VA Loans: The Ultimate Veterans Affairs Loan Guide

The VA offers several programs for military personnel looking to purchase, refinance, or improve a home. These loans are provided by private lenders, such as banks and mortgage brokers. The VA guarantees a portion of the loan, enabling the lender to provide you with more favorable terms. Often, these home purchases can be completed without requiring a downpayment or private mortgage insurance.

As a service member, you’ve earned and deserved the ability to use your VA benefits, including those offered through the VA’s home loan programs. Having a better understanding of these programs will help you make the best decision for you.

VA loans are available to veterans and most active-duty members after six months of service. Additionally, spouses of military members who died while on active duty or from a disability caused by their service can qualify.

Members of the reserves and National Guard must wait six years to apply unless called into active duty sooner, in which case they may apply after 181 days. During times of war, this term may be as low as 90 days.

VA home loans can be used to purchase or refinance a single-family home or a condominium. When it comes to buying condos, your choices are more limited than purchasing a single-family home. The VA maintains a list of eligible locations, so your condo will need to be on that list in order to purchase it with a VA loan. The VA provides a Condominium Search Tool for military men and women looking for a smaller home.

There are a couple of key terms you should understand when it comes to getting VA home loans: entitlement and guaranty.

Entitlement refers to how much money the VA will guarantee for an eligible borrower on home loans they might get. Think of it as the VA saying to a lender that you’re good for a specific amount of money because they’re backing you up financially.

The basic entitlement offered by the VA is $36,000. It doesn’t sound like a lot, but lenders typically will approve a mortgage for four times that amount without requiring a down payment. That means you can use the entitlement to purchase a house for $144,000 with no money down as long as you meet credit and income guidelines.

Still, $144,000 doesn’t cover the cost of a home in many places. For homes selling over that amount, the VA will guarantee up to one-quarter of the purchase price up to the local loan limit determined by the Federal Housing Finance Agency for a single-family home. Depending on where you live and the price of real estate, that can put the loan limit up between $417,000 and $625,000.

If the home you want is above that max limit, you’re not totally out of luck. You can still use a VA loan, but you’ll need to make a down payment equal to 25 percent of the excess. For example, if you want to buy a home for $525,000 in an area with a loan limit of $425,000, then you’ll need to make a down payment that is 25% of the difference. The difference is $100,000, so the down payment would be $25,000.

Now, on to the guaranty. That is the amount the VA actually guarantees on a single loan, which remember is 25% of the sale price. So if you purchased a $100,000 home with no money down, the guaranty would be $25,000. It might be helpful to think of the guaranty as taking the place of your down payment in the homebuying equation.

It’s important to remember that the entitlement and guaranty aren’t “free money” that is part of your mortgage. You’ll still be covering 100% of the costs. The VA is just there to provide the financial backing that makes you more favorable to lenders.

There are four types of VA home loan products that may work for you if eligible:

• Purchase loan: This program is for borrowers who want a loan to purchase a single-family home or eligible condo at a competitive interest rate.
• Native American Direct Loan (NADL) program: This program is specifically for Native American veterans or veterans married to a Native American. Loans can be used to buy, build, or improve a home on federal trust land.
• Interest Rate Reduction Refinance Loan (IRRRL): This program (also known as a streamline refinance) is for borrowers who have an existing VA-backed home loan and want to reduce their monthly payments or make them more stable by moving from a loan with an adjustable or variable interest rate to one that’s fixed. You can also refinance a VA adjustable-rate mortgage (ARM) into a fixed-rate mortgage.
• Cash-out refinance loan: This program is for borrowers who want to use their home’s equity to cover expenses such as debt, tuition, and student loans, or home improvements This loan also can be used to refinance a non-VA loan into a VA loan. The VA will guaranty loans up to 100% of the value of your home.

The process of getting a VA home loan to buy a home is similar to that of a traditional mortgage. You’re still meeting with a loan officer to present the aforementioned documents, receiving a pre-approval on a mortgage, meeting with real estate agents to look at homes, and participating in all the other intricacies of the home buying process. Every veteran’s situation is different, so the length of time it takes to get a loan will vary.

