VA loans are a great benefit for eligible service members, veterans and their surviving spouses. It allows you to qualify for a low-cost mortgage when you’re looking to purchase or refinance, even if your credit isn’t perfect.
If you currently serve in the military or are a veteran, you’re probably eligible for a VA loan. Here’s what you need to know about these special government-backed loans.
What Is A VA Loan?
VA loans are a type of military loan that mortgage lenders issue to qualified veterans, active service members and spouses. They’re backed by the government through the Department of Veterans Affairs (VA).
The VA offers specific guarantees to private lenders on loans to qualified veterans, active service members and surviving spouses. Because of these guarantees, lenders will issue loans to candidates that could be considered risky.
How Do VA Loans Work?
The VA does not issue VA loans, but they do determine who qualifies for one and which lenders issue them.There are several types of VA loans, and they pose less of a risk to lenders because they’re backed by a government agency.
VA loans are considered nonconventional loans because of their easier credit requirements. They offer many advantages over conventional loans, including lower interest rates, more lenient borrowing requirements and no down payment due at closing.
Who Qualifies For A VA Loan?
For those who are eligible, VA loans are attractive because they don’t require a down payment. They also have lower interest rates than many other types of mortgage loans you can get for similar terms. They don’t have monthly mortgage insurance.
Although lenders set their own requirements for certain aspects of qualification, VA loans have more lenient credit requirements than many other mortgage programs.
Not all who have served in the Armed Forces qualify for a VA loan. You must meet at least one of the following criteria to qualify:
Served 181 days of active service during peacetime.
Served 90 consecutive days of active service during wartime.
Served more than 6 years of service with the National Guard or Reserves.
Are the spouse of a service member who lost their life in the line of duty or as the result of a service-connected disability. You generally cannot have remarried, although there are exceptions.
What Is A Certificate Of Eligibility (COE)?
A COE is a document that shows your mortgage lender that you’re eligible for a VA loan. To get a COE, you need to demonstrate proof of service. The proof you need to submit varies based on whether you’re an active-duty military member, a veteran, a surviving spouse, etc.
Documents You’ll Need
Veterans need to submit DD Form 214. DD Form 214 is a certificate that verifies your military discharge. You can request your DD Form 214 online by using the eVetRecs filing system.
Active-Duty Service Members
You’ll need a statement of service signed by your personnel officer, or an adjunct or unit commander if you’re an active-duty service member. The statement of service must include your full legal name, Social Security number and birthdate.
It must document the date you entered the service, information on any breaks or discharges you took from service and the name of the commander providing the information. Ask your superior for a statement of service before you apply for your COE.
Current National Guard Or Reserve Member
Current National Guard or Reserve members also need a statement of service. The requirements for your statement are the same as they are for active service members.
Discharged Member Of The National Guard
Discharged members of the National Guard need to have NGB Form 22, Report of Separation and Record of Service for each period of National Guard service. You must also have NGB Form 23, Retirement Points Accounting and proof of character of service.
National Guard units belong to individual states, so there is no central record archive. Contact the National Guard Adjutant General’s Office in the state where you served and request your NGB Form 22 and 23 to get your COE.
Discharged Member Of The Selected Reserve
You must have a copy of your annual Retirement Points Statement if you’re a discharged member of the Selected Reserve. You also need proof of honorable service and discharge.
Surviving spouses who do not get dependency benefits can get a COE if you have your spouse’s DD Form 214, your marriage license and your spouse’s death certificate. You also need to print and complete VA form 21P-534-ARE, available on the VA benefits website.
Surviving spouses who receive dependency benefits need to print and complete VA form 26-1817. You can download the form for free From the VA benefits website.
Once you’ve got your evidence, you have a few options to apply for your COE. You can apply online through the VA’s eBenefits website. You can also mail your documents and a completed VA Form 26-1880.
Other VA Loan Eligibility Requirements
Once you’ve verified that you meet the service requirements for a VA loan, you need your income, assets and credit to check out, as well as the property you’re buying.
