Understand Your VA Home Loan
If you are an armed forces veteran and are planning to apply for a mortgage on a new home or refinance an existing loan, you might be eligible to secure favorable terms from your lender.
What is a VA Home Loan?
The letters “VA” in VA Home Loan advertise that this benefit is provided by the Department for Veterans Affairs. The VA Home Loan helps service members, veterans, and surviving spouses secure loans to help recipients’ with homes for their own occupancy.
The VA guarantees part of the loan, helping the borrower obtain a loan from a private lender, bank, or mortgage company at favorable terms without making a down payment. The VA will guarantee up to 25% of a home loan, up to a maximum amount of $113,275, making the maximum loan amount $453,100.
Over 22 million VA loans have been approved since the program’s creation as part of the GI Bill in 1944.
What are the Benefits?
- All qualified veterans are guaranteed equal opportunity to obtain a loan
- The loan is reusable
- No down payment, except if required by the lender or if the purchase price is more than the reasonable property value
- No mortgage insurance required
- The one-time VA funding fee can be included in the loan
- Veterans receiving VA disability compensation are exempt from the funding fee
- The VA places a limit on the closing costs the veteran can pay
- Veterans can turn to VA staff for assistance if they become delinquent on their loan
How do You Apply?
To approve your VA Home Loan, lenders need a Certificate of Eligibility (COE).A COE confirms that an applicant served the required time and attests to honorable character of service.There are three ways to apply for a COE: through a VA-approved leading mortgage lender; through the VA’s eBenefits website; or through the mail, with VA Form 26-1880.
There is a two-part appraisal process comprised of a valuation and an assessment of property conditions called the Minimum Property Requirements (MPRs). The appraisal process may be requested by any party to the transaction – provided the appraiser is assigned by the VA.
VA loans typically close within 30-45 days.
Who can Apply for a VA Loan?
The following people meet the requirements for the VA loan program:
- Veterans who have met the minumum service period
- Active service members who have served a minimum period
- Reservists and members of the National Guard who meet requirements
- Some surviving spouses of deceased veterans.
The minimum service period is usually 90 consecutive days of active service in wartime, 181 days of active service in peacetime, more than six years of service in the National Guard or reserves, or the spouse of a service member who has died in the line of duty or as a result of a service-related disability.
People meeting any of these descriptions can go to eBenefits or call 1-877-827-3702 to determine their eligibility.
What are the Risks?
- Rejection: Some veterans and service members have reported being rejected by sellers who preferred to accept a lower offer from a non-VA bidder. This may be due to a misperception that a lack of a down payment means the buyer is not qualified and is less likely to be able to close a transaction.
- Under appraisals: If the appraisal value is below the targeted loan amount, a buyer can ask the seller to lower the purchase price and pay the remainder in cash, or request a new appraisal. In some circumstances, the buyer may find they have little choice but to withdraw their purchase offer.
- Wait time: Appraisals can take around 10 days, but this varies by area and some people can be left waiting for much longer.
- Repairs: Although the MPR process is designed to ensure a home is safe, sanitary, and structurally sound, it does not protect the buyer against the risk of having to make repairs right after closure.
What are the VA Loan Rates?
The average interest rate of a 30-year fixed-rate VA home loan was 4.05% in December 2017, according to Ellie Mae, the software company that processes almost one-quarter of American mortgage applications. In comparison, the average cost of a conventional mortgage was 4.32%.
The VA does require payment of a one-off funding fee for all VA-approved loans. Most borrowers pay a fee of 2.15% of the amount of the loan, although members of the National Guard or reserves pay 2.4%. The VA will reduce the fee to 1.5% (or 1.75% for National Guard or reserves) for those who pay a 5% down payment on the home, and to 1.25% (or 1.5% for National Guard or reserves) for a 10% down payment. Surviving spouses and disabled service members are exempt from the funding fee.
How do You Find the Right Lender?
Factors to consider:
- Customer service
- Online user experience and tools
- Experience with VA loans
- Origination, closing and inspection fees
- Your credit score
Most of the top lenders that offer conventional mortgages will also offer VA home loans and many of the considerations you should think about apply to other types of mortgage loans as well. As with any loan, VA loan rates vary between lenders, so it is worth shopping around at the best VA home loan lenders and their rates and terms.