VA loans provide improved access and affordability to veterans when buying or refinancing their home. The most common program is a VA-guaranteed loan offered by lenders such as Union Home Mortgage.
What can a VA loan be used for?
Qualifying borrowers can use a VA-backed mortgage for the same purposes as other home loan options. Because a VA loan is backed in part by the Department of Veteran Affairs (VA), lenders may extend credit for the same purposes with less risk and can offer better interest rates, fewer closing costs, or even offer low- or no-down payment options. This includes:
Buying a home! A VA loan can be used to purchase the home that you intend to live in. Whether it is an existing home or new construction, single family home, multiple unit home, condominium, or manufactured home, a VA loan may be an option for you to buy your home. Because options may differ from lender to lender, check with a mortgage company such as Union Home Mortgage to see what your options are.
Better terms or lower interest rate! If you already own your home and are looking for a lower interest rate or better terms than the loan you already carry, a VA refinance may be a great option. This includes homeowners who already have a VA loan on their home: the Interest Rate Reduction Refinance Loan (IRRRL) program allows those with an existing VA loan to refinance with less documentation, fewer fees, and typically a less involved reassessment of qualifications and no new appraisal needed.
Cash out! As with other mortgages, you may be able to cash out equity from your home. VA loans are unique in that, if certain credit and financial qualifications are met, you may be able refinance with a loan amount, including the funding fee, of 100% of the reasonable value of your home.
In addition to VA-backed mortgages that are obtained through a lender there is also a VA-direct loan program, the Native American Direct Loan (NADL). It is obtained directly from the Department of Veterans Affairs rather than through a lender and is available to eligible Native American service members buying, building, or improving a home on federal trust land.
Who can obtain a VA loan?
A VA loan is intended to provide affordable, low- or zero-down payment mortgage options to service members, veterans, and their families. Being able to use a VA loan is a matter of meeting VA’s service eligibility and your lender’s financial requirements.
Service Eligibility
The Department of Veterans Affairs (VA) loan program is available to a range of veteran or military personnel classifications. This includes U.S. military veterans, active-duty service members, National Guard, reservists, and qualifying surviving spouses. If a service member or their surviving spouse is eligible, a Certificate of Eligibility (COE) requested from the VA will show that they meet service requirements for a VA loan. These requirements vary depending on the duty type and time of service.
Service members with active-duty service of 90 continuous days or greater are eligible for a VA loan, regardless of the time of service.
Eligibility will otherwise depend on the dates of service. Military veterans serving on or after August 2, 1990 are eligible if one of the following are met:
- At least 24 continuous months of service
- 90 days or more of active-duty service
- At least 90 days service, if discharged due to hardship or reduction in force
- Less than 90 days service, if discharged due to service-connected disability
National Guard service members and reservists serving on or after August 2, 1990 must have served 90 days or more of active-duty service.
Eligibility for military veterans, National Guard, and reservists serving prior to this period will is outlined on the Department of Veterans Affairs (VA) website on their Eligibility for VA home loan programs page.
Qualifying surviving spouses include the following:
- Unmarried surviving spouse of a veteran who died in active-duty or from service-connected causes
- Unmarried surviving spouse of a veteran who had been rated totally disabled for 10 years or more before death, or at least 5 years immediately before death
- Spouse of an active-duty member listed as MIA or POW for at least 90 days
Financial Requirements
In addition to meeting the VA’s requirements for service-related eligibility, the borrower must meet the lender’s qualifying lending guidelines. Union Home Mortgage can review your qualifications with you and determine if the financial requirements are met.
VA loans are generally more lenient with respect to credit score and income requirements compared to conventional loans. While conventional loans often require a credit score of 620 or higher, VA loans may be available to borrowers with a score of 580 or higher under certain circumstances. Additionally, qualification for a VA loan is typically more flexible in considering other aspects of your financial profile, such as your debt-to-income ratio.
What makes a VA loan different from other mortgages?
Unique Benefits of VA Loans
These mortgages have VA’s backing, but what does that mean for you? VA loans come with several advantages over conventional mortgages, making them an attractive choice for eligible service members and veterans.
The most notable benefit for homebuyers is that it is possible to qualify for a loan to buy a home without a down payment. Typically, loan programs require you to bring at least 3% to 5% of the purchase price as a down payment, and conventional loans are often taken with a 10% to 20% down payment. VA borrowers with a full entitlement may be able to finance 100% of the home’s value. This can empower veteran and active-duty military homebuyers, especially those without substantial savings for a traditional down payment, to avoid putting down tens of thousands of dollars upfront.
In addition to no down payment, for many borrower profiles a VA loan will offer lower interest rates, fewer closing costs, and more lenient credit requirements than other loan programs. VA also does not require payment of “mortgage insurance”. By comparison, conventional loans may have Private Mortgage Insurance (PMI) when less than 20% down payment is made, and a Mortgage Insurance Premium (MIP) is paid for the entirety of the mortgage on FHA loans.
Finally, the options to refinance with a VA loan offer unique benefits, such as access to up to 100% equity on a cash out loan. Additionally, the “streamlined” IRRRL rate reduction program allows homeowners who find better terms to save money over the life of the loan with fewer steps and costs than with other refinance loan types.
Limitations and Drawbacks
There are a few restrictions and drawbacks unique to the VA program. Because the program is intended for buying a “primary residence”, the home that you will reside in, this means that the VA program cannot be used to purchase vacation properties or “second homes”, nor can it be used to purchase a rental property or “investment property”.
The VA loan is also subject to a one-time “funding fee” at closing, which is paid to the Department of Veterans Affairs. This fee varies depending on a few different factors such as the amount of down payment (if applicable), military category, and whether this is the first time using the program.
- First time use: Funding fee is between 1.25% - 2.15% of the loan amount.
- Subsequent use: Funding fee is between 1.25% - 3.3% of the loan amount.
- VA IRRRLs: Funding fee is 0.5%.
This fee can be rolled into the loan. Since it is a one-time fee instead of the recurring charge of mortgage insurance, in most eligible borrowers’ cases the VA loan remains a preferable option.
Some eligible borrowers are exempt from this funding fee altogether. Exempt borrowers include surviving spouses, veterans receiving or meeting eligibility for disability, and Purple Heart recipients returned to active duty.
How do I apply for a VA loan?
The process of applying for a VA loan is similar to applying for any other type of mortgage, but there are a few other steps involved:
1. Obtain your Certificate of Eligibility (COE)
Your COE is proof from the Department of Veterans Affairs that you meet the service requirements for a VA loan. If you do not already have a copy, speak with a lender that takes part in the VA loan program, such as Union Home Mortgage, for direction and assistance on this step!
2. Choose a VA-Approved Lender
While the VA guarantees the loan, the mortgage is issued by private lenders. You’ll need to find a lender that participates in the VA loan program.
3. Get Pre-Approved or qualified
Just like with other types of loans, it is important to work with your lender to determine your eligibility on financial requirements and property appraisal, if applicable. If you are buying a home using a VA mortgage, it is a tremendously helpful step to get pre-approved before you start!
The information provided here is for informational purposes. When interest rates and loan program information are included, it is for illustration purposes only and not a solicitation or quote for services. This is not an advertisement or loan estimate. Current interest rates, loan programs and qualification criteria can change at any time. If you have questions or need assistance, we can be reached using the contact information above.
