VA Home Loan Guide
VA home loans are an excellent option for military veterans, servicemen, and families to affordably own their own home.
If you've ever found yourself wondering, "What is a VA loan?" or how to apply for one, this guide will get you started so you can discover if one is right for you.
What Is a VA Loan?
VA loans were implemented in 1944 when President Franklin D. Roosevelt created the Servicemen's Readjustment Act.
Basically, VA loans are home loans that help veterans and eligible military servicemen and their families afford to purchase a home.
Unlike conventional home loans, VA home loans don't require a down payment because the government backs the loan.
This government backing provides security for the private lenders, like banks and mortgage companies, who provide the loans, allowing them to offer lower rates and better financing terms.
Main Types of VA Loans
There are two main types of VA home loans: new purchase loans and refinance loans.
Some of the main aspects for a new VA purchase loan include:
- Being able to buy a property you don't already own or have a loan on
- Qualifying for more competitive interest rates
- Avoiding having to pay closing costs or a down payment at signing
For VA refinance loans, some of the main features include:
- Being able to lower your interest rate and/or monthly payment by replacing your current mortgage
- Changing or improving terms on your mortgage
- Getting cash out to pay off other debts or to renovate your home
Learning about which loan is right for you will help you understand what to look for when you go to get your VA loan.
VA Loan Eligibility
Now that you've learned what a VA loan is, you may be asking yourself what it takes to qualify.
Luckily, VA loan eligibility requirements are pretty straightforward. For starters, you must be either a current servicemember, honorably discharged veteran, or the spouse of a servicemember.
Then, in addition to proof of your military status, you will also need:
- Evidence that your income is sufficient to cover your mortgage and have a certain amount remaining for other expenses each month
- A Certificate of Eligibility (COE)
- Acceptable credit*
If you are unsure of your VA loan eligibility benefits, visit the U.S. Department of Veterans' Affairs VA home loan eligibility page for more information.
*Please be aware that some companies, like Low VA Rates, do not have a minimum credit requirement to be approved
VA Loan Benefits
VA home loans were created with military servicemembers in mind. The benefits provided by the VA recognize the hard work of our military servicemen and women by helping them afford their own homes. Some of these main VA loan benefits are outlined below.
No Down Payment
Conventional home loans require homeowners to pay up to 20% of the home loan when purchasing their home. Depending on the price of the home, this could mean paying anywhere from $7,500 to $90,000 up front. In comparison, VA home loans do not require any money down when purchasing because the government backs the loan.
In fact, the only fee present at closing is the funding fee, a small, one-time fee of 1.25% to 3.3% of the total loan amount. This fee can be paid up front or it can be rolled into the life of the loan and paid over time, eliminating up-front costs when purchasing.
VA home loans are regulated by the government, which sets limits on the fees lenders can charge borrowers. Because lenders cannot raise fees above what the government has established, you have less out of pocket expenses than with a conventional home loan.
Many borrowers who get a VA home loan wouldn't have been able to qualify for a conventional home loan. However, they're able to get a VA home loan because of the flexible underwriting requirements that look at more than just the credit score.
While underwriting requirements can vary depending on where you get your loan, they tend to be less strict across the board because veterans and servicemembers have earned the right, through their service, to become homeowners.
When you sell your home, you can transfer the benefits of your VA home loan to other buyers who may not be eligible for their own VA loan, which could help you sell your home faster.
No Mortgage Insurance Premiums
The government provides the insurance and backing for your loan, which means you won't have to pay any Private Mortgage Insurance (PMI). This can save you thousands of dollars every year on your mortgage payments.
It is perfectly fine to refinance your VA home loan in order to get a lower interest rate or reduce your monthly payments. Unlike conventional home loans, some types of VA refinance loans might not require income verification or a home appraisal.
VA loans typically offer lower rates than conventional home loans. As of 2017, VA loans had a 4.05% interest rate compared to conventional loans that were around 4.32%. It may seem like a small difference, but over time it can really add up and increase what you save on your loan.
No Minimum Credit Score
Many conventional lenders look for a minimum credit score around 620, though it could be up to 720 in some cases, when they approve home loans.
However, there is no minimum required credit score for VA loans (though lenders can set their own policies that specify a minimum).
But some companies, like Low VA Rates, work with borrowers from all credit backgrounds if they have the appropriate income and job stability.
Lower Delinquency Rates
Because VA lenders look at the overall financial makeup of the borrower, the delinquency rate for VA loans is often lower than the delinquency rates for conventional loans.
Though this may not always be the case at any given moment in time, the general trend is for a lower rate of foreclosures with VA loans. And, even when delinquency rates for VA loans are higher, it is usually only by a small margin.
The Perfect Time to Get a VA Home Loan
VA loan benefits are too good to pass up, and now is a great time to buy. Interest rates on homes are beginning to rise and are predicted to reach 5% by the end of 2018. If you're thinking about purchasing a home, you'll want to start sooner rather than later.
Refinance & Loan Options
There are three main types of VA refinance loans. Check out an overview of each of these three loan types below. If one of them sounds like the perfect fit for you, visit Low VA Rates to apply today.