VA loans can also be used on condos and manufactured homes, but not all lenders will finance loans for these property types.
The property you buy must be your primary residence within 60 days of purchase. You can’t use a VA loan for a vacation or investment property, but you can use it to buy a one-to-four family home if the eligible member uses it as a primary residence.
The VA doesn’t require a specific minimum credit score for VA loans, so the credit requirement varies by lender.
Your lender will evaluate your debt-to-income ratio (DTI) when considering your ability to pay back the loan. Your DTI represents how much of your monthly income goes toward paying back debt. Importantly, the VA does not set limits on your DTI, although some lenders might.
VA Loan Limit
The VA doesn’t limit how much you can borrow, but there is a cap on the VA’s guarantee. That’s the amount of money they’ll back if you default on your loan. According to the VA, the loan limit for a no-down-payment VA loan is $548,250 in most of the country.
Certain high-cost areas have higher limits. If you need a loan higher than that amount, you may be able to look into a VA jumbo loan, which doesn’t require a down payment and may offer a lower rate than regular jumbo loans.
Down Payment And Assets
VA loans are one of the few loan options that don’t require a down payment. Your lender may have specific requirements for a no-down-payment VA loan.
For example, they may require that you have a higher credit score if you’re putting down less than 10%.
It’s important to keep in mind that “no down payment” doesn’t mean “zero cost.” Here are some other costs, akin to closing costs due at a conventional mortgage closing, to be prepared for, even if you’re putting 0% down:
Most people who get a VA loan are required to pay a funding fee, which covers the cost to taxpayers. The funding fee ranges from 1.25% to 3.3% (2.3% – 3.6% beginning January 1, 2020) of your loan amount.
The cost of the fee is determined by your type of service, the size of your down payment, whether it’s the first-time you’re getting a VA loan and whether you’re buying or refinancing. Surviving spouses, veterans who receive disability and Purple Heart recipients serving in an active-duty capacity are exempted from funding fees.
Don’t worry, though. In most cases, if you don’t have the money up front, it can be added to the loan amount in many cases.
Most loans require you to have additional money in the bank that you’re not using for upfront costs. This ensures that you’ll be able to make payments once your loan closes. The amount of leftover funds you’ll need is determined by the cost of your mortgage payment, including principal, interest, taxes and insurance. Although it’s not always required, it’s a good idea to show reserves equal to 2 months’ worth of mortgage payments.
VA Loan Benefits
VA loans have many benefits over conventional loans. Among them are lower interest rates, no down payment requirement, no mortgage insurance, easier credit requirements and additional pluses for disabled veterans.
VA Loan Rates Are Typically Lower
Because they’re backed by the government and carry lower risk for lenders and investors, VA loans typically have lower interest rates than conventional loans, particularly for borrowers with credit issues. You can see today’s VA mortgage rates here.
VA Loans Don’t Require A Down Payment
VA loans are one of two major mortgage options (the other is the USDA loan for rural home buyers) that don’t require a down payment. This means you’ll need less money up front, being able to save the extra or spend it on home furnishings and projects.
100% Loan To Equity Value
You don’t need any equity to refinance your VA loan into a lower rate. In fact, with a VA Streamline loan, you can refinance up to 120% of your home’s value for changing your term or lowering your rate. This means you can refinance even if you owe more on your home than it’s worth.
No Private Mortgage Insurance (PMI)
VA loans don’t require PMI. PMI is mortgage insurance on conventional loans that a lender may require you to pay if you don’t put 20% down. Not having to pay PMI can save you between 0.5% – 1% of your loan amount per year until you reach 20% equity.
Lenient Borrowing Requirements
VA loans allow you to qualify with a higher DTI than any mortgage program from one of the major mortgage investors. The limit is 50% with an adjustable rate mortgage (ARM), but with a fixed-rate mortgage, that limit can go as high as 60% with a median 620 credit score.
If your score is at least 580 but less than 620, your mortgage payment can't account for more than 38% of your gross monthly income. Additionally, your total DTI can be no higher than 45%.
