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How does a VA loan work?

VA loans are a type of mortgage loan offered to members of the military, veterans, and their spouses in the United States. As long as the borrower meets the relevant military service requirements, a VA loan can be used to buy a house or refinance an existing mortgage.

When compared to standard mortgages, VA loans come with a lot of advantages, including:

  • No down payment: Unlike other mortgage choices, VA loans do not require any type of down payment.
  • Mortgage interest rates are low because VA loans are backed by the US government, which reduces the risk for lenders and allows them to provide lower interest rates than other loans.
  • No Monthly mortgage insurance: Most other loans require mortgage insurance, which is paid on a monthly basis. VA loans do not require mortgage insurance or a down payment, which can save you a lot of money in the long term.
  • The credit score criteria have been relaxed: Credit scores in the upper 600s or low 700s are frequently required for conventional loans. As long as the other standards are met, VA borrowers can have credit ratings significantly lower than this.
  • Costs of closing are limited: The VA sets a cap on how much borrowers can pay in closing costs, considerably decreasing the barrier to homeownership.
  • VA loans have no loan limits, allowing Borrowers to buy larger homes or residences in more expensive areas.
 

VA loan types

Many Veterans are shocked to learn about the variety of financing alternatives available through the VA loan program. Veterans can use their VA loan benefit to not only buy a home, but also to make energy-efficient upgrades, pull equity out of their home, and refinance into a cheaper interest rate.

VA Purchase Loans

Veterans’ purchase loans are one of the most popular types of financing available to them. This form of loan is used by veterans to buy a primary residence.

VA Interest Rate Reduction Refinance Loan (IRRRL)

Veterans who wish to lock in a reduced interest rate or refinance out of an adjustable-rate VA loan might consider VA IRRRL loans, often known as VA Streamline refinances. Only Veterans with active VA debts are eligible for this option. If you are not a service members and need assistance with your mortgage loan consider an FHA loan program with support from the Federal Housing Associations.

VA Cashout Refinance

Veterans who wish to take equity out of their home in exchange for cash might use a VA Cash-Out refinancing. The money from a VA loan might be used to pay off debts, make home improvements, or for an emergency. This option is available to Veterans who want to refinance non-VA mortgages.

VA Energy Efficient Mortgage (EEM)

Veteran homebuyers have the option of using VA EEMs to potentially lower their utility expenditures. Investing in energy-efficient modifications when you buy a house can help you save money on heating, cooling, and other energy-related costs in the long run. Homeowners may be allowed to include energy-efficiency improvements in their loan if they meet certain criteria.

VA home loans benefits

Millions of Veterans, service members, and military families have benefited from the VA home loan benefit program, allowing them to realize their dream of homeownership. As a result, since the Great Recession, the use of VA loans has increased dramatically, and these government-backed loans are undoubtedly one of the greatest mortgage options available today.

Lower Credit Requirements

Because it only oversees the loan program and does not make loans, the Department of Veterans Affairs does not set or enforce credit score minimums. Credit score benchmarks, on the other hand, are used by most VA lenders to estimate a borrower’s likelihood of default.
Credit score criteria vary, but they’re typically lower than those for traditional loans. Veterans don’t need near-perfect credit to secure home financing at moderate interest rates. VA loans are also more forgiving when it comes to bouncing back after a bankruptcy, foreclosure, or short sale.

Limits on closing cost

Fees and closing costs are part of every mortgage, but the VA places restrictions on how much Veterans can be charged for these expenditures. In fact, other parties in the transaction must cover some costs and fees. These measures contribute to the affordability of homeownership for qualified homebuyers. VA borrowers can request that a seller cover all loan-related closing costs as well as up to 4% in concessions, which can include things like prepaid taxes and insurance, paying off collections and judgments, and more.

Minimizes foreclosure

For more than a decade, VA loans have been one of the safest loans available. That’s impressive considering that nearly eight out of ten homebuyers don’t put any money down. For various reasons, including the VA’s residual income criteria, the VA mortgage program has emerged as a safe haven. The VA has also done an outstanding job advocating for Veterans who are in danger of losing their homes, and fighting to guarantee that they remain in their homes.

No down payment

The fact that qualified Veterans can buy without a down payment is by far the most significant benefit of the VA loan. This significant benefit enables Veterans and military members to purchase homes without having to save for years in order to make a traditional lump-sum down payment.

No private mortgage insurance

PMI is a type of insurance that protects lenders in the event of a Borrower default. Many conventional mortgage lenders in Greeville demand applicants to pay private monthly mortgage insurance unless they have a 20% down payment, which is difficult for most people to achieve. Traditional Borrowers will be required to pay this monthly fee until they have accumulated 20% equity in their home.  However, VA loans do not require PMI, which is a significant savings for Veterans.

