Landing an extraordinary home loan probably isn’t anyone’s top reason for enlisting in the armed forces, but since the end of World War II more than 22 million active military members and veterans have used Veterans Administration mortgages to achieve the American Dream of home ownership.
The VA home loan program, part of the 1944 GI Bill of Rights, was designed to ease the path to homeownership for both active military personnel and veterans. Qualified loan applicants aren’t required to make down payments, pay mortgage insurance or some closing costs. Those expenses can be substantial and can kill deals relying on conventional financing.
VA loans are extremely popular because they’re money savers. During fiscal 2019, 624,000 buyers used VA financing to cover more than $161 billion in real estate purchases. VA loans historically made us 2% of the mortgage loan market, but that has grown to 10%.
So how do you get a VA mortgage? Here are a few answers that will help you decide whether one is right for you.
Am I Eligible for a VA Loan?
If you have served in any active or reserve units of any military branch or National Guard branch, you almost certainly are eligible. Those who served active duty qualify after six months in the service; those in the reserves or National Guard may apply after being enlisted for six years. If they are called to active duty, their eligibility begins after serving 90 days during times of war.
Spouses of military personnel who died on active duty or died from a service-connected disability or of a service member who is missing in action or a prisoner of war also are eligible if they have not remarried before reaching age 57.
Cadets at the U.S. Military, Air Force or Coast Guard academies and midshipmen at the U.S. Naval Academy also qualify, as do those who serve as Public Health Service or National Oceanic & Atmospheric Administration officers and merchant seaman with World War II service.
What Types of VA Home Loans Are Available?
An advantage of VA loans is that banks and mortgage companies can offer better terms because the VA guarantees a portion of the loan.
Types of VA loans include:
- Purchase Loans: These offer competitive interest rates, typically without requiring a down payment or private mortgage insurance.
- Cash Out Refinance Loans: These permit you to take cash out of your home equity for a wide variety of needs.
- Interest Rate Reduction Refinance Loan: Also known as the Streamline Refinance Loan, these help borrowers refinance an existing VA loan to get a lower interest rate.
- Native American Direct Loan Program: Native American veterans can finance the purchase, construction or improvement of homes on Federal Trust Land, or reduce the interest rate on a VA loan.
- Adapted Housing Grants: These loans help veterans with a permanent and total service-connected disability buy, build or modify a home to account for their disability.
What Are the Benefits of a VA Loan?
The VA doesn’t issue mortgages, it guarantees them, setting requirements on the sort of mortgages it will accept and relying on approved lenders (banks, credit unions, online lenders) to issue the loans. The VA takes on risk associated with the mortgages it backs, and the lower risk to the lenders who issue VA is passed along to buyers, often meaning slightly lower interest rates compared to conventional loans.
VA home loan applicants with poor credit histories, including bankruptcy and foreclosure, can often qualify for VA loans more easily than if they sought conventional financing. The VA won’t count a bankruptcy or foreclosure against you after two years. Conventional mortgage lenders often require that you wait up to four years following a foreclosure to apply for a new mortgage.
VA home loans benefits are substantial for those who qualify. Here are some of the ways VA and conventional mortgages differ:
|VA Loans||Conventional Mortgages|
|No down payment for buyers who meet loan requirements.||As much as 20% down payment might be required, though amounts vary considerably.|
|No private mortgage insurance (PMI) required on any loan.||Private mortgage insurance necessary for loans with less than a 20% down payment. This can add hundreds of dollars to a monthly mortgage payment.|
|Underwriting standards are relaxed since the government backs the mortgages. The VA will use an agency-approved appraisal to establish the value of the property you wish to buy.||Underwriting standards can be strict. After the 2008 financial meltdown that was largely pinned on poor mortgage underwriting standards, lenders became much stricter about borrowers’ required incomes, assets and credit scores,|
|Fewer closing costs compared to conventional mortgages. VA loans include a fee that is used to help fund the program. The fee can be waived for eligible borrowers with disabilities.||Closing costs can be extensive, often amounting to 3% or 4% of the sales price.|
|Not available for all types of property. Borrowers must reside in the homes they purchase, excluding vacation homes and many rental properties (you can buy a multi-family property provided you live in one of the units). Also, the home you want to finance must be move-in ready, meaning no farms, businesses or fixer uppers||Loans are available for an assortment of properties, including those not used as the owner’s residence.|
|VA interest rates are typically about 0.25% lower than rates for comparable conventional loans||Interest rates vary and are set by complex market factors. Lenders generally compete with one another, holding rates fairly close. But the rate you receive is based on an assortment of factors, especially your creditworthiness.|
VA loans are guaranteed against default, so they pose less risk to mortgage lenders. In addition to charging fewer closing costs – a VA requirement – lenders often offer lower mortgage interest rates to VA loan customers. The difference between conventionally available interest rates and VA rates can vary over time and from lender to lender.
What Are the Borrowing Limits?
The VA isn’t really in the loan business. It guarantees home loans and you must find a VA-approved lender to get a VA loan. As such, there are no official borrowing limits, but there are limits to the amount of liability the VA will assume.
