What is a VA Home Loan?
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 home buyers because of the exceptional benefits they offer military borrowers, including lower rates than most traditional banks.
A VA loan is a mortgage guaranteed by the U.S. Department of Veteran Affairs. VA loans are designed to help active duty military and veterans qualify for 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 and 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 2019 being $484,350.
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 service members 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.
Take a look at some quick facts and figures regarding VA home loans.
Certificate of Eligibility (COE)
The COE is 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. Otherwise, you can contact the Veterans Administration directly to obtain the certificate. The VA ultimately determines eligibility, and the COE verifies the duration and character of service that qualifies the borrower for the VA loan as well as 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 26-1180) instead, and mail it in to VA- complete with proof of eligibility
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 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 service members, 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 costs 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.
- Reduced funding fees: You may qualify for a reduced VA funding fee 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.
- 90% 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 requires payment of a Funding 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 2.15% funding fee based on the loan amount. If the borrower puts down 10% or more, the funding fee is reduced to 1.25%. Active-duty members will pay on average around one-quarter of a percentage point less in fees than Reservists or National Guard members.
Anyone using a second VA loan with no down payment would be charged a 3.3% fee.
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 service member who died in the line of duty, or as a result of a service-related disability
Borrowers are usually required to move into their new home no more than 60 days after it is purchased, and it must be used as their primary residence. Some exceptions can be made in certain circumstances.
Borrowers cannot use a VA loan for investment properties or second homes.
VA Home Loan Options
VA mortgage holders may refinance with the VA Interest Rate Reduction Refinance Loan (IRRRL), aka the VA Streamline refinance, and the VA cash out refinance, to lower their interest rate.
For Veterans who currently have a VA Loan, the VA Streamline Refinance offers:
- Simplified refinance process
- Access to a lower rate and monthly mortgage payment
- No need for submitting bank statements, W2s, paychecks and other documents
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.
- VA 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.