Before you bite the bullet and decide, “This is it. It’s time to become a homeowner.”, you must first ask yourself, “How?”. As a member of the United States military, you may be eligible for some unique advantages other homebuyers dream of. The U.S. Department of Veterans Affairs (VA) offers a variety of home loans often with favorable terms to eligible military borrowers. And tapping into this assistance can save you a lot of grief during the mortgage process.
If you’re looking to learn more about VA home loans, check out this comprehensive guide.
VA Home Loan Features
No Down Payment
One of the biggest advantages to a VA home loan is that they typically don’t require any down payment no matter the property type or cost. Other mortgages often require at least a 3 percent down payment, and many people have to wait years to save up for this expense alone.
Lower Interest Rate
Mortgage interest rates for VA home loans are generally lower than other types of home loans. A lower interest rate could mean that you may be able to qualify for more money on a loan, meaning a bigger budget, and you may be able to save more on your monthly mortgage payments.
Leniency with Credit Scores
The VA has more flexible credit score qualifications than many other loans. Although specific numbers vary from lender to lender and the type of loan you apply for, the typical required minimum score is 620.
Limited Closing Costs
Fees can quickly add up during the mortgage process. Fortunately, the VA has restricted lenders from how much they can charge an eligible military borrower for an origination fee. Sellers also may be able to pay up to 4 percent of the loan amount in concessions. Additionally, there are some other costs that eligible borrowers are not allowed to pay.
No Private Mortgage Insurance (PMI)
Conventional loans typically require a borrower to pay PMI if they can’t pay at least a 20 percent down payment. But VA loans don’t usually require any down payment or PMI, which can help significantly boost your buying budget.
Entitlement
The amount that the VA guarantees on your loan is your entitlement. If you’re a first-time homebuyer and have never taken out a VA loan before, you have full entitlement. If you have taken out a VA loan, you may still have entitlement left to use on a second VA loan. The good news is that your entitlement lasts for as long as you have some.
Eligibility for a VA Loan
A common myth about VA loans is that only active-duty members and veterans can apply for a VA loan. However, there are multiple situations in which you may be able to qualify for a VA loan:
- Service members: If you’ve served at least 90 continuous days without breaks
- Veterans, National Guard or Reserve members: This depends on when you served. Make sure you consult the VA website for specific details.
- Surviving spouse of a service member who died while serving
- Discharged members: You may be able to qualify if you were discharged for hardship, convenience of the government, early out, reduction in force, certain medical conditions or a service-connected disability. See the VA website for details.
To apply for a VA loan, you must have a certificate of eligibility (COE), a formal document issued by the VA that states you meet their guidelines for a VA loan. Your lender can typically pull this as they qualify you with just your date of birth and social security number.
Types of VA Home Loans
Purchase
Eligible borrowers can generally buy a home with no down payment and no mortgage insurance. Guidelines for VA purchase loans can vary by lender so make sure you discuss specifics with yours before making a decision.
Interest Rate Reduction Refinance Loan (IRRRL)
Also known as a VA streamline refinance, IRRRLs allow you to refinance an existing VA loan to get a lower interest rate or convert an adjustable-rate mortgage (ARM) to a fixed-rate mortgage. This can help you reduce and/or stabilize your monthly mortgage payments.
Cash-Out Refinance
If you need money in your pocket quickly and already have a mortgage, a cash-out refinance might be the solution. You can tap into your home equity to take out cash to use on whatever they need, including renovations, debt or a big-ticket item like a new car.
Native American Direct Loan (NADL) Program
Native American veterans or veterans married to a Native American can use an NADL to buy, build or improve a home on federal trust land. Find out if you’re eligible for an NADL from the VA website.
VA Loan Closing Costs
Another huge financial advantage for VA home loans includes the fact that the VA limits how much you’re charged on some closing costs. Here are some key differences for VA loan closing costs.
VA Funding Fee
The VA funding fee is the main difference between VA loan closing costs and other loan types’ closing costs. This is a required fee to help decrease the cost of the loan for taxpayers since the VA doesn’t normally require a down payment or mortgage insurance. The actual amount depends on your specific situation.
Loan Origination Fee
The VA prohibits lenders from charging eligible borrowers more than 1 percent of the loan amount for home purchases. You may even be able to decrease this cost by negotiating with your lender.
Appraisal Fee
An appraisal is required when you apply for a VA loan, but the cost varies depending on where you’re buying. However, like the origination fee, the VA limits how much appraisers can charge you.
Other Closing Costs
Other costs for a VA loan are like any other home loan. These can include:
- Loan discount points
- Credit report
- Payment for any credit balances or judgments
- Hazard insurance
- Real estate taxes
- State and local taxes
- Title insurance
- Recording fee
Make sure you speak with your lender to understand the full scope of your specific closing costs.
The VA Advantage
As a veteran, educating yourself about these specific details is essential. But it never hurts to seek counsel from professionals who have your best interests in mind. As you transition into a homeowner, don’t be afraid to ask questions, shop around, and verify your advantages with multiple resources.
This information is intended for educational purposes only. Products and interest rates subject to change without notice. Loan products are subject to credit approval and include terms and conditions, fees and other costs. Terms and conditions may apply. Property insurance is required on all loans secured by property. VA loan products are subject to VA eligibility requirements. Adjustable Rate Mortgage (ARM) interest rates and monthly payment are subject to adjustment. Upon submission of a full application, a mortgage banker will review and provide you with the terms, conditions, disclosures, and additional details on the interest rates that apply to your individual situation.
