VA Loans: What Veterans Should Know
As a prospective homebuyer or current homeowner, you may have heard of a VA loan during the process. This can be a great option if you meet the eligibility requirements, but it can be a bit of a confusing financial product as well. Keep reading to understand more about VA loans and if one may be right for you.
What is a VA Loan?
A VA loan is a zero down mortgage that is available to Veterans, current Service Members, and certain military spouses. Lenders including mortgage companies and banks distribute this type of home loan.
VA loans are partially guaranteed by the United States Department of Veterans Affairs (VA)), similar to how FHA loans are backed by the Federal Housing Administration and USDA home loans are insured by the U.S. Department of Agriculture.
Created in 1944 by the federal government, the purpose of VA home loans has always been to help service members, both current and former, purchase houses without the usual necessary qualifications like a considerable down payment and strong credit.
And, as mortgage-lending practices have tightened down due to experiences from the 2008-2009 Financial Crisis, VA loans have recently become of great value to those who have served in our armed forces and their families that are trying to become first-time homebuyers but otherwise wouldn’t qualify.
It is important to remember that the VA is not financing this type of mortgage, but rather only insuring the private home loan lender up to a certain amount of the total loan. There are a number of benefits that come with VA home loans, let’s get into them.
Benefits of VA Loans
There are numerous benefits attached to VA loans, including:
Eligible VA loan borrowers can finance the home’s total value without paying a single cent for a down payment.
With VA loans, there is no private mortgage insurance (PMI) that is required on conventional mortgages where the down payment is less than 20%. This benefit is possible because the VA is insuring the private mortgage lender.
VA home loan limits are greater than usual due to VA entitlements, which is usually 25% of the total loan minus basic entitlement.
Lending requirements in terms of credit score and income are quite lenient.
Qualification Requirements For a VA Loan
Since VA loans are catered to a specific group of homebuyers, the loan requirements are quite unique, and include the following:
- Members of the regular military, Reserves, National Guard, or a veteran are usually eligible. Further, spouses of military members that either died on duty or later on due to their service are also eligible.
- During wartime, a military member served 90 consecutive days of active service.
- During peacetime, a military member served 181 days of active service.
- Someone that has been an active member of either the Reserves or National Guard for at least six years.
- There is no income threshold for homebuyers, but rather they must prove that they have reliable, recurring income to meet monthly payments and other major expenses.
How to Apply For a VA Loan Certificate of Eligibility
Before applying for a VA home loan, you will have to prove your eligibility through acquiring a VA loan Certificate of Eligibility (COE). To acquire a COE, you must first meet one of the service qualifications listed above, and then apply through one of the following methods:
Understanding VA Funding Fees
It is true that VA loan costs are typically lower than most other types of mortgages, but this type of home loan will come with a one-time funding fee that offsets taxpayer costs because VA loans don’t require PMI or a down payment.
The size of the VA funding fee will depend on the size of the down payment and the military category of the homebuyer. For example, those in the Reserves or National Guard will usually pay about a quarter of a percentage point more in funding fees than would active-duty service members.
If a first-time homebuyer serving in the military uses a VA loan for the first time and puts no money down, the funding fee would probably be 2.15% of the total loan. If they put 10% down on the total mortgage, the funding fee would drop to 1.25%.
Using a VA loan for the second time usually results in a larger funding fee than when you utilized this type of mortgage initially.
Applying For a VA Loan
After getting your VA loan certificate of eligibility, you are ready to apply for a VA home loan. Only certain lenders will provide VA loans, and you can find these financial institutions on the VA website.
Once you compare some different VA loan lenders and feel comfortable in your knowledge of the financial product, apply for a VA home loan directly through the lender.
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