If you’re a veteran of the military, you may qualify for VA home loan financing. This attractive financing option is affordable and offers competitive terms. If you know you’re eligible for VA financing or you would like to find out if you are, keep reading our guide to learn how beneficial this loan program can be for you.
A VA loan is a loan available to veterans and current military members, along with their spouses. The VA doesn’t underwrite or fund VA loans, but they guarantee them, which is why you must show eligibility for the loan (proof that you served in the military).
The VA approves specific lenders to underwrite and fund VA loans in their name. VA lenders must follow the VA guidelines but can add their own requirements on it as well.
The VA loan originated in 1944 to help veterans that served our country achieve homeownership without strict requirements. The program doesn’t require a down payment and doesn’t have a minimum credit score requirement either, but most lenders require a specific score, so always check with the lender first.
The VA loan continues to be a popular option for veterans and active-duty military as lenders tighten their restrictions or as consumers find it harder to save money for a down payment in today’s economy.
Contrary to popular belief, VA loans aren’t hard to get; they aren’t hard for sellers to work with, and they are just as affordable, if not more affordable, than any other loan program available today.
Understanding the VA Loan Guarantee
The VA loan guarantee is a guarantee the VA promises private lenders. It’s how private lenders can have lenient guidelines including no down payment, low credit scores, and high debt ratios. They follow the VA guidelines and as long as they do, they aren’t at risk of a total loss should a borrower default.
The VA guarantee is the reason veterans can get loans with such relaxed guidelines, helping veterans own a home much faster and more affordably. The VA gets the funds to handle their guarantee from the VA funding fee most borrowers pay for a VA loan.
The VA funding fee you pay goes into the VA’s reserves in case they need to bail out a bank for a borrower’s default.
Understanding the VA Funding Fee
Veterans don’t pay mortgage insurance on a VA loan even if they don’t make a down payment. It’s the only loan with this option, so it’s a valuable benefit.
But veterans do pay a funding fee upfront. The funding fee is what keeps the VA program going, giving more veterans the chance to buy a home with no down payment or refinance their home.
Most veterans pay a funding fee equal to 2.3% of the loan amount. There are some exceptions to the rule including if you are disabled as a result of your time in service (according to the VA) or you’re a surviving spouse of a veteran that lost his/her life during service.
If you’ve already used your VA home loan benefit, you may pay a funding fee of 3.6% to use it again and if you take advantage of the VA IRRRL program, you pay only a 0.5% funding fee.
If you can’t afford the fee upfront and the seller won’t pay it, you can wrap the fee into your loan amount, and it doesn’t affect your loan-to-value ratio.
What are the VA Loan Limits?
The VA used to have specific loan limits and if a veteran borrowed more than the limit, he/she had to make a down payment of 25% of the difference. Today, the VA loan limits have been removed. As long as you can prove you can afford the payment, you can borrow as much as you need.
But, if you don’t have full entitlement because you used your VA benefit before and weren’t able to restore it, you have a loan limit. The limit is equal to 4 times your entitlement. For example, if you have $50,000 in entitlement, you can get a loan for up to $200,000.
Here are a couple of examples.
John is a veteran who is eligible for a VA loan. He has never used his entitlement before, and he wants to buy a house for $450,000. He isn’t making a down payment, and he qualifies with his credit score and debt ratio. John gets the VA loan because he never used his entitlement and he proved he can afford the loan.
Jim is a veteran who is also eligible for a VA loan. He has used his entitlement before, but he sold the house he used the entitlement on. He petitioned the VA to reinstate his entitlement and now he wants to buy a house for $500,000. He has full entitlement since he sold his house, paid off his old mortgage, and had his entitlement reinstated so he could buy the $500,000 home with no down payment.
Jack is a veteran who is eligible for a VA loan. He used his entitlement before on a $100,000 house. Jack still has the house but refinanced it with the VA IRRRL mortgage and kept the house. He now wants to buy another house with his VA benefits, but he has $100,000 less in entitlement because he still owns his original house.
The Different Types of VA Loans
The VA loan program is an umbrella for many different types of loans. Here’s a quick overview of each of the loans the VA offers.
