We are forever grateful to the members of the US military. They work extremely hard in dangerous situations. It takes a different level of courage to be ready to sacrifice your life so that others can sleep in peace at night. As a token of appreciation for their sacrifice, the US government has designed various programs to help them out physically, mentally, and financially.
One of those programs is the VA loans. The VA loan program is administered by the US Department of Veteran Affairs. It was previously known as the Veterans Administration. The primary goal of this loan program is to help the veterans and service members get their own homes. The spouses of the deceased members also come under the criteria.
In some of our previous posts, we’ve covered the FHA loan and the conventional loan. These are the two major branches when it comes to housing loans in the country. But it can often be hard for veterans and other members of the US military to qualify. Because they are busy keeping us safe instead of saving their credit score.
In this post, we’re going to go deep into the VA loans. We’ll learn how it works, what benefits you can get, and what are the requirements to get approved for one.
What are VA Loans?
One of the biggest differences between VA loans and other types of loans is the down payment. In general, you won’t need to put any money upfront to get your dream home. The loan is processed and disbursed by private lenders like banks or mortgage companies as usual. The difference is that they’re backed by the Department of Veterans Affairs (VA).
It first came to light back in 1944. The returning service members from world war 2 could buy houses without putting up any down payment. An excellent credit was also out of the question because the members didn’t have the time or opportunity to improve their scores.
Over 25 million VA loans were processed at that time which is a phenomenal number no matter how you look at it.
Fast forward to today, VA loans are still equally important because the US military is scattered all over the world to maintain peace. There’s no doubt that the program is specially catered to the service members. But the requirements and the proceedings are more or less the same as other loan programs.
We’ll be breaking down different types of VA loans and their requirements. However, just as it is with other loans, VA loans vary from state to state. So, after you’re done with our initial guide, you should visit a Veterans United Home Loans specialist in your local area.
How Does a VA Loan Work?
VA loans are very much different than conventional loans. You can compare with FHA loans for easier understanding. But still, those are two different loan programs.
The first thing you need to understand is that the Department of Veteran Affairs isn’t giving you the loan. They’re just guaranteeing the loan on behalf of you to the private lenders.
In this regard, the comparison with the FHA loans stands. Because an FHA loan is backed by the Federal Housing Administration and processed by private lenders. But FHA still fails to get you a $0 down payment deal which you can get with VA loans.
What Makes VA Loans Superior?
As we’ve said earlier, VA loans are easier to handle for service members. Also, there are various benefits to it when compared to other programs. Here is a list of things that other educational content may not have told you.
VA Loans Works for a Certain Type of Property
Just like FHA loans, VA loan approvals require the property to meet certain criteria. Under construction properties, properties that require a lot of repair work, or farmhouses usually don’t get approved for this loan.
The VA loan program is designed for properties that are ready to move in. You get the loan, you complete the paperwork and you move in immediately.
It Works for Only Primary Residences
If you’re thinking about using this loan as an investment opportunity, it’s not for you. VA loans are only approved when you apply to buy your primary residence. If you own any other houses, the authorities won’t give you the money.
However, there are loopholes in the system. You can use the money to buy duplex properties or multi-units that you can later sell or rent out. But the condition is that you must live in one of those units or floors.
You Can Get Approved More than Once
As long you pay off your previous VA loan, you can start from scratch again. However, if you lose your previous home to a foreclosure, you may be able to get approved for another. You’ll need to show extensive reasoning to the lending companies about why it happened in the first place.
The same goes for bankruptcy. If you go bankrupt and lose your property because you didn’t manage to pay for your mortgage, you’ll be eligible for another VA loan. Similar to foreclosure, you’ll need to provide adequate documentation and reasoning to justify your point.
There is a VA Funding Fee
You’ll learn in an upcoming section that VA loans are free from any kind of mortgage insurances. However, you’ll need to pay a mandatory fee once you get approved. It’s known as the VA funding fee.
While the interest goes to the private lenders who gave you the loan, the funding fee goes directly to the VA program. It ensures that the program is sustainable and can help hundreds of other veterans like you.
In general, the VA funding fee is 2.3% of the price you’re paying for the home. After the first time, the VA funding fee increases to 3.6%. If you want, you can roll the funding fee into your total loan amount and pay it with your installments.
When we’re talking about a special loan program like the VA, it’s not wise to jump on any concrete decision. Depending on the evaluation of the VA, you may get relieved from the funding fee entirely. It happens more often when a surviving spouse is taking out the loan.
