A Helpful Guide to VA Loans
If you are an active serviceperson, veteran, or surviving spouse, you may be eligible for VA home loans from a qualified lender. VA home loans have been a benefit for current and former members of the military since the end of World War II, and this government-backed loan has helped generations of veterans and their families become homeowners. VA loans are marked by key characteristics such as the option for a $0 down payment, lower interest rates, and no need for mortgage insurance.
While there are some drawbacks, let’s take a look at the ways VA home loans can serve those who have served, and what exactly you need in order to take advantage of this benefit.
First Things First: Certificate of Eligibility
The first thing you’ll need to do is get a Certificate of Eligibility (or COE) from the VA. Not everyone who has been in the military is eligible for a VA loan, and lenders will require a COE as a baseline in order to apply.
Some potential markers of eligibility are:
- A veteran who served 90 days of active duty in a warzone
- An active-duty service member who has served 181 days in peacetime
- A National Guard or Army Reserve member who served 6 years
- A regular service member who served 2 years
- The spouse of a service member who died on active duty, is MIA, or is being held as a POW
Keep in mind that this is by no means an exhaustive list, but if any of the above apply to you, you may be able to get your COE and begin the process of purchasing a home through a VA mortgage.
However, remember that your COE only establishes your eligibility for the program as far as the VA is concerned. In the end, you will still get your VA loan from a bank or other private lender that is working with the VA, and each one will have their own requirements that you must meet to be considered for a loan.
Lenders Set Their Rates and Requirements
Once you have your COE, the process of finding a VA loan and lender is much the same as finding any other loan. While the government backs VA loans, individual lenders will set their own interest rates, requirements, and any perks they are offering. These requirements will generally be less strict, and their interest rates will typically be lower than for conventional mortgages, but you may still need to shop around to find the best deal for you. Likewise, if you have a poor credit score or your debt-to-income ratio (DTI) isn’t exactly stellar, you may not be approved by every lender you want to work with.
Keep in mind that even if a lender will work with you—and VA-friendly lenders are usually more forgiving as the loan is supported by the government to offset risks—your credit score and DTI might mean a higher interest rate. On the flipside, if you are an otherwise excellent candidate, lenders may throw in special bonuses and make sure you have access to the most competitive interest rate to secure your business.
Find a Lender, Find a House
When buying a house, it’s important to—well—find a house to buy. You’ll want to locate a house that is:
- structurally sound
- has enough space for all inhabitants
- on sale at a fair market value
Since the VA loan program is intended to help current and former service members secure housing, the program is not intended to help you purchase a fixer-upper or vacation home, and cannot be used that way.
In order to ensure this, the VA requires you to get a specialized appraisal from a VA-approved appraiser, who will be able to confirm that the property is appropriate for you and your family according to the standards in place. These appraisals are typically somewhat harsher than they would be for a conventional mortgage application. If you do your research ahead of time, it should be okay. However, some applicants can get a surprise if the property they are looking at doesn’t pass muster.
The Downside of $0 Down
One of the things that makes VA home loans so accessible to so many veterans is the possibility of purchasing a home without needing to put forward a down payment. One of the most difficult aspects of home purchase is having enough money available not just to put 20% down on a home, but to have six months of savings afterwards. While many are interested in becoming homebuyers, this is often a significant barrier, and the VA loan program helps to alleviate that. Unlike FHA loans, which also have the option of $0 down, in most cases VA loans do not require you to purchase mortgage insurance to compensate for the lack of a down payment.
However, if you are able, you may want to consider paying a small down payment. This will lower your funding fee and save you money in the long run. Remember: any money paid upfront is money you aren’t paying interest on later.
Funding Fee & Closing Costs
As with most loans, once everything else is settled, you will need to contend with the closing costs. Among these is the funding fee, which is a price paid by VA home loan borrowers to help keep the program affordable for taxpayers. This funding fee can be anywhere from 0%-3% of the total cost of your loan. How much money you put down and other factors—such as the length of your service—will determine what you end up paying.
If you are short on upfront capital, the funding fee can be financed as part of the total cost of the loan, but keep in mind that this means you will be paying interest on it over the life of the loan. It is generally accepted that if you can pay the funding fee at closing, you should.
After the Starter Home: VA Refinance Loans & Purchasing a New Residence
Sometimes, circumstances change down the road. Interest rates fluctuate, and as you pay off your debts your credit score may improve. If you reach a point where it becomes advantageous to consider refinance, you have the option of taking out a VA refinance loan. Possible benefits of VA refinance loans (depending on your goals) include:
- Lower interest rate
- Lower monthly payments
- Shortened loan term
- More favorable terms
Lastly, while a VA home loan cannot be used to purchase a second home or vacation home, if you sell your current primary residence with the intent to purchase another primary residence, you can take advantage of the VA home loan program as many times as you need to. This means the VA loans program makes it easier for veterans to not only purchase their first home, but also upgrade as their circumstances change.