VA Loan for Purchases
The VA loan for purchases works like any other loan to buy a home, only with this loan you don’t need a down payment. You can buy a new or existing home, but it must be your primary residence. In other words, you must live in the home full-time. It can’t be a second home or investment home.
A VA loan for purchases can be used on almost any type of home including:
- Single-family home
- Multi-unit homes
- Manufactured homes
Veterans can use their VA loan benefit to buy a home right out of the military or anytime in their lifetime. The benefit lasts for as long as you are alive and as long as you have entitlement.
VA Streamline Refinance
The VA streamline refinance is a refinance of an existing VA loan. If rates drop after you buy your home or you want to change your loan’s term, you may be able to use the streamline program, also called the Interest Rate Reduction Refinance Loan (IRRRL).
To qualify, you must prove you made your last 12 mortgage payments on time and that you live in the home as your primary residence. It doesn’t require full verification of your income, assets, credit score, or even the home’s value.
You must also prove there is a net tangible benefit for you to refinance. In other words, you save money or realize another benefit by refinancing. For example, if interest rates dropped, you’d benefit from the lower payment. Another example is if you originally had an ARM loan but refinanced into a fixed-rate loan for the predictability – the VA considers that a net tangible benefit too.
VA Cash-Out Refinance
The VA cash-out refinance is for any eligible veteran. You don’t have to have a VA loan currently to use the program. Unlike the IRRRL, this is a fully verified loan that you must qualify for with your credit score, debt-to-income ratio, and home value.
You can use the program to take cash out of your home’s equity, which is the difference between your home’s value and the loan amount. Let’s say for example your home is worth $250,000 and you have a $150,000 mortgage outstanding. You have $100,000 in equity in the home.
Most veterans can tap into up to 90% of their home’s value, which in the case above means you’d be able to take out an additional $75,000 to use how you want.
You can also use this program if you are a veteran but didn’t use your VA home loan benefit when you bought the home. Even if you use the program as a rate/term refinance, it’s still considered a cash-out loan to the VA since it’s not a purchase loan.
VA Energy Efficient Mortgage
You can make energy-efficient changes to your home either when you buy it or when you refinance with the VA Energy Efficient Mortgage. This mortgage allows you to finance up to $6,000 in energy-efficient changes including the installation of solar panels, energy-efficient windows, or heat pumps. The money may only be used for energy-efficient changes, though, and this doesn’t include the purchase of energy-efficient appliances.
How VA Loans Differ from Conventional Loans
Most people compare VA loans to conventional loans when deciding which loan is right for them. The conventional loan is the ‘traditional loan’ for borrowers, but the VA loan often has more benefits for eligible veterans.
Down Payment Requirements
VA loans don’t require any money down, but conventional loans require 3% – 20% down payment. The conventional loan down payment requirements varies by borrower and qualifying factors. The more money you put down on a conventional loan, though, the higher your chances of approval become.
Conventional loans have tougher qualifying requirements than VA loans because they don’t have a government agency guaranteeing them. VA loans have the VA guarantee which helps lenders if a borrower defaults.
Because of the guarantee, VA loans have very relaxed guidelines and conventional loans tend to require higher credit scores, lower debt ratios and have tougher requirements overall.
VA loans don’t charge mortgage insurance. Veterans pay an upfront funding fee of 2.3% in most cases, but they don’t pay insurance monthly. Conventional loans don’t have an upfront mortgage insurance fee, but you’ll pay mortgage insurance monthly until you owe less than 80% of the home’s value.
VA loans have the lowest interest rates in the industry. You don’t need a perfect credit score or the lowest debt ratio to get the best rates either. Conventional loans, on the other hand, have competitive interest rates, but you have to earn them. If you don’t have great credit or a low debt ratio, you’ll likely get a higher interest rate than you would with a VA loan.
How do you Get a VA Home Loan?
You can get a VA loan by applying with a VA-approved lender. Start by getting pre-approved so you know how much you can afford. This will help you when you look at homes too because you’ll have a letter that states you can afford financing and on what terms.
Even if you’ve used your VA loan benefit before, as long as you sold the house and/or had the benefits restored you can use them again. If you have full entitlement, there’s no loan limit up to what you can afford, which we can tell you when you get pre-approved for a VA loan.