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A VA home loan is a mortgage option available to active military and veterans. Created by the U.S. government in 1944 as part of the Servicemen's Readjustment Act (also known as the GI Bill of Rights), the VA home loan was designed to help veterans purchase homes when they borrow from mortgage lenders, even those veterans with bad credit and no money to put down. Today, the program has provided active service members, veterans, and military spouses with over 24 million loans.

The benefits of VA home loans

VA mortgages have many advantages over regular home loans. Since many private lenders offer them and they're backed by the government, VA loans are easy to find and relatively easy to obtain, so long as you meet a handful of basic requirements (more on that later).

Regular home loan borrowers have to deal with stricter qualifications, such as high credit scores. They also have to pay more money in the form of down payments and monthly rates. If you're qualified for a VA loan and are thinking about buying a home, here are some of the benefits you'll enjoy:

  • You can choose not to have a down payment. Most lenders require the borrower to pay a certain percentage of the mortgage up front, which is typically anywhere from 6% to 20%. But with a VA mortgage, the minimum down payment is 0%. This is advantageous for veterans who return home from service with no income and very little in savings.
  • You won't have to buy private mortgage insurance (PMI). This is a type of insurance that protects lenders in the event that a borrower stops making payments on their mortgage. Normally, if you were financing more than 80% of your home, the lender would require you to purchase PMI, adding another expense onto your monthly mortgage payments. Those who qualify for VA mortgages don't have to worry about PMI, even if they plan on financing 100% of their home.
  • You'll pay low interest rates. Lenders assume less risk with VA loans, which means more cost savings for the borrower. When you make monthly payments on a VA loan, you'll likely pay lower interest rates than with a conventional loan according to Value Penguin.
  • You don't need a good credit score. Getting approved for a conventional loan is hard with bad credit. If you're not a veteran and are currently in the process of repairing your credit, lenders may reject your loan application. VA mortgage borrowers, on the other hand, can get approved with lower FICO scores. 

How does a VA home loan work?

Like regular home loans, VA mortgages are obtained through private lenders, such as a bank or a mortgage company. Then, the loan is guaranteed by the U.S. Department of Veteran Affairs: If the borrower can't make their payments and the loan defaults, the VA will assume the debt, not the lender. It's important to note that VA mortgages must be conforming loans, which means they don't exceed limits established by the Federal Housing Finance Agency (FHFA). In most counties, the limit for a conforming loan is $484,350. Though, it's important to note that the conforming loan limit will be changing in 2020. Anything higher than the limit would be considered a jumbo loan and would not be guaranteed by VA. 

Here's some more important knowledge to have before applying for a VA loan:

  • If you're trying to purchase a vacation home, you probably won't be able to take advantage of the VA loan program, even if you're a qualified borrower. VA loans are specifically meant for purchasing primary residences.
  • If you're a veteran who receives a monthly housing allowance (also part of the GI Bill of Rights), you can put that money toward paying your monthly mortgage fees.
  • If you'd like to pay off your VA mortgage in full, you can do so at any point without being charged a prepayment penalty fee.
  • If you already have a regular home loan, but are now an active service member, you can refinance it into a VA loan. This usually comes with a cheaper refinancing fee. 

How to apply

In order to get a VA loan, you'll need a certification of eligibility (COE), which can be acquired after 90 days of service during wartime or 181 days during peacetime. You'll also be eligible if you've been a member of the National Guard reserve for at least six years, or if your spouse was killed in the line of duty. Once you've obtained your COE, you can begin the process of applying for a VA loan. From this point on, the process is similar to applying for a conventional loan. Before being approved, the lender will require access to your credit score, debt-to-income ratio, and income verification.

Interested in learning more about VA loans and how to apply? We're here to help! Contact The Federal Savings Bank today