Lower interest rates

Another significant way the VA loan program saves money for Veterans is that it has the lowest average fixed rates on the market. According to statistics from ICE Mortgage Technology, VA loans have had the lowest average 30-year fixed rate on the market for the past six years. Interest rates on VA loans are typically at least .25% lower than conventional loans. Lower interest rates allow Veterans to save money each month and over the course of their loan.

How to apply for a VA loan – the process

  1. Work with a VA-approved Lender

Remember, not all lenders are equal., VA mortgages can only be issued by Lenders who have been approved by the Department of Veterans Affairs in the United States. Second, although some Lenders focus almost solely on the VA loan program for military clients, others specialize in traditional loans. Using a VA specialized Lender who is familiar with the VA loan process rather than a Lender who only funds a few VA mortgages each year, may result in a smoother and speedier loan process.

  1. Get your Certificate of Eligibility

A knowledgeable lender can assist you in obtaining a Certificate of Eligibility (COE). The COE will show that you meet the VA’s first qualifying requirements. It will also inform the Lender of your entitlement, or the amount that the Department of Veterans Affairs will guarantee on your VA loan. To acquire your COE, you’ll need to provide some information about your military service to your Lender. A COE can usually be obtained promptly online using a Lender’s portal or the VA.gov website’s eBenefits portal. Those servicemembers or surviving spouses who can’t access their COEs online, will have to wait for them to arrive in the mail. A VA Lender or the VA can assist you in finding the best resource for your case.

  1. Find a home and sign a Purchase Agreement

Borrowers frequently enjoy the home search process since it allows them to look at homes they might want to buy. Working with a real estate agent who understands the intricacies of VA loans can help you maximize your advantages. This is because the VA allows the seller to pay certain fees and expenditures (if both you and the seller agree) and a skilled Agent will be aware of this and can assist you in negotiating seller-paid fees. You can proceed with the underwriting process once you have a signed Purchase Agreement.

  1. Finalize Lender Process and Order VA Appraisal

To continue the underwriting process, you’ll need a signed Purchase Contract. The VA appraisal will be ordered once your lender receives the contract. However, the Appraiser must be approved by the VA and on the VA portal. The home being considered for VA financing can only be evaluated by a professional who is certified to do appraisals to VA requirements. The VA Appraiser will ensure that the price you agreed to pay for the house matches the current market value. Another crucial aspect of the VA appraisal is the inspection of the home to ensure that it complies with the VA’s minimum property requirements (VA MPRs). The VA appraisal, on the other hand, does not replace a home inspection, which looks for code violations, flaws, and the overall condition of the property. While many borrowers have heard horror stories about the length of the VA appraisal process, the Department of Veterans Affairs only gives Appraisers 10 days from the time they get the order through completion, unless there are extenuating circumstances. You’ll be busy providing documentation to your VA-approved Lender to demonstrate your capacity to qualify for the loan while you wait for appraisal to be completed. The Underwriter will provide his or her stamp of approval if the home passes the appraisal for valuation and the VA minimum property standards, and the Lender confirms that you qualify for your loan.

  1. Close on your home and get moving

All that’s left to do now is close on the VA loan and move in once the loan closing is complete. The property officially transfers from the previous owner to you at closing. Closing is a step in the loan process that requires you to sign documentation confirm that you understand and agree to the loan’s terms. You must show proof of identity and, if necessary, pay closing costs. You will get the keys to your new house once you’ve signed all of your closing documents.

VA loan eligibility requirements

Most service members are taught that if they stay in the military long enough, they would be eligible for a VA loan. The following are the general service requirements:

  • 181 days active duty during peacetime
  • 90 days active duty during wartime
  • 6 years for Reservists and National Guard members
  • 2 years for regular service members
 

Several military branches may come to mind when most people think of VA loan eligibility. However, did you know that there are seven uniformed branches that offer home finance assistance? These are some of them:

  • Marines
  • Navy
  • Air Force
  • Army
  • National Oceanic Atmospheric Administration (NOAA)
  • Public Health Service (USPHS)
  • Coast Guard
  • Space Force

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After 6 years of service in the Reserve or National Guard, you are eligible for this fantastic perk. A large number of Reservists were called to active duty during the Iraq War. You might be eligible under active duty wartime (90 days or duration ordered) standards if you were. After 6 years of honorable service, you may be discharged or placed on the retired list, or transferred to the Standby or Ready Reserve, or continue to serve in the Selected Reserve.

Spouses play an important role not only in their husbands’, wives’, or partners’ decisions, but also in military decisions. While they may not be serving alongside their spouse, their sacrifice for the greater good can cause anxiety and worry, as well as the unthinkable.

Previously, surviving spouses were only eligible for VA loans if their husband or wife died while on active duty or as a result of a duty-related injury. However, the times have changed. When a veteran dies from any cause, his or her spouse is now entitled to apply for a VA loan if the veteran had a duty-related ailment for a period of time specified by the VA and was eligible for compensation at the time of death. The following are some eligibility requirements:

  • Veterans who died while serving in the military or as a result of a duty-related illness
  • POW or MIA veterans who were disabled and qualified for compensation

During this sad moment, surviving spouses should seriously consider checking with the VA regarding all bereavement benefits.