There are No Limits
This is probably the biggest advantage of VA loans over any other kind of loan. There is no limit to how much you borrow! As long as the lender and you agree on the terms, you may be able to get a $1 million loan under the program. All that with no down payment requirements!
It is beneficial because FHA loans, conventional loans, Jumbo loans, etc. all are limited to how far the ceiling value can go. For FHA, the limit hovers somewhere around $350,000 and for conventional, it’s around $548,000!
However, the limits will vary based on the living cost of the area in question. The same is true for VA loans.
No Prepayment Penalty
The only reason private lenders are approving you for loans is the interest rates. So, when you decide to pay the rest of a loan before it’s time, they slap you with a prepayment penalty. It’s true for almost all regular loan schemes.
But not with VA. You can make larger payments any time you want, without paying anything extra!
Different Types of VA Loans
Just like there are various types of FHA loans and conventional loans, there are certain types of VA loans as well. In this section, we’re going to briefly go over them to have a better understanding of the entire program.
VA Purchase Loan
It’s as simple as the name suggests. Military veterans or their surviving spouses can purchase an existing home with this loan. The details will vary from lender to lender and from area to area. But it’s safe to say that this is the most straightforward form that housing loan service members can get!
VA Cash-Out Refinance
Both VA loan holders and non-holders can take out this loan. It allows the applicant to cash out from their equity while the loan is still active. In general, you stand a chance to receive refinancing up to 90% of your home’s market value!
The name of this loan might look like a typo to you, but it’s not. It stands for VA Interest Rate Reduction Refinance Loan. It offers two different refinance options and typically VA IRRRL is the first choice for the majority of the potential homeowners.
If you’ve heard about VA Streamlines while doing your initial research somewhere, they’re most likely referring to VA IRRRL. This loan applies to the service members who already have a VA loan active. The new interest rate will usually be lower than your previous rate.
VA Energy Efficient Mortgage
It’s basically the same as it is with FHA or other conventional loans. You can ask for additional money to do energy efficiency upgrades to your property. You just need to make sure that the upgrades are permanent in nature. It means no AC but it can be a thermal window.
The Difference Between VA Loans and Other Types of Loans
As VA loans are in a different category of loans, it’s obvious that there are many differences between the regular loan programs and this one. In this section, we’re going to find the differences between them.
We’ve already mentioned once that you can get away with a 0% down payment in VA loans. It’s one of the biggest difference with other loans. Whether you’re talking about an FHA loan or a conventional loan, the lender will never approve 100% of the property’s price!
For FHA, you can get as low as 3.5%. And for most conventional loans, the margin hovers around 20%.
No Private Mortgage Insurance Whatsoever
It’s another big difference between VA loans and other types of loans. For FHA loans, you must take on a PMI. If you’re putting more down payment, you get released from the insurance after about 11 years. If you don’t, you pay the premiums for the life of the loan.
As for conventional loans, you may or may not have to take a mortgage insurance policy. It’ll depend on the regulations of your local area and how your credit score, DTI, and other qualifications are.
But with VA loans, there is no PMI. You take out the loan and pay the installments along with monthly interests. Nothing else.
Very Good Interest Rates
According to Ellie Mae, VA loans have the most competitive interest rates when compared to all other loan programs. Sure, there are other programs that might offer similar rates, but they often come at a cost.
The cost is that you need to have spectacular credit scores, a very good DTI (debt to income) ratio, and spotless employment history. With VA loans, you need none of it.
How to Get a VA Loan
By now, you should have a very good idea of how the VA loan works. And we believe it’s safe to say you’re quite intrigued to apply for one, thanks to the added benefits.
So, how do you get started on the process? Let’s find out!
The first stage of getting a VA loan is to get preapproved. It shows the sellers that you’re serious about your decision. And it also helps you get in tune with your purchasing powers.
You need to go to your local VA loan provider and speak about the credit score requirement first. Due to the demanding nature of a veteran’s career, credit score cutoffs happen all the time.
The usual range starts at 620 minimum. There are some lenders that’ll approve you for even lower but you’ll lose some of the benefits in the process. If you have 640 or up, it’s all that better!
After you meet the lender’s benchmark value, you’ll be asked to provide documentation to prove your identity, service history, current income, etc.
Some common documents would be your driver’s license, DD-214 or Reserve/Guard points statements, an additional statement if you’re on active duty, recent pay stubs along with W-2s for two years, disability award letters (if any), and recent bank statements.
