Are you a veteran, active-duty military member, or surviving spouse? Are you looking to buy or refinance a home? If so, you might want to consider a VA loan. VA loans are a unique benefit offered to those who have served in the military, and they can provide a number of advantages over traditional mortgage options.
In this article, we’ll take a comprehensive look at VA loans, including what they are, how they work, and what benefits they offer. We’ll also cover some common questions and misconceptions about VA loans, so you can make an informed decision about whether this type of mortgage is right for you.
What are VA loans?
A VA loan is a type of mortgage that is guaranteed by the Department of Veterans Affairs (VA). This means that if the borrower defaults on the loan, the VA will reimburse the lender for a portion of the loss. Because of this guarantee, VA loans typically have more favorable terms than traditional mortgages.
Who is eligible for a VA loan?
To be eligible for a VA loan, you must be one of the following:
- A veteran who served on active duty and was discharged under conditions other than dishonorable
- An active-duty service member who has served for at least 90 consecutive days
- A member of the National Guard or Reserves who has served for at least six years
- A surviving spouse of a service member who died in the line of duty or as a result of a service-related disability
How do VA loans work?
VA loans are issued by private lenders, such as banks and mortgage companies, but they are backed by the VA. This means that the lender is taking on less risk, which can translate to lower interest rates and more favorable terms for the borrower.
In order to get a VA loan, you’ll need to apply through a private lender. The lender will review your application and determine whether you meet their requirements for income, credit score, and other factors. If you’re approved, the lender will work with the VA to finalize the loan.
What are the benefits of VA loans?
VA loans offer a number of advantages over traditional mortgages, including:
- No down payment required: Unlike many traditional mortgages, VA loans don’t require a down payment. This can make it easier for veterans and active-duty military members to buy a home, especially if they’re just starting out and don’t have a lot of savings.
- Lower interest rates: Because VA loans are backed by the VA, lenders can offer lower interest rates than they would for a traditional mortgage.
- No private mortgage insurance (PMI) required: With most traditional mortgages, borrowers are required to pay for PMI if they put less than 20% down. With a VA loan, there is no PMI requirement.
- Flexible credit requirements: While lenders still require a minimum credit score for a VA loan, the requirements are often more flexible than they are for a traditional mortgage. This can be especially beneficial for veterans or active-duty military members who may have had credit issues as a result of their service.
- No prepayment penalty: Some traditional mortgages come with a prepayment penalty, which means that if you pay off your loan early, you’ll be charged a fee. VA loans do not have a prepayment penalty, which can save you money in the long run.
What are the downsides of VA loans?
While VA loans offer many benefits, there are also some potential downsides to be aware of, including:
- Funding fee: In order to offset the costs of the VA loan program, borrowers are required to pay a funding fee. The amount of the fee varies depending on factors such as the type of loan and the borrower’s military status.
- Limits on property types: VA loans can only be used to buy or refinance primary residences, not second homes or investment properties.
- Appraisal requirements: VA loans require a property appraisal to ensure that the property is worth the amount being borrowed. While this is standard for most mortgages, the VA has some additional requirements that can make the appraisal process more stringent.
- Some sellers may be hesitant: Because VA loans require some additional steps, such as a property appraisal and a pest inspection, some sellers may be hesitant to accept an offer from a buyer with a VA loan.
How do you apply for a VA loan?
To apply for a VA loan, you’ll need to follow these steps:
- Determine your eligibility: Make sure you meet the VA’s eligibility requirements (see “Who is eligible for a VA loan?” above).
- Obtain a Certificate of Eligibility (COE): You can obtain a COE from the VA, either online or by mail.
- Find a lender: Look for a lender who is approved to offer VA loans.
- Apply for a loan: Submit an application to the lender of your choice.
- Complete the loan process: Once you’re approved, you’ll need to complete the loan process, which typically includes an appraisal and a pest inspection.
What documents do you need for a VA loan?
When you apply for a VA loan, you’ll need to provide the following documents:
- Certificate of Eligibility (COE)
- Proof of income, such as pay stubs or tax returns
- Proof of employment
- Bank statements
- Proof of any other assets, such as retirement accounts or investment portfolios
- Proof of any outstanding debts, such as credit cards or car loans
What are the fees associated with a VA loan?
As mentioned earlier, VA loans come with a funding fee. The amount of the fee depends on factors such as the type of loan and the borrower’s military status. The fee can be paid upfront or rolled into the loan amount.
In addition to the funding fee, there may be other fees associated with a VA loan, such as closing costs and origination fees. These fees can vary depending on the lender and the specific loan.
How long does it take to get a VA loan?
The timeline for getting a VA loan can vary depending on factors such as the lender’s requirements and the borrower’s eligibility. In general, however, the process can take anywhere from 30 to 45 days.
How much can you borrow with a VA loan?
The amount you can borrow with a VA loan depends on a number of factors, including your income, credit score, and the value of the property you’re buying. The VA has specific guidelines for how much a borrower can borrow, but in general, the maximum loan amount is $548,250 (as of 2021).
Can you use a VA loan more than once?
Yes, you can use a VA loan more than once. In fact, there is no limit to the number of times you can use a VA loan, as long as you meet the eligibility requirements each time.
Can you get a VA loan if you have bad credit?
While VA loans have more flexible credit requirements than traditional mortgages, lenders still require a minimum credit score. The exact score required can vary depending on the lender, but in general, a score of at least 620 is recommended.
If you have bad credit, it may be more difficult to get approved for a VA loan, but it’s not impossible. You may need to work with a lender who specializes in VA loans and has experience working with borrowers who have less-than-perfect credit.
Can you use a VA loan to buy a rental property?
No, VA loans can only be used to buy or refinance a primary residence. They cannot be used to buy a rental property or other investment property.
How do VA loans compare to other types of mortgages?
Compared to other types of mortgages, VA loans offer a number of benefits, such as lower interest rates and no down payment requirement. However, they also come with some unique requirements, such as a funding fee and limits on property types.
It’s important to weigh the pros and cons of each type of mortgage and determine which one is right for you based on your individual financial situation.
Conclusion
VA loans can be a great option for veterans, active-duty military members, and surviving spouses who are looking to buy or refinance a home. They offer a number of benefits over traditional mortgages, including lower interest rates and no down payment requirement. However, they also come with some unique requirements and potential downsides.
If you’re considering a VA loan, it’s important to do your research and make an informed decision. Talk to a lender who specializes in VA loans and weigh the pros and cons carefully before making a commitment.
FAQs
- What is the VA funding fee? The VA funding fee is a one-time fee that is paid by the borrower to help offset the costs of the VA loan program. The amount of the fee varies depending on factors such as the type of loan and the borrower’s military status.
- Can you use a VA loan to buy a second home? No, VA loans can only be used to buy or refinance a primary residence. They cannot be used to buy a second home or investment property.
- What is the minimum credit score for a VA loan? While there is no specific minimum credit score required for a VA loan, most lenders prefer to see a score of at least 620. However, some lenders may have more flexible requirements depending on the borrower’s individual financial situation.
- How long does it take to get a Certificate of Eligibility for a VA loan? The timeline for getting a Certificate of Eligibility (COE) can vary depending on how you apply. If you apply online, you may be able to get your COE instantly. If you apply by mail, it can take several weeks to receive your COE.
- Can you refinance a VA loan? Yes, it is possible to refinance a VA loan. There are two types of VA loan refinancing options: a VA streamline refinance (also known as an Interest Rate Reduction Refinance Loan, or IRRRL) and a cash-out refinance. Both options can help borrowers save money on their mortgage payments or access the equity in their home.
