What is a VA Home Loan?
A VA loan is a mortgage guaranteed by the United States Department of Veterans Affairs. VA loans were created in 1944 as a benefit for people who served in the military. VA loans are designed to help active-duty military and veterans achieve the American dream of homeownership. They offer lower interest rates and better terms than Conventional mortgages and are offered exclusively to service members and certain military spouses.
VA home loans are issued by private lenders such as banks and mortgage companies. They are guaranteed against default in case the borrower or a future owner is unable to repay the loan. The VA guarantee is usually up to a quarter of the total loan amount, with the current maximum conforming loan amount in 2022 being $647,200.
VA home loans can be used to refinance an existing mortgage with either the IRRRL Streamline Refinance or a Cash-Out Refinance. VA loans are one of the most popular choices among eligible first-time homebuyers because of the exceptional benefits they offer military borrowers.
Take a look at some quick facts and figures regarding VA home loans.
VA Home Loan Benefits
Since VA loans are guaranteed by the government, VA loans provide access to special benefits, including:
- No down payment required: For many servicemembers, this is the most attractive feature of a VA loan. You can become a homeowner without having to save for a down payment.
- Lower interest rates: VA loans typically offer interest rates well below those of Conventional loans.
- No monthly mortgage insurance premiums: MI payments can cost borrowers hundreds every month, an expense you'll never have with a VA loan.
- No prepayment penalty: With a VA loan, you can sell or refinance at any time without having to pay a penalty. However, there are different rules on cash-out refinances, including that the borrower must have six months of payments on their existing mortgage prior to refinancing.
- Reduced funding fees: You may qualify for a reduced VA funding fee on a purchase mortgage or exemption from VA funding fees for Veterans receiving service-connected disability compensation.
- Ability to finance the VA funding fee: The funding fee can be rolled into the entire loan amount.
- Less than perfect credit usually accepted: You don't need to have perfect credit to qualify for a VA loan.
- Up to 100% Cash-Out Refinance, including the funding fee: Use your home's value and pull cash out to pay off debt, make repairs to your home, remodel, or spend any way you wish.
- VA assistance to borrowers experiencing certain financial difficulties
VA Home Loan Eligibility
According to the United States Department of Veteran Affairs, there are several eligibility requirements to qualify for a VA home loan. The borrower must have a Certificate of Eligibility (COE), good credit, and sufficient income.
The COE may be obtained if a service member has been honorably discharged and meets a minimum of two service requirements. These requirements fall under qualifying wartime and peacetime periods, the dates of active duty, and minimum service.
U.S. citizens who served in the following organizations may also qualify:
- Armed forces of a U.S. ally during World War II
- Air Force
- Coast Guard Academy
- Public health service officers
- U.S. Military cadets
- Midshipmen of the U.S. Naval Academy
- National Oceanic and Atmospheric Administration officers
- Merchant seaman who served in World War II
Spouses of veterans may apply for a VA home loan if they meet specific requirements. If a spouse's partner is missing, a prisoner of war, or if remarriage has not occurred after a service-induced disability or death, they may qualify for a VA loan.
A spouse that remarries after first reaching the age of 57 may also apply for a VA loan.
VA Home Loan Requirements
VA loan eligibility typically requires one of the following:
- 90 days of service during wartime
- 181 continuous days of active service during peacetime
- 6 or more years of service in the National Guard or Reserves
- Being the un-remarried, surviving spouse of a servicemember who died in the line of duty, or as a result of a service-related disability
In addition to eligibility requirements, VA loans also require:
- Payment of a Funding Fee. This fee can vary depending on the amount of the down payment and military category. For example, someone trying to obtain a VA loan for the first time who puts no money down will be assessed a 2.3% funding fee based on the loan amount. If the borrower puts down between 5% to 9.99%, the funding fee is 1.65%. If their down payment is 10% or more, the funding fee is reduced to 1.4%. Anyone using a second VA loan with no down payment would be charged a 3.6% fee. For borrowers on their second VA loan who are putting down between 5% and 9.99%, their funding fee will still be 1.65%. If they are putting down 10% or more, the funding fee will still be 1.4%.
- Borrowers are usually required to move into their new home no more than 60 days after it is purchased. Some exceptions can be made in certain circumstances.
- VA loans must be used for a primary residence. They cannot be used for investment homes or second homes.
Types of VA Loans
VA Streamline Refinance Loan
VA mortgage holders may refinance with the VA Interest Rate Reduction Refinance Loan (IRRRL), also known as the VA Streamline refinance.
- The VA Streamline refinance loan can be a good choice for veterans who already have a VA loan
- Simplified refinance process
- Access to a lower rate and monthly mortgage payment
- No need to submit bank statements, W2s, paychecks and other documents
- Can stabilize your monthly mortgage payment
VA Purchase Loan
VA Purchase loans with a fixed rate are great for borrowers looking for a consistent payment for the life of the loan.
An Adjustable-Rate Mortgage can be ideal for military borrowers looking to take advantage of the upfront savings offered in an ARM loan. For example, borrowers who expect to receive PCS orders within 5 years may consider a 5/1 VA ARM.
- Can be used to buy or build a home
- Can be used to make your home more energy efficient
VA Cash-Out Refinance
The VA Cash-Out Refinance allows borrowers to pull cash out of their home's equity, even if they are currently in another type of loan like FHA or USDA.
- Refinance up to 100% of the value of your house for loans that meet the Conforming loan limit
- Can be used to refinance a non-VA loan
- The cash can be used for many things including paying off debt, paying for tuition, or buying an investment property
- Good choice for borrowers who have wealth tied up in their home and would like cash assets
- Must meet VA loan seasoning and Net Tangible Benefit Requirements
VA Energy Efficient Mortgage
A VA Energy Efficient Mortgage is designed to help you update your home with energy efficient improvements such as adding solar panels or installing insulation.