Preapprovals have become immensely popular among sellers because it increases the chance of a deal going through. We’ve seen cases where sellers refused a direct offer because the buyer didn’t have preapproval.
All of the processes and steps you’ve followed so far will result in the final outcome, the preapproval letter. Once a loan officer goes over your documents and double-checks your current financial status, you’ll get the preapproval letter.
Find the House
Once you get your preapproval ready, it’s time for the most exciting part! You’re going to go out into the market and find your dream home. The fact that you have your preapproval ready will allow you to make offers on the go!
As you know that only a certain type of property qualifies for VA loans, it’s somewhat necessary that you have a real estate agent who knows the criteria. You can always wing it yourself but when it comes to VA, it’s not wise to go based on assumptions.
So, make sure that you have a real estate agent who understands the VA criteria in your local area very well. It may cost you a substantial amount for the commission, but you’ll know that you’re in good hands.
If you’re not sure where to get the perfect agent for you, you can check out Veterans United. They work toward the goal of connecting prospective buyers and sellers who are willing to work under the VA loan criteria.
Existing single-family homes, multi-unit properties, condos, modular houses, etc. properties get approved fairly easily. This is ensured via the VA appraisal process. An officer checks out different properties and marks them whether they’re appropriate for the loan or not.
If you find a property that you like and meets all the requirements, make an offer to the seller and see how they respond. We’ve got an entire guide on how to make an offer in a seller’s market. You should check it out before you go house hunting.
If he/she agrees, it’s time to get the contract ready.
Getting the Contract Ready
You’ll need all the help you can gather for this section. Your loan officer and your real estate agent will play the two major roles in getting you ready. To make the perfect offer, your real estate agent will compare the value of the surrounding properties.
Also, it’s important that you talk to both your agent and your loan officer about the closing costs. With traditional loans, the closings costs are taken care of by the buyer. But when it comes to VA loans, your loan officer can get you a better deal where the seller will take care of closing costs. At least the majority of it.
Although you may not need it, but it’s always good to have the property inspected. The VA appraisal will give you an idea of the condition of the property, but it’s not as thorough as a dedicated home inspection.
The benefit of a VA contract is that veterans get more security for their earnest money. If the home inspection returns a lower value than the appraisal, a contingency of the VA contracts allows the buyer to back off from the deal. If they put in any earnest money prior to the inspection, they’ll get it back.
After the initial documentation is done, it would be time for underwriting.
Underwriting VA Loans
The moment you solidify a contract and send it to your loan officer, the underwriting stage begins. The loan processors send the contract to the Department of Veteran Affairs. The department will then assign an independent appraiser who’ll go out and prepare a detailed report on the condition of the property.
You, the seller, the Department of Veteran Affairs, or the lending company. No one has a say in how the appraiser does his/her job. The timeline, the parameters, and the reports are all independent.
Usually, the buyer needs to pay the appraiser fee upfront. Some lenders may allow you to reimburse the amount with your total loan amount.
After the appraisal comes in, you need to see whether it surpassed the offer you made or not. It can be equal to the offer as well. But if the appraisal falls short in value, you need to renegotiate with the seller about the price of the property. It’s one of the regulations the VA loans have in place to protect your money.
The final step in getting the loan is to close it. As a buyer, you’ll receive a closing disclosure. This is the documentation that you need to compare your final closing costs!
The loan officer will be present while you review this document. If you have any questions, make sure that you ask them thoroughly and clearly. You won’t get a better chance to clarify any confusion after this step.
This is also the step where you undergo severe scrutiny for the last time. The lenders will cross-examine your employment history, your credit scores, your DTI, and all other relevant documents.
One important tip we can share with you is not to take any new loan or try any investments once you’re in the process of getting approved for a VA loan. It can disrupt the trust lenders have put into you.
Lastly, make sure that you’re present on time on the designated day and sign the final paperwork.
Congratulations! You’ve just received your VA loan to buy your dream house!
VA loans are probably the best kind of housing loan out there. It’s fairly easy to qualify if you’re a veteran and the interest rates are very competitive despite the fact that there are no insurances involved.
Also, there are no limits to how much you can ask for. The better you manage your finances prior to the years of applying for the loan, the better interest rates and higher amounts you can receive.
The bottom line is that if you have the chance, go for VA loans over any other loans available. Sure, it limits your options in terms of the actual properties. But you get a lot of slack to live a better life!