Understanding VA Loan: Complete Guide on What It Is & How It Works
If you’re actively serving in the military or are a military veteran, you are eligible for a VA loan to finance your new home. VA loans offer many benefits over other types of mortgages available in the market.
If you are unsure how a VA loan works or have questions related to a VA loan, you’re at the right place. This article will discuss some of the advantages and disadvantages of a VA mortgage, helping you make an informed decision.
What is a VA Loan?
VA loan is similar to the usual mortgage, with the only difference being that it’s guaranteed by the U.S. Department of Veterans Affairs. The mortgage you get would be from a private lender only, but the Department of Veteran Affairs will become the loan’s guarantor and back the loan, making it easier for you to qualify and get the loan.
How does a VA Loan Work?
Once you apply for a VA loan and qualify for it, you’ll receive what’s termed “entitlement.” The ‘entitlement’ is the amount the U.S. Department of Veteran Affairs guarantees in case you become insolvent and go into default. However, the private lenders would often let you borrow more than the ‘entitled’ amount, typically going up to four times the entitlement.
The guarantee by the Department of Veteran Affairs works as a sign of trust and supports your application as a veteran to get the mortgage quickly and at easier terms.
Types of Entitlement
There are two types of entitlement:
- - Basic Entitlement – this is $36,000 or 25 percent of the mortgage amount, whichever is lower.
- - Bonus Entitlement – this is 25 percent of the loan limited standardized by the Federal Housing Finance Agency, minus the basic entitlement. For the majority of the United States, the limit is $510,400. So, the 25 percent of that amount comes to $127,600, and subtracting the Basic Entitlement ($36,000) from it leaves you with $91,600, which is the maximum amount of bonus entitlement you can possibly get.
If the basic entitlement amount is insufficient to buy you the home you’re looking for, you can combine both the bonus and the basic entitlement amount to get a higher mortgage.
It’s important to remember that you’re typically allowed to borrow amounts four times the entitlement amount. The basic entitlement provides you with a mortgage of $144,000, but that might not be sufficient to buy a home in some of the more expensive areas of the country.
When this is the case, combine your basic and bonus entitlement, to sum up the total entitlement amount to $127,600, and then borrow four times that equaling $510,400.
Do VA Loans have a down payment?
Usually, you’re not asked to provide any collateral or give any down payment to secure a VA loan. However, you need to have sufficient income-related documents to prove that you’ll be able to keep up with the monthly mortgage payments.
There are no minimum credit score requirements to get a VA loan, but it’s always better if your credit score is in green. The higher your credit score, the higher the chances of your VA loan getting approved.
One thing to keep in mind is that if your credit score is below 620, it would be difficult to secure a VA loan. However, there are some mortgage options for borrowers with a low credit score that you may be eligible for. If your credit score is poor or below 620, it’s better to work on rebuilding your credit and improve it before you apply for a VA loan for higher chances of approval.
Can I Apply for VA Loan to Buy a Second Home?
No, the VA loans are only allowed to buy your primary or first house. Applying for a VA loan to buy an investment property and a vacation home is not allowed. However, you can apply for a VA loan to buy a unit of a townhouse or a condo unit, but its approval is dependent on the sole discretion of the Department of Veteran Affairs. The VA would evaluate the community before concluding whether to approve the loan or not.
Who Is Eligible to Apply for a VA Loan?
There are several criteria you need to fulfill for you to be eligible for a VA loan. If you’re applying for a VA loan and want to be approved, you need to qualify for at least one of these basic requirements:
- - You must be actively serving in the military.
- - You must be an honorably discharged/retired military veteran.
- - Have served in the military actively for 90 consecutive days during the war.
- - Have served in the military for 181 days or more consecutively during a period of peace.
- - Have served in National Guard or Selective Reserve for more than six years.
- - You’re eligible for a VA loan if your spouse has died in the line of duty, even if you’ve never served yourself.
Closing Costs & Fees
Just like any other loans, VA loans come with their own set of closing costs and fees. You have the option to add the closing costs to your mortgage and pay it with your monthly mortgage payments rather than paying up front. The closing costs include the following but may include other fees as well:
- - Loan Origination Fees or Processing Fees
- - Title Insurance
- - Underwriting Fees
- - Appraisal Costs
- - Courier Fees
- - Recording Fees
- - Credit Check Fees
- - Homeowners Insurance
- - Property Taxes
- - Funding Fee (If you’re applying for such a loan for the very first time – 3.6% of the home’s purchase price)
It’s important to note that the funding fee would gradually decrease if you make a down payment.
Benefits of VA Home Loans
There are many benefits of applying for a VA home loan if you’re eligible for it. Let’s enumerate a few for your better understanding:
No Need for Savings
If your current income allows you to pay towards a monthly mortgage payment, but you don’t have enough money in savings to make a down payment, applying for a VA home loan is a feasible option.
No Need for Additional PMI or Private Mortgage Insurance
When you can’t pay a 20 percent down payment when applying for a home loan, private insurers would charge you heftily for it and term it private mortgage insurance. The payments for PMI are added to your monthly payments, making it more expensive. With a VA loan, you don’t have to pay for PMI.
Easy to Qualify
It’s easier to qualify for VA loans than conventional mortgage loans, primarily because the Department of Veteran Affairs backs it. This reduces the risk for the private lenders, making the requirements to get VA loans more lenient than traditional mortgages.
Competitive Interest Rates
Typically, the rate of interest on VA loans is lower than the standard market rates. However, what interest rates you qualify for would depend primarily on your credit score and the VA loan amount.
VA Loan – Drawbacks
While there are many advantages to applying for and getting a VA loan, there are several disadvantages as well, these are:
- - You might not be paying PMI or private mortgage insurance with VA loans but would be paying funding fees, which would make your mortgage expensive.
- - You can only use a VA loan to buy your primary house.
How To Apply for A VA Loan?
You will need to have a Certificate of Eligibility to apply for a VA loan, which can be availed at the U.S. Department of Veteran Affairs’ e-Benefits Portal.
Once you have the certificate and other paperwork ready, you can apply for a VA loan with private lenders. Most private lenders offer VA loans, and it’s always recommended to do a bit of research before applying for a VA loan due to the difference in the interest rates.
VA loans are a way to make it easier for the military men and women who’ve served or serving the country to buy the home of their dreams
* Specific loan program availability and requirements may vary. Please get in touch with the mortgage advisor for more information.