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Updated on Friday, February 1, 2019
A VA loan is a mortgage that’s guaranteed by the U.S. Department of Veterans Affairs. The loan is available to certain veterans, active duty servicemembers, and qualifying spouses. Since 1944, the program has helped make homeownership possible for more than 23 million veterans and their families.
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The basics of a VA loan
The Department of Veterans Affairs does not issue VA mortgage loans. Rather, private lenders such as banks and mortgage companies provide VA loans to eligible applicants. The VA program guarantees loans up to a certain limit (more on those limits below).
The federal government agrees to back the loan if a borrower goes into default. This added protection enables lenders to provide more favorable terms to borrowers who are eligible to participate in the program.
To qualify for a VA mortgage, you first have to satisfy a lender’s qualification standards. Basic lender requirements generally include
- Satisfactory credit history
- Sufficient income to purchase the home
In addition to satisfying a lender’s requirements, you’ll also need to obtain a valid Certificate of Eligibility (COE) from the VA. To qualify for a COE, you generally need to fit into one of the following categories:
- You are a veteran and you served for a certain length of time.
- You are an active duty servicemember and have served for a minimum period of time.
- You are an eligible Reservist or National Guard member.
- You are an eligible surviving spouse of a deceased veteran.
You can get more information by calling 877-827-3702.
You’ll provide your lender with your COE, which confirms that you are eligible to receive a VA-backed loan.
VA Home Loan Benefits
VA home loans are packed full of some great benefits for eligible borrowers. Here’s an overview of some of the best ones:
One hundred–percent financing
As long as the sales price doesn’t exceed the appraised value of the home, VA loans offer 100% financing for eligible borrowers. Translation: You won’t need a down payment to qualify for a VA loan.
In contrast to an FHA loan, which typically requires a down payment of at least 3.5%, a VA loan can save home buyers thousands of out-of-pocket dollars at closing. That equals a $7,000 upfront savings on a $200,000 mortgage when you compare the two loan products.
No loan limit
VA loans don’t have a cap on how much money you can borrow to purchase your home. However, the VA will only guarantee loans up to a certain limit. These liability limits may influence how much a lender is willing to loan you for your home purchase, and they change every year.
Liability limits vary based on the county where you are purchasing a home. They are the same as the loan limits for Fannie Mae and Freddie Mac conforming loans. In most of the U.S., veterans can borrow up to $484,350 without a down payment in 2019.
No minimum credit score
There is no minimum credit score requirement associated with VA loans. This may make VA loans a good choice for borrowers with a less-than-perfect credit history. Yet keep in mind that although the VA doesn’t require a minimum score to qualify, most lenders impose credit score requirements of their own.
In an interview with MagnifyMoney, Tendayi Kapfidze, chief economist for LendingTree, recommended that borrowers with credit challenges shop around and compare offers before committing to a specific lender.
Kapfidze explained, “Different lenders will target different types of borrowers. The more lenders you talk to, the more likely you are to find one who may be willing to work with your particular circumstance.”
Limited closing costs
The VA sets limits on the amounts lenders may charge VA borrowers for specific closing costs and fees. These limitations might lower the amount of funds required at closing.
Additionally, sellers are allowed to pay closing costs if the buyer can negotiate the agreement into their purchase contract.
A borrower should be prepared to pay the following potential fees and costs (plus maybe a few others) with a VA loan:
- Appraisal fee (averages from $400 to $450)
- Credit report fee (averages from $50 to $65, often due at time of application)
- Title insurance fee (averages from $600 to $800)
- Recording fee (averages from $20 to $75)
- Loan discount points (up to 2% of loan amount is considered reasonable)
- Loan origination fee (usually 1% of loan amount)
- State and local taxes
No private mortgage insurance (PMI) required
With certain loans, borrowers are required to pay for private mortgage insurance (PMI). PMI protects your lender if you default on your loan payments. If you’re taking out a conventional mortgage and putting down less than 20% of the purchase price, PMI is typically required.
Because VA loans do not require private mortgage insurance, borrowers are able to save money on their loan payments every month. This can add up to thousands of dollars saved over the life of your mortgage loan.
VA loan challenges
Although VA home loans boast some of the best benefits available for homebuyers, the loans are not without their challenges. If you’re thinking about using a VA loan to finance your home purchase, here are a few facts you should consider first.
Lender loan limits
As mentioned above, VA liability limits can influence how much money a lender is willing to extend to you for your home purchase. If the home you want to buy costs more than a lender is willing to offer you with a VA loan, consider a different loan option or see if another lender is willing to work with you.
Most VA borrowers pay what is known as a funding fee in order to help offset the costs of the program for taxpayers. The funding fee is a percentage of your loan amount and can vary based upon the following:
- Loan type
- Military category
- Buyer status (first-time user of the VA benefit or repeat borrower)
- Down payment (optional)
Borrowers may choose to pay their funding fees in cash at closing or opt to finance the fee into their mortgage.
Certain types of borrowers are exempt from funding fees, including:
- Veterans receiving VA compensation for a service-connected disability (or those who would be eligible to receive the benefit under different circumstances)
- Surviving spouses of veterans who died in service or from a service-related disability
Although closing costs associated with VA loans are often lower than those required for other mortgages, it can still be a challenge for some borrowers to come up with the necessary funds to bring to closing.
Mark Smith, director of programs and development for the PenFed Foundation in Alexandria, Va., explained why his nonprofit organization believes it’s so important to help veterans overcome this common obstacle.
“One of our missions is to help ensure that our veterans and active duty military members have the tools they need to build healthy financial futures,” he said. “We believe homeownership is a way to help those who have served become thriving members of their local communities.”
Through its Dream Makers Program, the PenFed Foundation provides a no-strings-attached down payment assistance grant that VA borrowers may also use to help cover closing costs. The grant offers eligible applicants a 2-for-1 match (up to $5,000) of any funds borrowers put up personally for earnest money and closing costs.
According to Smith, around $6.5 million in grants has been distributed to help borrowers since the program’s inception.
Potentially larger loan than the value of your home
VA will guarantee loans up to 100% of the value of your home. As a result, if you also finance your funding fee requirements, there’s a chance that your VA loan amount could end up being higher than the value of your home.
Thankfully, there are a number of ways you can avoid this potential problem.
- Apply for a grant or ask the seller to cover some (or all) of your closing costs.
- Provide a down payment.
- Purchase a home priced below its appraised value.
- Consider other loan options.
What else should you know about a VA loan?
Although VA loans have been around for more than 70 years, they are surprisingly underused. Only 3.12 million veterans were actively participating in the VA Home Loan Guaranty Program as of 2018. This is remarkably low when you consider the total number of veterans is estimated to be somewhere in the neighborhood of 19.6 million.
Borrowers may not take advantage of VA loan benefits because of common misconceptions like:
- The false idea that VA loan benefits can’t be used more than once. In reality, VA loans benefits are not limited to a single use.
- The false idea that benefits expire. VA benefits don’t come with an expiration date, even if your service ended decades ago.
- The fear that credit issues like bankruptcy or foreclosure may prevent you from qualifying. Lenders have their own requirements for loan qualification, but a past bankruptcy or foreclosure typically will not permanently exclude you from VA loan benefits.
Before you sign on the dotted line for any new home loan, it’s important to do your homework first and make sure that you are ready for the commitment.
According to LendingTree’s Kapfidze, you should educate yourself, compare offers from multiple lenders and understand your finances completely. “Taking out a mortgage is a pretty big financial obligation,” he said. “Make sure you’re prepared for that.”
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