When using a VA loan, it’s important to remember that Veterans Affairs will play a role in the process because it wants to ensure any home it is backing with a loan does not have any outstanding issues. Take for example the step of appraising a home. Appraisal means that a certified appraiser visits the home and determines its current worth (not to be confused with the asking price).

Banks require appraisals to ensure the worth of a home is accurate. Traditionally, if you are seeking to buy a home with a $300,000 asking price but the appraisal of its worth comes back at $280,000, you have no recourse to get the price adjusted. If you’re purchasing the home with a VA loan, the VA requires justifications to be given for the discrepancy and can even ask for a second appraisal. You can’t do that with any other loan types. It’s one of the reasons VA loans are an excellent option.

While VA loans have numerous advantages, there are some potential drawbacks that borrowers should be aware of before pursuing these loans.

• Funding fee: In order to ensure future veterans have the same opportunity to use VA loans as their contemporary counterparts, there is a “funding fee” charged with the loan. The cost of the funding fee is generally around 2% of the mortgage amount. However, if you’ve been disabled because of your service, are on active duty pay, or are receiving retirement, you’re exempt from the fee.
• Primary only: VA loans can only be used to purchase or refinance your primary residence, so you can’t use them to buy a vacation home.
• Property restrictions: Not all property types are eligible for VA loans, so do your research when selecting potential homes.

The major differences are in the details. Overall, there are several favorable elements VA home loans have when compared to traditional loans:

• No down payments: The most enticing aspect of a VA loan for most prospective home buyers is that a down payment is not required. Almost every mortgage looks for at least 3.5 to 20% down. Moreover, if you’re on the lower end of that range, you’ll be looking at a pretty significant increase in interest in addition to the cost of purchasing private mortgage insurance (PMI). (Mortgage insurance is a policy from a private mortgage insurance company that protects the mortgage lender against loss due to default or foreclosure.)
• No PMI: Veterans and members of the military can circumvent PMI altogether with VA loans. With PMI prices as high as 1% of a property’s value, potential homeowners would be spending an additional $2,500 a year for a $250,000 home. Going with a VA loan will save you thousands of dollars over traditional loans on this alone.
• No borrowing maximum: There’s no limit on how much you can borrow through a VA loan. However, there are limits on the amount of liability VA can assume, which usually affects the amount of money an institution will lend you.
• No minimum credit score: There’s no minimum credit score, However, a lot of banks do have their own credit score minimums, so keep that in mind.
• Use now and again: With all the benefits of VA loans, you would think there would a limited number of times one could apply for this mortgage option. However, as soon as you pay off your mortgage, you’re eligible to apply for another VA loan. Similarly, if you’ve refinanced your VA loan with another mortgage, your entitlement to another VA loan is restored.

When you get down to the nitty-gritty of applying for a VA home loan, there are other differences you’ll encounter.

To get started, you’ll need to visit a loan officer and have them prequalify you for a mortgage. As part of this step, your loan officer will determine your income by reviewing financial documents as well as verifying your work history to ensure you will be able to pay back the home loan.

A VA loan is much more strict about your work history. For example, let’s say while acting as a member of the military you worked in mechanical operations. If you took a civilian job as a mechanic at a car dealership, you can be qualified for a VA loan based on that income. If you took a position as a bank teller, you will not qualify for a VA loan. The VA wants to ensure that veterans have been in the same line of work for two years when applying, so your civilian job should correlate to your military work experience.

Second, how much you’re qualified for and how that is determined is different from the traditional process. Loan officers look at income and subtract any debts reflected on your credit report (e.g. car loans). This determines the amount you qualify for. When it comes to a VA loan, other costs are factored into calculating your debt-to-income (DTI) ratio. Your debt-to-income ratio is the percentage of your gross monthly income spent on monthly debt payments like rent, credit cards, and student loans.

For a VA loan, other expenditures such as child care and utility bills also are factored into the equation. Both types of expenses are plugged into a residual income calculation, the results of which help determine your eligibility for a VA loan. The term residual income refers to the money left over after all your bills are paid. It’s best, to be honest with your loan officer upfront about your spending, so they have the most accurate information available for determining your loan eligibility.

