Owning a home is everyone’s dream, and service members and veterans are no exception. While serving the country overseas, it is nice to know you have a home to return to. Fortunately, service members and veterans can own a home at better rates through VA loans.
But how do you get a VA loan?
Keep reading to find the answers to this and many more questions about VA loans.
What is a VA Loan?
A VA loan is a particular type of mortgage offered to service members and veterans. Unlike conventional mortgages, there is no need for a down payment or a healthy credit score. The main reason for more relaxed terms is because the Department of Veteran Affairs backs the loans.
To be clear, the VA doesn’t provide the loan. They offer guarantees to private lenders, making it easier for active and retired service members to get a loan. If the individual defaults for whatever reason, the VA reimburses the lender for any losses due to foreclosure.
How Do VA Loans Work?
VA loans are only available to service members and veterans. By backing the loans, the Department of Veteran Affairs reduces the risk that comes with such loans.
As a result, lenders are more willing to offer loans to our service members and veterans.
So How Do VA loans Work?
Well, for starters, you have to be in the armed forces or retired from the forces. However, not everyone who is serving or has served qualifies for these loans.
- The department of veteran affairs determines who qualifies. More on that later.
Due to the government backing, VA loans have lenient requirements.
- Borrowers enjoy lower rates and don’t need a down payment. Once the VA gives you the green light, borrowers can approach VA-approved lenders for a loan.
- The Veteran Affairs usually guarantees a percentage of the home loan. The exact amount depends on your credit, income, and entitlement.
Generally, the VA guarantees up to 25% of the loan amount. If, for some reason, you are unable to pay your loan, the VA takes over that responsibility as the guarantor. They reimburse the lender for any percentage guaranteed.
- Defaulting negatively affects your credit rating. Additionally, your VA entitlement also takes a hit and limits how much you can borrow.
If you have used up all your entitlement, it locks you out of future VA loans. The only way to restore your entitlement is to repay the VA.
Who Qualifies for VA Loans?
While VA loans are meant for service members and veterans, you qualify if you have ever been in the Army, Air Force, Marine Corps, and Coast Guard.
However, this is just an essential requirement. You have to qualify for a certificate of eligibility to take part in the VA loan program.
- Property Type
There are restrictions to the kind of property you can buy with a VA loan. This kind of financing is specifically meant to help service members acquire a home. That means you can’t use a VA loan to buy an investment or vacation property.
Some lenders may also have a problem with some kinds of homes. For instance, you may not get loan approval if you plan to buy a manufactured home. After getting the home, you must live in that house for at least 60 days.
- Credit Score
A credit score is the biggest impediment when applying for a loan. Fortunately, the requirements are pretty low with VA loans. For conventional loans, a credit score of about 700 is considered ideal. With a VA loan, you can get a loan with as little as 580.
That limit may change depending on the lender. The good news is that VA lenders look at more than just the credit score. They look at the whole credit report, including outstanding balances and how late you are on your payments.
- Down Payment and Assets
VA loans are attractive because they generally don’t require a down payment. The backing of the department of defense covers all the risks. However, that guarantee is limited to the service members’ entitlement. Usually, that coverage maxes out at 25% of the loan amount.
The maximum you can borrow without a down payment is $453 100. If you want any more than that, you may have to put up a down payment of your own. Alternatively, you can list your assets as collateral. These assets cover what the VA is not able to guarantee.
- Funding Fee
VA loans are very different from conventional mortgages. However, they are also similar in certain ways. For instance, you can expect to pay some administrative fees along the way. Since the government backs these loans, the funding fees cover taxpayers’ costs.
The funding fees typically range from 2.3% to 3.6%. The exact funding fee depends on factors such as down payment. However, some people are exempted from paying a funding fee. The group include
- Surviving spouse
- Veterans on disability
- Purpleheart recipients
How to Apply for VA Loan
Now that you know what you need to get a VA loan, it’s time to look at the application process. Fortunately, applying for a VA loan isn’t any different from applying for a normal mortgage.
Here is a step-by-step process on how to apply for a loan.
- Get Prequalified
Before you can approach a lender about a loan, you must make sure everything is in order. That journey starts with obtaining a certificate of eligibility (COE).
For that, you will need to provide proof of military service. Your lender can help you acquire a COE faster if you provide your service details.
- Get Pre-approved
Pre-approval is not always necessary but can save you a lot of grief later on. This is when you have an honest discussion about your income, credit rating, and marital status with your lender.
The lender uses these details to determine what kind of house you can afford. It makes it easier to start house hunting.
- Shop for a House
After pre-approval, you have a ball-park range of the property you can afford. Armed with this information, you can now start house hunting. This is the fun part of the entire process.
You get to look at homes you might consider buying. Take your time to find a property you like and within your budget.
- Get VA Appraisal
Once you find a home you like, it’s time to act fast and make an offer. But before you do that, you must first get an appraisal from the lender.
Since they are backing the loan, they need to ensure the home is not overvalued. The appraisals process is much stricter than conventional mortgages.
- Close On the New Home
Once you get the green light from the VA, it is time to close on your new home. Closing involves the legal transfer of ownership from the seller to you.
Signing the documents means you understand and agree to the loan terms. You will need to provide homeowners insurance and cover the closing costs.
You Can Get a VA Loan!
Hopefully, this article answers all your questions about VA loans. If you have served your country, getting a VA loan is an easier way to owning a home.
However, not all service members qualify for a VA loan. Find an approved lender and have an honest discussion about your situation.