The VA Loan Guaranty program was created during World War II to help military members veterans purchase a home. The program makes it easier for qualifying military members and veterans to purchase or refinance a home using a loan that is guaranteed by the Department of Veterans Affairs.
Since World War II, the VA has helped over 18 million military members, veterans, and surviving spouses purchase a home using their VA Loan benefits.
How VA Loans Work
The VA doesn’t actually guarantee the full amount of the mortgage. They actually only guarantee 25% of the loan amount. However, that reduces the borrower’s overall risk profile and makes lenders more willing to extend a loan to qualified veteran homebuyers.
In addition, VA Loan interest rates are very competitive. They are sometimes even lower than the interest rates for conventional mortgages, FHA loans, and similar homebuying programs.
As an added benefit, VA Loans do not require a down-payment from the buyer, don’t require Private Mortgage Insurance (PMI), and sometimes offer up to 100% financing. It’s also incredibly easy to refinance a VA Loan with VA Streamline Refinance loan, also called an Interest Rate Reduction Refinancing Loan (IRRRL).
As you might have guessed by now, there are some stipulations and qualifications to get a VA Loan for your next home purchase. Let’s take a look at who can use a VA Loan.
VA Loan Eligibility
The VA Loan is one of the most valuable benefits available to military members and veterans. And thankfully, many current and former military members are eligible for VA Loan benefits.
In general, you will be eligible for the VA Loan if you meet the following qualifications:
Current Active Duty Military Members
- at least 90 consecutive days of service.
Active Duty Veterans (with a discharge rating other than dishonorable discharge)
- Served at least 90 consecutive days on active duty during wartime.
- Served at least 24 months of consecutive active duty during peacetime.
- Served at least 181 days under certain circumstances. (Some examples include, discharge for needs of military, reduction in force, hardship, early out, the convenience of the Government).
- Served less than 181 days on active duty when discharged for a service-connected disability.
Guard and Reserves
- Served at least 90 consecutive days on active duty during wartime.
- Served at least 181 consecutive days on active duty during peacetime.
- Completed six years of in-service time with their Guard or Reserve Unit (These must be “Good Years” to qualify).
Spouses of those killed in the line of duty.
- Visit VA.gov for more information.
Members who are eligible for a VA Loan must prove their eligibility by obtaining a VA Loan Certificate of Eligibility (COE). Your COE can be obtained through the VA or by a qualified lender (some banks and lenders that specialize in VA Loans will help borrowers obtain a VA Loan Certificate of Eligibility when they apply for a VA Loan*).
*Note: This is free through the VA, so you should not have to pay for this service!
Qualifying for a VA Loan
It’s important to understand that being eligible for a VA Loan and Qualifying for a VA Loan, are two different things.
Being eligible for a VA Loan simply means your military service makes you eligible to apply for a VA Loan.
Qualifying for a VA Loan, on the other hand, means you are financially qualified to buy the home.
There is a big distinction between these two.
Think about it this way. When you are borrowing money, the lender wants to know you can afford to make the payments. Even though the VA Guarantees 25% of the loan amount, the lender is still on the hook for the remaining balance if you default.
So the lender is going to look at your credit history, credit score, debt to income ratio, and other factors. Your Debt to income ratio is the ratio of your current income and debt obligations.
In general, you will still need to have a clean credit history and a decent credit score. There is no set credit score requirement, but most lenders require a credit score of 620 or higher. And of course, your credit score will impact your interest rates. The lower your score, the higher your interest rates (if you qualify). And the higher your credit score, the lower your interest rates.
What Can You Use Your VA Loan For?
VA Loans can only be used for your primary residence. So you can’t use it to buy a rental property unless you buy a multi-family home that will also be your primary residence. You can buy up to a 4-unit residence using a VA Loan; anything above a four-plex is considered a commercial property and you would have to get a commercial property loan.
You also can’t use a VA Loan to buy land unless you are also building a home on it at the same time.
Some properties can also be tricky to buy while using a VA Loan. For example, you can only buy a townhome or condo in a VA-Approved development. This requires that the property and management company meet certain qualifications. Your VA Loan provider can give you more information on this.