Lastly, VA loans are a little more lenient when it comes to DTI ratios. Most home buyer loans won’t go above 43 percent. On the other hand, VA loans may be as high as 50 to 60 percent. There is an additional wiggle room in these situations. For example, if you are a veteran who is not currently receiving disability benefits but will in the future, you can factor that income into your DTI ratio. This flexibility allows more veterans to get into homes.

If you’ve decided that using a VA home loan is the best option for you, it’s important to find an experienced loan officer who can help you and keep the process running smoothly so you can move into the home of your dreams.

First, you should know that it’s far more difficult to be disqualified from VA home loans. That said, these mortgages are still borrowed through a private lender, which means there will still be some credit stipulations. However, the VA guidelines don’t have a credit score requirement.

Thanks to the VA’s backing of these home loans, lenders are more apt to consider borrowers with lower credit scores, rockier financial history, and even prior bankruptcy and foreclosure.

But, you’ll still need to meet the VA and your lender’s standards for credit, income, and any other requirements.

In order to check your eligibility for a VA home loan, you’ll need to obtain your DD Form 214, also known as your Certificate of Release or Discharge from Active Duty. You’ll need to present this document to your loan officer in order to receive a Certificate of Eligibility (COE) for a VA home loan (Note: If your loan officer doesn’t ask for this document, that’s a red flag). That COE will tell your loan officer important information such as how much of a loan you are eligible for or if you can use your VA benefits at all.

Presenting the DD Form 214 is a top priority. You don’t want to find out late in the loan process that you cannot purchase the home you want because of something revealed on your certificate of eligibility. You can visit this VA webpage to request your military records.

And good news! Once you’ve received your COE, your entitlement to a VA loan is permanent. Long-time veterans who served decades ago still have the same access to these benefits as younger servicemen and women. Eligibility is based on the time and period served as opposed to how long ago you were on active duty.

As mentioned, every service member’s situation is different. That means how long a VA home loan takes to close will depend on the situation. On average, a VA loan takes from 50 to 55 days to close. This may sound like a long time, but it’s only slightly longer than the average closing time on a conventional mortgage.

The good news is there are steps you can take to help speed up the process:

1. Get your COE early: The earlier the better. This is a document you absolutely need in order to determine your eligibility for a VA loan, so requesting it before you start the buying process is recommended. It’ll help prevent running into roadblocks that could slow down or stop your loan process.
2. Get preapproved: This means visiting with a loan officer and going through the preapproval process. Being preapproved means a loan officer has vetted you as a borrower—including a hard credit check—and issued a Letter of Preapproval that is typically valid for 60 to 90 days. By taking this step before you buy, you should be able to head off any surprises that may have popped up later in the loan process.
3. Get to know the requirements: The VA uses minimum property requirements (MPRs) to ensure the homes purchased through its loan programs are habitable. With this in mind, it’s important to find and work with a real estate agent who has experience in handling VA loans and the associated MPRs. That way, you can avoid major delays by not making an offer on properties with clear MPR violations.

Veterans can use VA loans to refinance their existing mortgage. Remember, there are two types of refinancing offered by the VA: IRRRL and cash-out refinancing.

An IRRRL allows homeowners with an existing VA home loan to lower their rates without a new appraisal, bank statements, or W-2s.

Veteran homeowners without a VA loan also are in luck. The VA cash-out loan is available to eligible veterans who have a different loan option currently. By turning your home’s equity into cash on hand, you can take out a bigger and better loan than you currently have. The difference between your old and new loan is issued to you at closing.

So are you eligible for either? Here are the VA requirements for an IRRR. All of these statements must be true:

• You already have a VA-backed home loan, and
• Are using the IRRRL to refinance your existing VA-backed home loan, and
• Can certify that you currently live in or used to live in the home covered by the loan

Note: If you have a second mortgage on the home, the holder must agree to make your new VA-backed loan the first mortgage.

And here are the requirements for cash-out refinancing. Again, all of these statements must be true:

• You must qualify for a VA-backed home loan Certificate of Eligibility, and
• Meet VA’s—and your lender’s—standards for credit, income, and any other requirements, and
• Will live in the home you’re refinancing with the loan

As with VA loans for purchasing a home, it’s recommended you find a mortgage professional who is familiar with the VA loan process.

The professionals at Co/LAB Lending can help you get answers!