What is a VA loan?
A VA loan is a mortgage loan issued under a program designed for Active and Veteran Service Members and their Surviving Spouses. VA home loans are offered through private mortgage lenders, but they’re ultimately backed by the U.S. Department of Veterans Affairs, which was previously known as the “Veterans Administration.”
Several types of VA loans exist. Including:
The program allows you to use a VA loan to buy a home or tap into your home’s equity to make home improvements. When using a VA loan to purchase a home, the loan can fund up to 100% of the home’s value, which is how you eliminate the need for a down payment.
Who qualifies for a VA loan?
VA loans are designed for Veterans, Active-Duty Service Members, or their Surviving Spouses. To qualify for a VA loan, you’ll need to provide proof of your Military service and meet the other eligibility requirements set forth by both the VA and your VA-approved lender.
The following items detail the requirements to secure a VA loan:
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Certificate of Eligibility (COE)
First, you’ll need to provide your lender with documentation proving your Military service. This document is known as a certificate of eligibility (COE) and can be obtained from the VA website.
The department may request that you provide additional service-related documentation which confirms your status as Active Duty or a Military Veteran.
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Credit score
On the one hand, the VA does not have a minimum requirement for your personal credit score. But VA lenders can have different eligibility requirements, so it’s important to check with each lender before applying for any type of loan.
Generally speaking, it’s easier to qualify for a VA loan than a conventional loan, though some mortgage lenders may charge a fee to applicants with less-than-stellar credit.
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Debt-to-income ratio (DTI)
All lenders will look at your debt-to-income ratio (DTI) before approving you for a loan. Your DTI is calculated by dividing your monthly debts by your monthly income. Most VA lenders will approve loans if your DTI is 45% or lower, though, as with your credit score, this threshold can vary considerably between lenders.
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The VA funding fee
Approved applicants will have to pay a modest VA funding fee. This fee helps support the VA program so that other Veterans and their families can receive the benefits of a VA loan. This fee is a percentage of your total loan amount, which can vary depending on how much you’re borrowing.
The funding fee doesn’t have to be paid upfront, nor does it have to be paid at closing. You can roll this funding fee into your regular monthly payments to make it easier to cover.
However, you may be eligible for a refund or a waiver of this funding fee if you have service-connected disabilities. Contact the Department of Veterans Affairs to see if you qualify.
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Property requirements
To qualify for a VA loan, the property you are buying must meet the minimum property requirements. The property itself must be:
- A conventional family home
- The borrower’s primary residence
- Free of any structural defects (e.g. rot, termite infestations, etc.)
- Free of any mechanical or electrical issues affecting safety
- Able to supply adequate heating
These restrictions mean you can’t use a VA loan for commercial property or real estate investing. But homebuyers will find no restriction on the home’s geographic location, which allows you to use this loan program for any home in the U.S.
However, if you want to buy a condo with a VA loan, you’ll need to search the approved condo database on the Department of Veterans Affairs website.
Benefits of a VA loan
VA loans make particularly great options for first-time homebuyers. If you or your spouse are a current or former member of the U.S. Military, you have access to the following benefits of a VA loan:
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One of the primary benefits of a VA loan is eliminating the need for a down payment. Traditionally, homebuyers could expect to make a 20% down payment when purchasing a house. And while this requirement can vary by loan program and lender, a VA loan eliminates this requirement altogether.
Of course, while this removes one financial barrier for qualifying applicants, the flip side is that you’ll be making a higher monthly mortgage payment, so make sure to factor this into your overall budget to ensure you find a home in your price range.
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What is private mortgage insurance? Typically, when you purchase a home with a down payment of under 20%, the lender requires you to purchase private mortgage insurance (PMI).
The actual cost of your PMI can vary but usually ranges from 0.1% to 2% of every $100,000 you borrow. So for instance, if you purchase a $300,000 home, you could find yourself paying an additional $100 to $250 each month.
A VA loan requires no PMI payment because the VA guarantees at least a portion of the loan, reducing the risk lenders take in providing you with a mortgage. As a result, qualifying homebuyers can purchase a home with no money down and no additional monthly mortgage insurance fees.
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While the department backs VA loans, they are originated and funded by private mortgage lenders. This setup means that U.S. banks, credit unions, and mortgage lenders must compete to offer the best loan rates and fees.
Homebuyers can therefore compare lenders to find the best interest rates. The upshot of this is that VA loans typically have lower interest rates than conventional mortgages, which can reduce your monthly mortgage premiums.
Secondly, VA loans offer lower closing costs. A “closing cost” is a fee you pay to the lender in return for their assistance. VA loans have specific restrictions on what closing costs your lender is permitted to charge, limiting costs such as the origination fee and prohibiting prepayment penalties or attorney fees.
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If you’ve read this far, you probably already qualify based on your Military career or your spouse’s. But beyond this basic requirement, VA loans are easier to qualify for than other mortgage types.
For one thing, you can qualify for a VA loan even if you have a low credit score, with some lenders willing to work with borrowers with credit scores in the 550 range. Additionally, lenders are more willing to work with Veterans with a higher debt-to-income ratio — as high as 45% — which can reduce the barriers to home loan eligibility.
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The U.S. Department of Veterans Affairs guarantees all VA loans. This setup means that the government is on the hook for at least a percentage of the total loan amount in the event of a default.
Such backing is mainly good news for lenders, who take on less risk when extending these types of home loans. But recipients of VA home loans also benefit from this guarantee since lenders can adopt less-stringent eligibility requirements.
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Understandably, first-time homebuyers may be looking for a “starter home,” with plans to sell the property at a later date. The good news is that most VA loans are “assumable.” This designation means you can transfer your current VA loan to another buyer if that buyer is also eligible for a VA loan.
An assumable loan can increase the resale value of your home since future buyers can take on the low mortgage rates of your current loan if interest rates have risen.
Alternatives to VA loans
Despite the benefits of a VA loan, there may be times when you wish to use a different type of loan entirely. For instance, if you have strong credit and enough savings for a 20% down payment, you may qualify for better rates and terms with a conventional mortgage.
You might consider other first-time home loan options if you’re not eligible for a VA loan. If you’re buying a home in a rural or suburban area, you may qualify for a USDA loan, which will also allow you to purchase a home with no down payment.
Otherwise, you might look into an FHA loan backed by the Federal Housing Administration, which offers rates as low as 3.5% for qualified buyers.
Thank you for your service
VA loans are just one way of thanking the dedicated personnel of the U.S. Military for their sacrificial service. This mortgage vehicle can put homeownership well within reach and provide you and your family with some much-needed comfort and stability.