The VA loan is the only program that lets you access up to 100% of your equity in a cash-out refinance, a key difference from other options. However, this may vary depending on the lender.
Additional Benefits For Disabled Veterans
In addition to standard VA loan benefits, disabled veterans also have access to other benefits as well.
Exemption From Funding Fees
Disabled veterans are exempted from the VA funding fee, so they don’t have to pay the VA funding fee during closing. To qualify for the exemption, you must currently receive some form of disability benefits. Your level of disability is irrelevant.
This this exemption can save veterans or their surviving spouse thousands. For example, if you buy a home worth $200,000, you might pay as much as $2,500 – $6,600 ($2,800 – $7,200 starting January 1, 2020) in VA funding fees when you close. Disabled veterans can avoid this fee.
Access To Specially Adapted Housing (SAH) Grants
Do you have a disability that affects your mobility or sight? You may qualify for a SAH grant.
SAH grants can go toward constructing a special home designed to fit the needs of the disabled individual. Or they allow you to modify an existing home to make it more accessible. SAH grants can also pay the unpaid balance of an adapted home already purchased without VA grant assistance.
In 2020, you may qualify for a grant of up to $90,364, and you may use the grant up to three times – as long as your disability qualifies. Because the SAH is a grant and not a loan, you don’t need to pay it back.
Access To Other Adaptation Grants
Disabled veterans may also qualify for a Temporary Residence Adaptation (TRA) grant to add modifications to your property that make it easier to navigate if you live with a family member. Like SAH grants, you won’t need to pay back your TRA grant, which makes them a powerful tool for veterans with mobility-related disabilities.
Property Tax Exemption
Property taxes fund things like libraries, fire departments, and local road and development projects. Disabled veterans’ property tax exemptions can lower the amount you must pay in property taxes.
These tax exemptions aren’t a federal program, and they vary by state, so check with your local VA office to learn the exemptions you’re eligible for. Some states offer an exemption to all veterans, while other states limit this benefit to veterans who are currently receiving disability payments. Disabled veterans are 100% exempt from property taxes in some states.
How To Apply For A VA Loan: 6 Steps
Applying for a VA loan is a lot like applying for any other mortgage in many respects. Take these 6 steps into consideration when applying.
1. Secure A Certificate Of Eligibility (COE)
You’ll need this to be eligible for your VA loan. You’ll need to provide proof of your military service based on your status.
Tell your lender you need your certificate of eligibility early in the process so they can help you get it.
2. Get Preapproved
When buying a home, get preapproved early on. The approval will give you a baseline for determining how much you can afford. In addition, when you make an offer on a house, you’ll find sellers tend take offers more seriously if a letter of preapproval is attached.
3. Shop For A House
Finding a house with a VA loan is like finding a house with any other loan option. Whatever property you buy must meet the VA’s Minimum Property Requirements, or MPRs. MPRs ensure the home is safe, structurally sound and sanitary. These requirements vary according to known risks in an area.
A VA appraiser inspects the home to ensure it meets the MPRs. If any MPRs are not met, repairs must be made, either at the seller’s or buyer’s expense, before the loan can close.
4. Make A Purchase Offer
Once you find a home you like in your price range, put in an offer to buy the home. The seller may accept your offer, reject the offer or counteroffer. Once you and the seller agree on a price, a real estate agent or attorney can help draw up a sales contract.
5. Undergo VA Appraisal And Underwriting
Underwriters from your lender assess your finances and make sure you qualify for a VA loan. The VA will also require an appraisal before they approve the loan. VA appraisals are stricter than conventional loans. During a VA appraisal, the appraiser will check that the home meets the VA’s MPRs and is sanitary, structurally sound and move-in ready with minimal repairs.
6. Close On Your New Home
Once the VA appraiser says your new home is safe and sound, it’s time for you to sign on your new home, get your loan and receive the keys to your new property.
Is A VA Loan Right For You?
A VA loan is an important benefit earned by our military. If you qualify, you can get a great interest rate with no money down, and even past credit problems.