Qualified veterans looking for home loans can do their homework ahead of time so they can understand the process, which is slightly different for a VA home loan than a conventional mortgage. Some of the areas to pay special attention to are the types of specialty loans the U.S. Department of Veterans Affairs offers and the eligibility requirements for applying for the mortgage.
VA Loan Basics
A VA loan is a guaranteed loan available to eligible veterans for the purchase of a home. Though the loans are made by private lenders, such as banks or mortgage companies, the loan is actually guaranteed by the Federal Government, which means that the lender is protected against loss if the borrower defaults on the loan. This can benefit both parties, because it allows borrowers to receive a home loan with no down payment and other favorable financing terms, while also protecting the lender.
Other borrower benefits of a VA loan include:
- Competitive interest rates
- Closing costs are comparable to other loans or lower
- Private mortgage insurance is not necessary
- No prepayment penalties
- VA assistance to borrowers who are in default
A basic loan entitlement is $36,000. However, most lenders will lend veterans up to four times the amount of the veteran's entitlement, as long as the veteran can qualify for the loan based on their income and credit, and the property appraises for at least the sales price of the home. For loans that exceed $144,000, additional entitlement may be available. As of 2014, qualified veterans can get a no-down payment loan up to $417,000. Some counties across the country have higher loan limits.
The first eligibility requirement is that you must be a veteran. However, if you are a veteran, you are not necessarily guaranteed a loan. Lenders must still follow all of the credit and income standards that have been set by policymakers. To prove your eligibility, you must also:
- Show proof of military service
- If not active duty, must have proof of an honorable discharge (dishonorable discharges do not qualify)
- Sign a certified statement saying that you will occupy the home
- Purchase a property on U.S. soil or in a U.S. controlled territory
For disabled veterans, the VA offers special housing grants. In addition to the mortgage financing veterans are eligible to receive, the special grants can provide veterans with the money they need to adapt or build a home that caters to their special needs.
Some surviving spouses of veterans are eligible to apply for VA loans. Surviving spouses have to meet certain eligibility requirements as well. For example, a surviving spouse of a veteran or disabled veteran can be eligible for a VA loan, as long as they have not remarried. Spouses of service members that are missing in action are also eligible for VA loans.
To learn more about eligibility requirements, visit the VA website.
Interest rates for a VA loan are set by the lender or financial institution. Generally, interest rates for VA loans are lower than traditional mortgages. This is because VA loans are backed by the federal government, which makes the loans less risky for the lenders.
Even if the interest rate for VA loans is not lower than traditional mortgage interest rates, the rates are typically the same, making the rates for VA loans competitive with traditional mortgages.
Drawbacks of a VA Loan
VA loans come with numerous benefits, especially to the veteran and co-borrower on the loan. Along with the good parts come some drawbacks.
- Additional paperwork: In order to apply for a VA loan, the veteran has to complete the eligibility certificate request form. The VA also requires borrowers to sign additional documents at the closing table.
- Seller resistance: Some sellers are resistant to enter into a contract to sell to a buyer using a VA loan. Primarily, this is because of the rumors sellers hear about the VA taking too long to process loans and other myths.
- VA Funding Fee: One of the biggest disadvantages to using a VA loan is having to pay the required funding fee. The funding fee is required by law and is intended to enable veterans to contribute toward the cost of this veteran benefit, thus relieving the taxpayers' burden. Even though veterans do not have to come up with a down payment, the funding fee can be a hefty fee to pay out of pocket. Some lenders allow borrowers to finance this fee into the mortgage, so that it is not a direct out-of-pocket expense. To determine the exact fee that you would pay, review the Funding Fee Table.
- Limitation on property: Veterans cannot use VA loans for financing any homes except their primary residence. Second homes and investment properties are not permitted with VA loans.
- Co-borrower limitations: Only spouses are eligible co-borrowers on a VA loan. If you intend to purchase and finance a home with anyone other than your spouse, then a VA loan is not an option.
Overall, most borrowers find that the benefits they receive from obtaining a VA loan outweigh the drawbacks.
Applying for a VA Loan
The application process is relatively easy and very similar to applying for a traditional loan. Here are the steps:
- Apply for the Certificate of Eligibility. You can apply for the certificate before starting home shopping, so you have it available for the lender to start the process once you do find a home to purchase. Apply for a certificate by filling out VA Form 26-1880.
- Find a home that you are interested in buying. Make an offer and sign a purchase agreement that is contingent on the approval of your loan.
- Select a lender to apply for financing.
- Within a short amount of time, the lender will inform you of your approval status. If you are approved for the loan, a date will be set for closing.
If you need help applying for a VA loan, contact your regional VA loan center.
Home Sweet Home
There are many different benefits to getting a VA loan. If you are a veteran and feel you may be eligible, these specialized loans are worth checking into. Plus, as a veteran, you deserve to take advantage of this benefit.
As with any loan, make sure you take time to shop around and compare lenders. Rates, loan terms, and conditions will vary. By shopping around, you ensure that you get the best deal possible on your loan.
To learn more about loans, eligibility requirements, and other terms and conditions, visit Home Loan Guaranty Services on the U. S. Department of Veterans Affairs website.