Other VA loan Eligibility

Did you know that VA loans aren’t just for veterans of the 7 branches of the military and National Guard/Reservists? Several other groups, for example, may be eligible:  

  • Coast Guard Academy
  • West Point
  • Midshipmen
  • Air Force Academy
  • Naval Academy
  • Academy Cadets
  • POW and MIA

VA loan limits 2022

In 2021, the typical VA loan ceiling for most U.S. counties will be $548,250, up from $510,400 in 2020. VA loan limitations for more costly housing markets in the continental United States will rise to $822,375 in 2021, up from $765,600 in 2020. VA loan restrictions are neither a ceiling nor maximum loan amount. Without a down payment, veterans with full entitlement can borrow as much as a lender is prepared to offer them. Veterans who have one or more active VA loans or who have defaulted on a previous VA loan, on the other hand, will be subject to the limitations, which will determine their zero-down buying power in part.

VA loan pros and cons

Pros

  • Higher allowable DTI
  • No down payment
  • No prepayment penalty
  • Multiple refinance options
  • No PMI
  • Better interest rates
  • Credit flexibility
  • VA loans are assumable

Cons

  • Loan could be worth more than the market value.
  • Primary residences only
  • Sellers and agents may not be familiar
  • VA Funding Fee
  • VA Funding Fee increases after first use

 

VA Loan FAQs

Do you need mortgage insurance with a VA loan?

Do VA loans require PMI? No, unlike other loans, you don’t need to worry about private mortgage insurance (PMI). Due to the entitlement, which usually amounts to more than 20 percent of the home’s value, you don’t need to pay PMI on a VA loan.

Why are VA loans so expensive?

One upfront cost that VA loans have is the VA Funding Fee. This is a mandatory charge for all purchase and refinance loans unless the borrower has a service-connected disability. This fee — typically 2.3 percent of the loan amount for first-time buyers — goes straight to the VA and helps keep the program going.

What property type cannot be financed with a VA loan?

Vacant land is a not eligible for VA financing. You can’t use a VA loan to purchase a plot of land, even if you plan to put a home on it one day.

Can you buy land with a VA loan?

Buying land with a VA loan is possible, but it must be done simultaneously with constructing a new home. You can’t use a VA loan to purchase land by itself – even if you intend to build a home later.

Why do some home sellers not like VA loans?

Some of the reasons are VA loans can take longer to close due to Appraisal delays, VA Appraisers will look more closely at the condition of the property and the fees that are requried to be paid by the seller.

Can you pay off VA loan early?

VA loans have no prepayment penalties. You can pay off your mortgage early or make additional payments without fear of being penalized financially.

Can you be a first time home buyer with a VA loan?

Yes, the no down payment option for VA loans are perfect for first-time homebuyers who do not have enough money for a down payment. Most mortgage programs require between 3% and 5% down or more. Borrowers can put as little as zero money down with a VA-guaranteed mortgage.

Can you use VA and FHA?

You can have an FHA loan on one home, and a VA loan on another. Keep in mind that both programs require the home to be your primary residence.

Can I get a VA home loan with a 500 credit score?

Most mortgage companies state you must have at least a 620-660 credit score and proper income to qualify for a VA loan. However, you can get a VA loan with a lower score and higher down payment.

Can I get a VA home loan without a job?

You don’t have to have a job to qualify for a VA mortgage but you do need verifiable income. When applying for a VA loan, you can ask your lender to consider Social Security income, disability income, alimony, child support, annuities and retirement income.

How long does it take to get approved for VA loan?

Typically, 30 to 45 days in sufficient to get approved and close on a VA loan. However, this will vary by lender and even by borrower.

 

Can a convicted felon get a VA loan?

Yes, as long as the entitlement is intact and the income is sufficient to qualify.

What’s the benefit of a VA loan?

The largest benefit of a VA Loan is no down payment for qualified Veterans and active duty military. The second best benefit is no private mortgage insurance.

Is there an age limit on a VA loan?

There is no time limit or “maximum age” on VA loans. As long as a borrower is otherwise qualified, age and time do not play a part in the loan approval process, except where legal minimum age and mental competency are concerned.

Can you be denied for a VA loan?

About 15% of VA loan applications get denied, so if yours isn’t approved, you’re not alone. If you’re denied during the automated underwriting stage, you may be able to seek approval through manual underwriting.

Is it hard to get a VA loan?

If you’re eligible, VA loans are fairly easy to qualify for, since there’s no down payment required, no minimum credit scores, and lenient debt to income requirements.

 

How much can I borrow with a VA loan?

VA Loans are available up to $548,250 in most areas but can exceed $800,000 for single-family homes in high-cost counties. Loan limits don’t apply to all borrowers. Your VA loan limit — or how much you can borrow without making a down payment — is directly based on your entitlement.

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