good or excellent credit score.
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Since then, VA funding has helped over 24 million veterans, active military personnel and their families to purchase a new home or refinance an existing one. With the increasing cost of living, relatively stagnant wages, and rising house prices, VA loans are more important than ever and can provide a lifeline for veterans and those in active duty.
However, the VA loan program has some strict eligibility requirements and a few other important details, so we’ve created an extensive guide to help you out, covering everything you need to know about VA funding for vets, active personnel, surviving spouses, single-family homes, and more.
Who Qualifies for a VA Loan?
To receive a VA loan, soldiers, veterans or spouses must meet the necessary criteria and be in receipt of a Certificate of Eligibility (COE). If you meet any of the following criteria, then you may qualify:
- Have served at least 90 days of active duty during wartime
- Have served at least 181 days of activity duty during peacetime
- Have been in the National Guard or Reserves for at least 6 years
- Are married to an individual who has died in the line of duty or as a result of an injury occurred while on duty
You don’t necessarily need a Certificate of Eligibility before you apply, as it can be retrieved through the system, but they are often released instantly anyway. Visit the Veterans United website to get your Certificate of Eligibility.
What are the Benefits of a VA Loan?
A VA mortgage offers numerous benefits not provided by a conventional mortgage, including:
- No Down Payment: Applicants do not need to have a down payment for a VA mortgage. This is often highlighted as the biggest benefit of a VA loan when compared to the 3.5% required for an FHA loan and 5% or more for a conventional loan.
- No Private Mortgage Insurance (PMI): Lenders who make a down payment of less than 20% on a conventional mortgage are required to pay PMI, which can add $100 to monthly payments. With a VA loan, however, no such payments are required.
- Credit Score Requirement: The VA hasn’t set a minimum credit score requirement for VA loans.
- Low Interest: VA loans have lower interest rates on average, leading to a smaller monthly payment and a more manageable mortgage overall. A fixed-rate loan from the VA is one of the cheapest ways to purchase your primary residence.
- Fewer Penalties: VA loans are more forgiving when it comes to penalties. For instance, homeowners will not be punished when making prepayments, allowing them to clear their mortgage balance sooner.
- Alternatives to Foreclosure: Homeowners are less likely to be foreclosed on, as the VA will work with the homeowner and lender to find suitable alternatives.
- Closing Costs: A limitation is placed on the size of closing costs for all VA mortgage loans.
What a VA Loan Can’t Do
There are many more benefits than negatives for VA loans, but it’s not perfect and it’s not going to protect you in all circumstances, nor is it going to guarantee you against all potential issues.
For instance, a VA loan cannot:
- Guarantee Your Credit Score Will be Enough: The VA doesn’t set a minimum credit score requirement, but the VA is not the one offering the loan and the lender may set such a requirement, which the average being around 600 to 620.
- It Won’t Pay for an Inspection: An appraisal will be conducted on the house to assure the lender of its value. However, this is not a detailed inspection and will not guarantee the condition of the house. You will need to pay for an inspection if you want the extra peace of mind it can bring.
- Provide Legal or Investment Advice: The VA cannot provide you with legal services or advice, and it is not there to make a recommendation with regards to your investment. If you resell the house, there’s no guarantee that you will make a profit and nothing they can do if you end up taking a loss.
- Overlook the Debt-to-Income Ratio: A low DTI is still required for a VA loan, with many lenders insisting of a score of 41% or lower.
How Can a VA Loan be Used?
A VA-approved lender will allow a VA mortgage to be used for a multitude of purposes. It can be both a fixed-rate mortgage or an adjustable-rate mortgage and can be used to buy a house in a VA-approved project or even to build a home.
It can also be used to buy and renovate a home. If, for instance, you purchase a rundown home that you want to improve and update, adding energy-saving features such as solar panels, insulation, and water heaters, then a VA mortgage can cover all of these costs.
A VA loan can also be refinanced, such as a cash-out refinance or second mortgage. Refinance loans are often acquired with a view to reducing the interest rate, making the monthly payment more manageable or swapping home equity for cash.
VA Loan Limits
VA loan limits only apply to individuals with diminished entitlement and they range from $510,400 to $765,600, depending on the location. Loan limits differ considerably from state to state and even county to county, but they are typically well above the cost of the average house price.
Summary: Eligibility is Key
If you pass the eligibility tests and meet the terms needed for a VA loan, get your Certificate of Eligibility, speak with an approved lender and secure your mortgage. You can use the additional money you have saved for a deposit (if any) to make a prepayment and own more of your home right from the start. This will move you one giant leap closer to repaying your mortgage and owning your home in full, which is ultimately the goal of any homebuyer.
However, it’s important to remember that a VA mortgage is still a mortgage. You sign a contract with a lender, promise to make your monthly payment on time, and suffer consequences if you don’t. The VA may help you to find a solution if you’re struggling to make that payment, but ultimately the lender is there to make money and won’t rest until they do.
So, keep making your monthly payment, keep your credit score strong and debt-to-income ratio low, and make your mortgage your main priority until it is paid in full.