VA Interest Rate Reduction Refinance Loan (IRRRL)
Often called the VA streamline loan, there are many benefits to getting a VA IRRRL. However, there are also some requirements you have to meet first:
- You must be refinancing a current VA home loan
- Mortgage payments must be current
- You cannot have more than one 30-day late payment within last 12 months
- Your current loan must have seasoned for at least 6 months
If you meet these requirements, then you will be able to enjoy the following benefits:
- VA streamline refinance loans are easy to qualify for and have great rates
- VA refinance loans does not require income verification, bank statements, or pay stubs
- A home appraisal is not required
- There are no out of pocket expenses for the refinance, including closing costs
VA Cash-Out Refinance
Veterans who've established equity in their homes and need some extra cash might consider a cash-out refinance.
This type of loan is very useful because it allows you to get cash you can use to make home improvements, pay off bills, lower monthly expenses, and more. You may even be able to refinance up to 100% LTV (loan-to-value) on your home.
In order to be eligible for a cash-out refinance, you must:
- Verify income and employment with two years of tax returns, proof of income like rental properties or child support, two most recent pay stubs, and proof of employment history for two years.
- Provide information on your liabilities and assets including your credit report and two months of official bank statements for all accounts.
- Get home inspection and appraisal to determine the current value of your home.
Veterans who qualify for a cash-out refinance include:
- Those with an honorable discharge status
- Current members of the National Guard or Reserve
- Current servicemembers on active duty
- Surviving spouses that are have not remarried
- National Oceanic and Atmospheric Administration officers and Public Health Officers
You must also prepare and submit your COE and have your DD-214 ready.
VA Energy Efficient Mortgage (EEM) Refinance Loan
VA loan borrowers who are interested in improving the energy efficiency of their home can choose to pursue an energy efficient mortgage (EEM).
This type of mortgage refinance loan allows qualified applicants to improve the energy efficiency of their home. These updates and improvements must be completed within six months of closing on the loan.
Some updates are not allowed as part of an EEM. However, many are, including:
- Solar-powered cooling and heating
- Improvements to insulation
- Upgrades to thermostats and heat pumps
- Windows and doors that are energy efficient
Once improvements have been completed, your home will be audited for energy use to determine your estimated annual savings and to make sure your upgrades offset your renovation costs. The auditor will also recommend any additional changes that need to be made to make the home more energy efficient.
Securing VA Loans with Bad Credit
If you've ever gone through a bankruptcy, then you know how it seriously damages your credit, and you might feel that it means homeownership is out of your reach.
Thankfully, VA home loans can help you make the journey back into homeownership. Even if you've filed a Chapter 7 or Chapter 13 bankruptcy, you may still be eligible for a VA home loan.
Chapter 13 bankruptcy will typically require a 2-year waiting period (after bankruptcy discharge) and Chapter 7 will require a 12-month waiting period before most lenders will approve you for a VA home loan.
Additionally, your VA home loan lender will need the following:
- Proof of a stable job and income
- Evidence that you have built up your credit, or are actively building your credit
- No record of late payments since the bankruptcy discharge
Bankruptcy is a difficult choice and it requires hard work to get back on track. However, it is comforting to know that just because you have faced a bankruptcy doesn't mean you can't qualify for a home loan.
Paying Off Your Mortgage
Amidst all the excitement of getting a home, you should still take time to consider how to best pay off your mortgage. Thirty years to pay off a mortgage is a very long time when you sit down to think about it.
There are, however, simple things you can do to pay off your mortgage quicker; one of these methods is to pay your mortgage bi-weekly instead of just once a month.
Making Bi-Weekly Payments
An easy way to make extra payments is to pay half of your mortgage payment bi-weekly, especially if that's how your work's pay schedule is already set up.
If you pay half of your mortgage every time you get paid, you end up making 26 payments, which turns out to be an extra full payment on your mortgage every year. This payment can go directly to the principal balance on your loan.
While it may not sound like much, it adds up quickly. If you had a $100,000, 30-year mortgage with a 5.5% interest rate, you would end up cutting 5 years off the total life of your loan and saving around $34,000.
Because VA loans don't have a prepayment penalty, this type of payment schedule is a great strategy to help you pay off your loan ahead of schedule.
VA Loan Approval
Once you've established that you meet VA home loan guidelines, the next step on your journey for VA loan approval is to get your Certificate of Eligibility (COE). You can apply for your COE in one of three different ways:
- Online through the VA's eBenefits portal
- By mailing in the completed VA form 26-1880
- Through a VA-approved lender
The last option is actually the easiest, so we encourage you to contact one of our team members here at Low VA Rates.
After that, it's a matter of submitting all of the required documents and waiting the processing time to get your VA loan approval.
And if you aren't approved? Well, just because one lender doesn't approve your loan doesn't mean a different one won't. We encourage all of our borrowers to shop around to find the lender that best meets their needs and provides the best terms for their specific situation.
(We think that will still probably be us . . . but this way you'll know for sure!)
Your Experienced VA Loan Experts
Low VA Rates strives to provide servicemen and women with VA home loans that work for them. So, if you're looking for a VA home loan, apply now and see what we can do for you!