They vary by county, but the limit was $453,100 in 2018 for most parts of the U.S., but the amount can be as much as $679,650 in high-cost areas such as San Francisco and New York.
What Are the Fees Associated with a VA Loan?
Fees? Who said anything about fees? Sorry, but even veterans must deal with some up-front costs.
To keep the VA home loan system afloat, there is a one-time funding fee. It varies, depending on the down payment and type of veteran. For instance, a borrower getting his/her first VA loan and making no down payment would pay a 2.15% fee on the amount of loan. The fee is 1.25% if the borrower makes a down payment of 10% or more.
Reservists and National Guard members usually pay about one-quarter of a percentage point more than active-duty personnel.
If you’re using the VA loan program for a second time and have no down payment, the fee is 3.3% of the total loan amount. The fee is waived for veterans who received disability compensation.
Does the VA Offer Loan Aid and Forgiveness?
Another advantage of VA loans is that the company that handles your loan is supposed to work with you to help avoid a foreclosure. It is, however, not a guarantee.
When borrowers fail to make payments, the company must contact the borrower by phone and mail and try to reach an agreement so the borrower to bring the loan current. The loan servicer has to send a letter no later than the 30th day of the delinquency indicating the status and inform the borrower how to contact the company to take care of the default. Options for borrowers with VA-guaranteed loans include repayment plans and selling the property to someone who will take over the mortgage payments, among others.
Under VA guidelines, the borrower generally gets the right to reinstate the loan and stop a foreclosure sale by paying all overdue payments, late charges and foreclosure expenses unless state law precludes reinstatement.
Veterans struggling to keep their mortgage current may wish to contact the nearest VA Regional Loan Center. The VA may provide a technician who can contact the loan servicer and help you explore all options to avoid foreclosure, as well as conduct financial counseling with you. For VA guaranteed loan help, call 877-827-3702.
How Can I Restore My VA Home Loan Eligibility?
So, maybe unforeseen circumstances caused you to default on your VA mortgage. Does that mean you should forget about ever getting another?
Not necessarily. As you might expect, there will be repercussions. Your credit score will drop, likely 85 to 165 points. You will be ineligible for a VA mortgage for two years, but if you repay what the government lost on your default, you can regain full eligibility.
However, if the VA’s loss wasn’t reimbursed completely, you’ll receive only partial restoration of eligibility. VA loans guarantee a portion of a veteran’s mortgage, up to $36,000. If the VA is still owed $30,000 after your VA loan default, you’d only get a $6,000 mortgage guarantee.
Naturally, you’d be wise to rebuild your credit during this two-year period by paying all your other credit on time.
What Are the Income Requirements for a VA Loan?
The VA doesn’t have specific income thresholds for qualifying for a mortgage, relying instead on what it calls residual income requirements.
Borrowers are expected to have steady, stable income, which can come from employment, Social Security, disability payments, investments and other sources. Self-employed persons are often asked to document their income. Even income from foster care, worker’s compensation and public assistance is considered, though it has to be sustainable income that will continue well into the future.
Residual income requirements, often considered a key reason why the VA mortgage program has a very low default rate, vary from community to community around the country. The VA sets amounts of income that remain after all routine bills and expenses are paid. The requirement ensures that borrowers have a sufficient financial cushion to cover emergencies/
Can I Get More Than One VA Loan?
Yes you can, though the fee is slightly higher the second time around and beyond.
Normally you must sell your primary residence and pay off the off the loan before you can take out another VA loan on a new residence. But VA loan programs allow you a one-time opportunity to buy a second home with a VA financing if you have refinanced your primary residence with a non-VA loan or you have paid off the original loan.
How Do I Apply for VA Loan?
Applying for a VA loan begins with assembling some basic information about your service. If you’re a veteran, that includes a copy of your discharge or separation papers, or DD214. You can apply online, which is faster than applying by mail using a Request for a Certificate of Eligibility (VA Form 26-1880).
In most cases, your lender will be a bank or mortgage company. The next steps are:
- The lender will request a VA appraisal to estimate the house’s market value. (This is not the same as a home inspection, which is designed to determine structural problems, and it does not provide a guaranty of value.)
- Using the appraisal and information about your credit and income, the lender will decide whether to accept your loan application.
- If your application is accepted, the lender will help you select a title company to transfer ownership of the house.
While no one joins the military so they can get a better deal on a home loan, VA mortgages are one way the nation shows appreciation to those who were willing to put their lives on the lines in defense of the country.
In other words, you’ve earned it. Take advantage of it to make your civilian life as successful as possible.
Who Are the Best Lenders for a VA Home Loan?
The ones with the best rates and customer service, of course.
Interest rates fluctuate, and customer experience varies, however, depending on a variety of factors. The best answer is to find a lender that is well-versed in the VA home loan program. Even then, there is no shortage of candidates.
A 2017 NerdWallet study gave high marks to Navy Federal Credit Union, Veterans United, Quicken, Bank of America, Citibank and Fairway. As with any mortgage, the best advice is to shop around and find a lender you’re comfortable with and has rates that make you happy.
The big advantage veterans have is they can get into a program that makes it easier to get into a home that will make them happy.
After spending so much time in tents and foxholes, they deserve it.