Buying a mobile home with a VA Loan can be tricky. While there are no restrictions against it, some lenders just don’t offer them because they tend to decrease in value and may be riskier than some other types of loans.
So in general, your home may qualify for a VA Loan if you are buying a single-family home, duplex, triplex, or four-plex, and you plan on living in it as your primary place of residence.
Using a VA Loan to Refinance a Current VA Loan
The VA Loan program makes it incredibly fast and easy to refinance your current VA Loan through the Streamline Refinance Program, also called the Interest Rate Reduction Refinance Loan (IRRRL).
When you use a Streamline Refinance, you can refinance your home at a lower interest rate without having to submit proof of income, requalify based on your credit, etc. The loan has already been approved and you already qualify for VA Loan eligibility, so the process is quick and easy.
Benefits of VA Loans
There are many benefits of VA Loans, including the following:
- Competitive interest rates (based on your qualifying credit report, score, and other factors)
- Ability to finance 100% of your loan
- No Private Mortgage Insurance (PMI) required (this can save you hundreds of dollars each month)
- Less stringent qualification guidelines (depending on the lender)
- No pre-payment penalties
- Higher allowable debt-to-income ratios than conventional loans
- Sellers can pay up to 6 percent of closing costs and concessions
Comparing VA Loans
It’s always a good idea to compare several lenders when you buy a home with a mortgage. And that applies regardless of whether you are using a conventional loan, FHA Loan, VA Loan, or some other type of home loan.
Always compare at least three to five lenders to see how they compare for
- Interest Rates
- Closing Costs
- Cost of Purchasing Points
- and other factors.
Which Banks Offer the Best VA Loan Rates?
In general, I would start with your current bank, as well as companies that specialize in VA Loans or military banking. For example, companies such as Navy Federal Credit Union, Pentagon Federal Credit Union, USAA, Veterans United, and local military banks and credit unions.
Contacting several of these companies will help you get an overall idea of what to expect when buying a home, how long it will take to close the loan, etc. The organizations listed above are also great at educating their members and customers and are willing to give you a quote through their website or over the phone so you can take notes and compare your options.
Here are some banks to get started:
- Veterans United – Most Popular (they closed the most VA Loans in the U.S. in 2018).
- Quicken Loans – All Online Process – Easy to Use.
- North American Savings Bank (NASB) – Top 10 VA Lender. NASB does not charge lender fees on VA loans; however, fees payable to third party service providers are still required.
- J.G. Wentworth – Great for refinancing a VA Loan.
Downsides to VA Loans
The VA Loan is a very flexible program, and it offers military members and veterans a great way to buy their primary residence in an affordable manner.
However, there are some limitations, depending on your situation.
For example, we have already mentioned the types of properties you can buy with a VA Loan. The VA Loan program is great if you are buying a single-family home, up to a four unit home, and you plan on making it your primary residence.
However, the VA Loan isn’t an option if you want to buy some land to build on at a later date, or you want to buy a property with more units. You also can’t use it for a second home, vacation property, rental property, or for commercial property use (unless it is a farm you will also live on).
There are also VA Loan limits. The VA will only guarantee a loan up to $484,350.00 in most counties. However, the VA does guarantee higher loans in some high-cost of living counties. We will cover those details in a future article.
Finally, there is a mandated requirement to collect a VA Loan Funding Fee when you use the VA Loan. This is based on a percentage of the loan amount, and how many times you have used the loan.
The good news is that the VA Loan Funding Fee is waived if you have a VA Service-Connected Disability Rating. Having the funding fee waived can save you several thousand dollars on your closing costs.
VA Loans – A Great Way to Buy Your Next Home
Overall, I recommend looking into a VA Loan if you are buying or refinancing a home. They are generally easy to use and can be easier to qualify for than conventional or other mortgages. To top it off, the interest rates are almost always very competitive with conventional mortgages.
My wife and I have owned in three homes in the 13 years we have been married, and each of them was purchased with a VA Loan because that was the best offer available.
Again, I highly recommend contacting several lenders before applying for a VA Loan. That way you know you are getting a competitive rate that you can live with.