- Can be used together with other VA loans
- There are multiple tiers of EEMs, but the maximum amount is limited to $6,000
VA Native American Direct Loan
The Native American Direct Loan or NADL is specifically designed for Native American veterans or veterans whose spouses are Native American.
- Offers the same benefits as other VA Loan such as no down payment, no premium mortgage insurance, and reusability
- Direct lending by the VA
- Can be used to build your own home, buy a new one, or for home repairs on property on federal trust land
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How to Apply for a VA Loan
- Apply for a Certificate of Eligibility (COE). This certificate is the document that verifies your eligibility status for a VA loan. Your licensed mortgage specialist will help you gather the necessary forms. The information you will need will include information about your personal identity as well as details of your military service.
- Work with a mortgage specialist to ensure you qualify for the best home loan available for your specific needs. There are several different types of VA loans. Your lender will help you choose which one is right for you.
- Your lender will refer you to a Real Estate Agent in their preferred network to find and negotiate a purchase agreement for your new home.
- Your lender will take care of the home appraisal process for you, ordering a property appraisal from a VA-assigned appraiser.
- If your lender is authorized by the VA to approve and close your loan, you won't have to wait for separate VA approval of your credit application.
- Loan closing. You are now a homeowner.
A VA Loan vs a Traditional Mortgage
Unlike traditional mortgages, VA loans do not require any down payment. Borrowers also do not have to pay private mortgage insurance. For a traditional mortgage, PMI is required for anyone who puts less than 20% down on a home. VA loans also often have lower interest rates than traditional mortgages because they are backed by the government.
Basic Allowance for Housing (BAH)
The Basic Allowance for Housing, or BAH, is a military entitlement given to active-duty personnel to provide housing for themselves and their families. The BAH is calculated according to location and pay grade, and the allowance is designed to provide servicemembers housing compensation equitable to local civilian housing markets.
The BAH can be used toward rent or a mortgage, allowing you to build equity in your home, even if you don’t have a down payment to get started.
What is a Certificate of Eligibility (COE)?
Depending on the VA loan type, a COE may be required in order to move the loan process through the steps toward funding. Once you've contacted a Loan Officer, obtaining the COE can be taken care of on your behalf. You can also contact the Department of Veterans Affairs directly to get the certificate digitally or by mail.
The VA ultimately determines eligibility. The COE verifies the duration and character of service that qualifies the borrower for the VA loan. It also factors into the calculation of their Funding Fee.
How do I apply for a COE?
- Request a COE from your lender who will have access to a database that can quickly obtain the COE for you
- Apply for a COE via the VA website
- Complete the Request for Certificate of Eligibility (VA Form 26-1880) instead, and mail it into the VA - complete with proof of eligibility
Different types of documentation will be required depending on whether you are active duty or have been discharged. Some of the information required will be personal identifying information as well as details of service.
As soon as you qualify for a COE you can begin looking for a home loan. You will still need to meet lender requirements in terms of income verification, credit score, and debt-to-income ratio, however.
VA Loan FAQs
How many times can I use a VA Loan?
Once you are eligible for a VA loan, that eligibility lasts the rest of your life. How many times you can use your VA loan and what you can use it for depends on your degree of entitlement. The amount of your entitlement depends on the terms of your individual loan agreement.
What is a VA Loan Entitlement?
A VA loan entitlement is the amount for which the borrower's VA loan is guaranteed to their lender in the event of the borrower defaulting on their mortgage.
Can I Take Out More Than One VA Loan?
A VA loan is meant for purchasing a primary residence. However, a simultaneous VA loan, sometimes referred to as a second-tier entitlement, can be taken out for a second primary residence under specific circumstances. A Permanent Change of Station (PCS) is an example of such a circumstance.
What Are the Borrowing Limits on a VA Loan?
There will be no maximum loan amounts on VA loans in 2022 for eligible borrowers with full loan entitlements. However, according to the Department of Veterans Affairs, those with remaining entitlements have a VA loan limit based on the county loan limit where they live.
Can I Refinance a VA Loan?
Yes, borrowers can refinance a VA loan. VA loans can be refinanced as either VA Cash-Out Refinance Loans or VA Interest Rate Reduction Refinance Loans (IRRRL).
Find out more about VA home loans and refinancing to see what options are right for you.
Can I refinance my FHA loan to a VA loan?
Yes, refinancing from an FHA loan to a VA loan is possible. It may be advantageous to refinance if you can get a lower interest rate or if you are concerned about changes in property values.
Can I Apply for a VA Loan if I Have Defaulted on a Previous VA Loan?
It is possible for borrowers to apply for another VA loan even if they have defaulted on a previous loan, although their VA entitlement may be reduced. There may also be a required waiting period for a VA loan following a foreclosure, but the waiting period is significantly lower for VA loans (2 years) than Conventional loans (7 years).
Is the Surviving Spouse of a Deceased Veteran Eligible for a VA Home Loan?
Surviving spouses are eligible for a VA home loan. However, their spouses must have died as a result of their military service or due to injuries sustained while in the service. They must also have not remarried.
Do VA Loans have a PMI?
VA loans do not require private mortgage insurance. This is one of the things that sets them apart from other loans like FHA and Conventional loans.
How can I avoid closing costs with a VA loan?
VA loans allow the option for the seller to pay some, or all of the closing costs associated with a VA loan. They also place limits on the amount of closing costs you are expected to pay.