How Does a Veterans Affairs (VA) Loan Work for First-Time Homebuyers?

First-time homebuyers have a lot of options to weigh as they start their process. If you’re an eligible veteran, active-duty service member, or surviving spouse, the Veterans Affairs (VA) loan might be a good place to start.

The VA loan has unique advantages that may be particularly appealing for first-time homebuyers. In this article, we will explain some of those potential advantages and how you can get started with the VA loan process.

Advantages of a VA Loan for First-Time Homebuyers

Certain aspects of the VA loan will appeal to first and repeat homebuyers. Only one of the following items changes based on the number of times you use a VA loan. Still, these VA loan advantages are often appealing to first-time homebuyers.

VA Funding Fee

The VA funding fee is in place to help fund the VA loan program. It’s a low-percentage fee that can be paid all at once or financed into your loan. Some borrowers may be able to get an exemption from the VA funding fee, but in general, it is a requirement for using the VA loan.

Now, you may be wondering when this funding fee starts sounding like it belongs in your Pro’s column. Well, for VA purchase and construction loans, the funding fee percentage is lower on VA loans for first-time homebuyers.

The ultimate cost of your VA funding fee for those two loan types depends on the size of your down payment, how many times you’ve used the VA loan benefit, and the total value of your loan.

Potentially Low or No Down Payment

One of the biggest draws to the VA loan is that it can potentially allow for zero down payment home purchases. There are some factors that will determine whether this is possible for your specific loan, however. For example, if the home you purchase is appraised at a lower value than what you agreed to pay, you may need to make up the difference with a down payment.

No Private Mortgage Insurance

Lenders often require private mortgage insurance (PMI) on conventional loans when the down payment is less than 20% of the total loan amount. It’s used to protect the lender if the borrower defaults on their mortgage. Generally, it ends up being another monthly fee paid by the borrower.

With a VA loan, you don’t have to worry about that. Effectively, the VA would be insuring your loan in place of PMI. So, if you are eligible for a VA loan as a first-time buyer, or any time thereafter, you could potentially avoid this additional monthly fee.

Seller-Assisted Closing Fees

Usually there are fewer closing costs associated with a VA home loan, but another unique feature of the VA loan is that the seller can assist with up to 4% of the closing costs. Of course, the seller would have to be willing to do so, but if they are, that’s another way that VA loan borrowers can potentially reduce their total costs.

Starting the VA Loan Process

Step 1: Review your finances

Despite the potential advantages associated with a VA loan, it’s still necessary to make sure you can afford it. Spend time looking over your credit, debt, income, monthly expenses, and any other relevant financial information. You can also use a tool like our VA mortgage calculator to get a rough idea of how much your mortgage might cost (Results are estimates and not a commitment to lend).

If you find that your finances might support a mortgage, then you move onto to the next step. If your situation isn’t quite there yet, start putting together a plan to, for example, reduce your debt over time.

Step 2: Find a lender and agent you can trust

There are many lending options out there for your VA loan. It’s generally recommended that borrowers shop around different lenders to find the right fit for their needs. Each lender has their own rates, fees, familiarity with the VA loan process, and standards of service.

Since this will be your first time buying a home, you’ll want to carefully consider who to trust with your VA loan. It can be helpful for some eligible veterans to choose a lender who has experience working with veteran clients and the VA.

Around this time, it would be wise to find your real estate agent, too. Your lender may have recommendations, but speak with your family, friends, and other veterans to find trustworthy options. You could also find an agent, then a lender, if you prefer.

Step 3: Apply for a Certificate of Eligibility (COE)

The Certificate of Eligibility (COE) is a document issued by the VA proving that you are eligible for a VA loan. If you want, you can apply for a COE on your own before you find a lender, but it can be helpful to do this with your lender instead. Lenders who have worked on VA loans before are likely to be more familiar with the process

Now, veterans are able to apply for their COE themselves, and if you wish to do so, you can start that application process before you find a lender. However, know that your lender should never require you to obtain the COE on your own.

To obtain your COE, you will need to submit documents such as:

• DD 214 for Active-Duty Service Members and Reservists that indicates Character of Service
• NGB 22 for National Guard members that indicates Character of Service
• Driver’s license or other government-issued identification

Find more information on the VA’s eligibility requirements here.

Step 4: Get pre-approved for your VA loan

Pre-approvals can help show sellers and their agents that you are a more serious option as a buyer, so they can be helpful as a first-time homebuyer. Note that a pre-approval is not a commitment to lend you a VA home loan. Pre-approvals also generally have an expiration date, so be mindful of your timing.

Talk to your lender about what you need to submit for your VA loan pre-approval. If you are pre-approved, you will get a pre-approval letter from your lender. This letter documents how much you might be eligible to borrow, which is useful for the seller to know.

Step 5: Shop for your home

Now comes the moment you’ve been waiting for: finding your dream home. With your pre-approval letter in hand and a trusted real estate agent by your side, you can search for the place you’ll soon call home. Assuming you found an agent with VA loan experience, they can point you toward homes that are more likely to meet the VA’s requirements, too.

Good Luck in Your Homebuying Journey!

We wish you the best of luck in finding the right home for your needs. The homebuying process can be a long one, but hopefully, yours will be worth it! As a veteran-owned and operated bank, The Federal Savings Bank cares deeply about seeing veterans achieve their homeownership dreams. Whether we do that with information like in this article or by working with eligible veterans who apply for financing, we’re proud to support veterans’ goals.