Few men and women have ever volunteered for military service to get a good deal on mortgage rates, but when they eventually decide to buy a home, they discover a perk that can save them thousands of dollars.
VA home loan rates are usually lower than interest rates for conventional loans. VA loans require no down payment, allow for bad credit scores and a higher debt-to-income ratio. They don’t require private mortgage insurance, which lowers loan closing costs.
Those are some reasons that VA loans soared from $25 billion in 1995 to $124 billion in 2013. They also help explain why 79% of vets own their own home as opposed to 63% of the non-veteran population.
The Department of Veterans Affairs (VA) Home Loan Guaranty program has helped veterans, active duty service members, reservists, National Guard, and certain surviving spouses become homeowners since 1944. Approximately 21 million service members and veterans have taken out VA loans over the last seven decades. Nearly 60% of veterans who have ever obtained a loan to purchase a home, make home improvements, or refinance a mortgage have taken advantage of a VA loan program to do it.
The Veterans Administration guarantees loans made by conventional mortgage lenders (e.g. banks, credit unions, etc.) after borrowers make their own loan arrangements.
The VA then appraises the property and, if satisfied that the borrower is a good risk, agrees to indemnify the lender against loss if the borrower defaults. For the borrower, that can eliminate the lender’s down payment requirement and the need for private mortgage insurance, which is required for non-VA borrowers whose down payments are less than 20% of a home’s value.
VA Home Loan Options
A VA Guaranteed Home Loan can be used to do several things:
- Buy or build a new home
- Buy a residential condominium or cooperative housing unit
- Buy a manufactured home and/or lot
- Repair, alter, or improve a residence owned and occupied by a veteran
- Install a solar heating or cooling system or other energy-efficient improvements
A VA loan can cover the entire purchase price of a home. The VA’s maximum guarantee is generally 25% of the loan amount — up to $104,250 — for a maximum loan of $417,000. Due to regional variations in housing costs, the VA will guarantee loans of more than $1 million in certain areas. VA home loan requirements include a “funding fee” that ranges from 0.5% to 3% of the loan value. Most borrowers are charged 2%. The fee is paid with cash or included in the loan amount. It is used to fund the program guarantees in case of default.
VA Home Loan Requirements
To apply for a VA loan, the applicant must meet military service requirements and other standards set by the VA.
One such standard is a valid VA Certificate of Eligibility (COE), which is a form that can be downloaded from the VA website and mailed back when completed. The COE helps VA loan lenders calculate the applicant’s entitlement, or how much money the VA will guarantee the loan for. The basic entitlement is $36,000 for a $144,000 loan, but can be increased by an additional $68,250 — enough to cover a house worth $417,000. In some areas with especially high housing costs, the amount can go higher.
Other standards set forth by the VA include the following:
- Suitable credit and sufficient income
- Applicable proof of service documents (e.g. DD-214 discharge papers)
- Certification that the applicant will occupy the dwelling
- Other documents typically required to obtain home loans
VA Home Loan Benefits
The VA Home Loan program affords veterans several major benefits.
Some of these benefits include the following:
- The opportunity to buy or build a home
- A guarantee by the VA to repay a percentage of a loan (25% to 50%, depending on the loan amount) in the event of loan defaults
- The ability of a borrower to purchase a home without a down payment
- Limitations on closing costs
- VA home lenders can waive private mortgage insurance (PMI)
- VA interest rates that usually are lower than prevailing market rates
- Higher allowable debt-to-income ratios
- No prepayment penalties
- The option for sellers to pay all of the veteran’s closing costs as long as the costs do not exceed 6% of the sales price of the home
- Easier credit standards to qualify for a loan
- VA loan guidelines include special housing adaptation assistance for veterans with certain disabilities
- VA direct home loans are available to eligible Native American veterans who want to buy or build a home on trust lands
VA Refinance Rates
The VA also has several programs for veterans, and active service members and their spouses looking for VA refinancing rates on existing loans.
The Interest Rate Reduction Refinance Loan (IRRRL), also known as the VA Streamline Refinance, allows qualified veterans to:
- Refinance to a lower rate
- Switch from an adjustable rate to a fixed rate loan, or vice versa
- Qualify without having to document assets or income
- Waive an appraisal
- Pay lower — or no — out of pocket closing costs
- Finance energy efficient improvements into the loan
The VA’s Cash-Out Refinance program allows qualified veterans to tap equity taken when they refinance a mortgage. The veteran can use the cash for any purpose, including consolidating debts, paying for a child’s education and taking vacations.
Other VA Loan Programs
Native American Veterans – Native American vets who want to live on Federal Trust Land are eligible to apply for housing loans under the VA’s Native American Direct Loan program. The option provides direct loans to Native Americans for the purchase, construction or improvement of a residence.
Adapted Homes for Disabled Veterans – The VA provides grants to vets with certain service-connected disabilities. The money can be used for improvements such as ramps, wider doors and modifications to make a dwelling handicap accessible. The VA has three types of grants: Adapted Housing, Special Housing Adaptation, and Temporary Residence Adaptation.
Help for Homeless Veterans – VA medical centers provide assistance to homeless veterans and those in jeopardy of becoming homeless. Contact a VA hospital for information.
Loan Delinquency Help – If payments on a VA-guaranteed loan becomes delinquent, the VA will work with the borrower to avoid foreclosure. Help includes counseling and might involve the VA intervening with the lender on the borrower’s behalf.