What is a VA loan?
Veterans and current military members have access to a mortgage option not available to most Americans—the VA loan. VA loans are backed by the Department of Veterans Affairs. They give military families an advantage in the housing market—VA loans are easy to qualify for, and do not require a down payment.
Available since 1944 when they were introduced by the GI Bill, they’ve become increasingly popular in recent years. In 2018, VA loans made up 8% of all home purchases. Though issued by private banks and other financial institutions, they are insured by the government. If a loan goes unpaid, the government agrees to repay a portion to the lender.
What are the benefits of a VA loan?
Since VA loans carry less risk, they are easier to get. You can buy a home with no down payment up to a certain amount, and you can do it even with a low credit score. Though many lenders look for a credit score above 600.
Moreover, since the loan is backed by the government, you don’t need to pay Private Mortgage Insurance (PMI). Also, there is no prepayment penalty. You can pay off the loan as early as you’d like.
There is no limit to the amount you can borrow on a VA loan, but there is a limit to how much liability the VA is willing to take on. While the VA loan limit varies by county, the maximum guaranty amount for 2019 in most counties is $484,350. In selected high-cost areas, the limit goes up to $726,525.
Should you face the prospect of foreclosure, the VA will step in to help. They have loan specialists who negotiate with lenders on your behalf, to get you on a more manageable loan payment schedule. Veterans who are struggling to make mortgage payments, whether on a VA or conventional loan, can call (877) 827-3702 for assistance.
Am I eligible for a VA loan?
Current military members, reservists, veterans, and members of the National Guard are all eligible to apply for a VA loan. Spouses of military members who died while on active duty, or as a result of a service-related disability, are also eligible.
Active-duty military personnel typically qualify for a VA loan after six months of service. Meanwhile, reservists and National Guard need to serve for six years before they can apply. However, if they are called to active duty before meeting the six year requirement, they become eligible after 181 days of active duty.
You may be eligible for a VA loan if you meet one or more of the conditions outlined below:
- You served 90 consecutive days of active duty during wartime
- You served 181 days of active duty during peacetime
- You served more than 6 years in the National Guard or Reserves
- You are the spouse of a service member who died in the line of duty
Upon approval, the VA issues a Certificate of Eligibility (COE), indicating you are eligible to receive a VA loan. However, this does not mean you qualify for a mortgage. You must still meet lender requirements including income verification, credit score, debt-to-income ratio, and more.
Three ways to apply for your COE:
- Request a COE directly from your lender. Lenders have access to a database that can generate your COE within a matter of minutes.
- Apply for your COE at va.gov. Simply log into your account and navigate to the COE application page.
- Print out this form, fill it out, gather all required documents, and mail it in.
What documents do I need for my COE?
If you are a Veteran, current or former National Guard, or Reserve member in federal active service:
DD Form 214–must show type of service and the reason for leaving.
If you are an active duty service member, current National Guard or Reserve member who has never been in federal active service:
An up-to-date statement of service signed by either the adjutant, personnel office, unit commander, or headquarters. The statement of service should include your name, social security number, date of birth, start date of active duty, duration of lost time, and name of the source providing the data.
Current National Guard or Reserve member without history of federal active service:
An NGB Form 22, report of separation, and record of service for each period of National Guard service.
An NGB Form 23, Retirement Points Accounting, and proof of the character of service.
Discharged member of the Selected Reserve without a history of federal active service:
A copy of your latest annual retirement points statement, and evidence of honorable service.
Surviving spouse receiving Dependency & Indemnity Compensation (DIC) benefits:
Submit a copy of VA form 21-534. Send this form to the mailing address in your state. You can find that information here.
Submit a copy of form DD214 if applicable, proving discharge orders.
Submit a copy of your marriage license.
Submit a copy of death certificate, or DD Form 1300–Report of Casualty.
VA loans and private mortgage insurance (PMI)
While most mortgages with low a down-payment require PMI, VA loans do not. This benefit can save the borrower thousands of dollars over the life of the loan.
For example, a $285,000 FHA loan with a 5% down payment results in a $190 monthly insurance payment. With a VA loan, one instantly saves $190 per month, which adds up over the life of the loan.
What are the fees associated with a VA loan?
The costs of securing a VA loan tend to be lower compared to other mortgages with low down-payment mortgages. However, they require a one-time funding fee that varies depending on the down payment amount, military background, and other factors. This fee is designed to offset the cost to taxpayers, considering there is no PMI or down payment requirement.
For example, a regular military member with a down-payment between 5% and 10% pays a 1.5% fee. For reservists and National Guard, the fee increases to 1.75%. If the down payment is above 10% the fee goes down to 1.25% for regular military and 1.5% for reservists and National Guard. Click here to download a handy funding fee breakdown.
Can I lower the interest rate on my current VA loan?
VA loan borrowers who wish to lower their interest rate are in luck. The Interest Rate Reduction Refinance Loan (IRRL) gives VA loan holders an opportunity to secure a lower interest rate. However, it requires borrowers to refinance their current VA loan into another VA loan.
The IRRL program provides VA loan borrowers with several advantages. For one, credit and appraisal underwriting procedures are not required. In addition, you are not required to pay any cash out of pocket. The refinance is structured to incorporate any fees into the new loan, or the interest rate is adjusted to cover lender costs.
What are the home occupancy requirements for a VA loan?
VA loans can only be used to purchase a primary residence. Borrowers are generally required to move into their home within 60 days of purchase. There are some minor exceptions depending on circumstances. For example, a spouse or child can fulfill the occupancy requirement for an out-of-town active duty member. These scenarios are all taken on a case by case basis, and must be approved by the lender.
VA loans must never be used to purchase second homes or investment properties. Doing so violates the terms of the loan.
What are the lender underwriting requirements for a VA loan?
Even though the VA does not require a minimum credit score to qualify for a VA loan, lenders often have their own requirements. Most lenders want an applicant with a credit score of 600 or higher.
Typically, buyers must show sufficient income to make loan payments and should not have too high a loan-to-income-ratio. That being said, the requirements are more lax than for conventional loans.