VA Home Loans 101: What Is It, Benefits, and How to Get One
Written Nov. 19, 2018 by Conor Green
Are you interested in pursuing a VA loan for yourself or on behalf of your spouse who serves in the military? We’ll break down the benefits of the VA loan over conventional loans, eligibility requirements, and how to apply for one. If you are more video oriented, here’s a quick video to give you a high-level understanding of VA loans!
When was the VA home loan program created?
The VA home loan program dates back to WWII and was created in 1944, as part of the Servicemen’s Readjustment Act (GI Bill of Rights). Our military service men and women sacrifice an immeasurable amount for this country. A small part of this sacrifice is being unable to keep up with every-day civilian activities, such as building up credit.
The VA loan is designed to level this playing field and enable active service, veterans, and certain family members of military personnel to live the American dream of buying a home. For a full history of the VA loan program and it’s evolution, check out Veterans United’s timeline here!
VA helps Servicemembers, Veterans, and eligible surviving spouses become homeowners. As part of our mission to serve you, we provide a home loan guaranty benefit and other housing-related programs to help you buy, build, repair, retain, or adapt a home for your own personal occupancy. - Department of Veterans Affairs
What is a VA home loan?
A VA home loan is a loan from a private lender that is approved and guaranteed up to a certain amount by the Department of Veterans Affairs. By guaranteeing the loan, the VA is able to limit the riskiness of the loan for banks. The result is the bank is able to provide loans to military men and women with no money down (100% financing), lower interest rates, no mortgage insurance, and with lower credit scores.
Here are the benefits of the VA loan on a high level in this easy to read infographic from the Lenders Network:
Who is eligible for a VA Home Loan?
After you shop around between the various VA lenders and decide to go with one, you will need to have a Certificate of Eligibility (COE) to verify the details of your military service. The requirements vary depending on your situation, but in general, if you have served in the active military for at least six consecutive months, six years in the reserves or National Guard, or are a spouse of someone who meets these conditions, you will likely qualify for a VA home loan!
Do you or your spouse meet at least one of these? If so, you likely qualify for the VA home loan program.
- Served for at least 90 consecutive days of active service in wartime
- Served for at least 181 days of active service during peacetime
- At least 6 years in the Reserves or National Guard
If you believe you are eligible and would like to move on towards applying for a COE, visit the VA’s page here that breaks downs the details and methods of application!
Three types of VA Home Loans
1. Purchase Loan
As you would expect, a purchase loan allows you to obtain a loan for a home you or your spouse is going to live in. As I mentioned above and as shown in the graphic, the main benefits are lower money down, lower interest rates, no mortgage insurance, and lower credit scores accepted. What this means for you is that you can buy a home with less money saved up and pay a lower monthly mortgage payment.
2. Streamline Refinance Loan or Interest Rate Reduction Refinancing Loan (IRRRL)
For starters, you must have a VA loan to be able to leverage the IRRRL program. You cannot refinance a conventional loan using this VA program, but you could refinance it through conventional avenues.
So what’s the purpose of refinancing? Basically, it is switching your existing loan for a more attractive one. You refinance when you realize you could have better terms for your loan. The main benefit or incentive is too obtain a lower interest rate. For example, if you secured a loan with a 5% interest rate and interest rates lowered to 4%, wouldn’t you like to save on that 1%? Why pay more right? The government made the IRRRL program easy for military personnel and their families to conveniently refinance their VA loans when it’s financially advantageous.
Refinancing your VA loan can be a called a Streamline Refinance Loan or an Interest Rate Reduction Financing Loan. The names are interchangeable. Again, the main benefits are lowering your interest rate and potentially shortening the overarching loan time period. Since the initial VA loan process has many steps, the refinancing process is fortunately much more streamlined!
Please BE AWARE of Scammers!
It’s a shame that it happens, but there are many solicitors who will contact you about refinancing your VA loan to “take advantage of these benefits”. While refinancing can be beneficial, there are many lenders out there with pushy salesmen that will force you into refinancing even when it’s not financially advantageous. It’s not always a good idea to refinance! Especially when they are adding all of these “cost savings” right back on to the end of your loan. Check out this article that highlights the VA’s and Consumer Financial Protection Bureau’s warning against these harmful loan refinancing offers!
3. Cash-Out Refinance Loan
Do you have credit card debt with a terribly high interest rate? Do you really need cash out for funding your kids education or updating your home. The Cash-Out Refinance Loan may be able to provide that for you. You should never take cashing out on some of your home’s equity lightly. Make sure you consult with a credible and honest lender about this program and the pro’s and con’s of leveraging it, given your current financial situation, before moving forward with it. You can learn more about it at the VA website here!
VA's Cash-Out Refinance Loan is for homeowners who want to take cash out of your home equity to take care of concerns like paying off debt, funding school, or making home improvements. The Cash-Out Refinance Loan can also be used to refinance a non-VA loan into a VA loan. VA will guaranty loans up to 100% of the value of your home. - VA
Breakdown of the VA Home Loan Benefits
1. No Downpayment Required
Sometimes it’s hard to plan your finances for a home purchase or life happens and you have an unexpected emergency medical expenses. Whatever the reason may be, VA loans empower you to buy your dream home, without having to put the traditional 20% downpayment on it. In fact, you can use 100% financing on your home purchase if desired.
If you do have some money saved it is generally advisable to put some money down (around 10%) so that you can secure a lower VA funding fee. The VA funding fee “reduces the loan’s cost to taxpayers considering that a VA loan requires no down payment and has no monthly mortgage insurance.” It helps the program to be more self-sustaining in the long-run. You can learn more about the funding fee here!
2. No Mortgage Insurance Premiums (PMI)
With conventional home loans, you will have to get a mortgage insurance policy for your mortgage. With the VA home loan, you are able to reap the savings of partnering with the VA. These monthly costs can really add up to a pretty penny! It is a great benefit for military men and women.
Mortgage insurance is an insurance policy that protects a mortgage lender or title holder in the event that the borrower defaults on payments, dies or is otherwise unable to meet the contractual obligations of the mortgage. Mortgage insurance can refer to private mortgage insurance (PMI), qualified mortgage insurance premium (MIP) insurance or mortgage title insurance. - Investopedia
3. Low Credit Scores Accepted
Have you religiously paid off your debts in a timely fashion? Have you paid off all of your medical bills in the past? Looming debt can affect your credit score. A VA loan allows you secure a loan with lower than average credit scores. Generally, FICO credit scores greater than 620 will be acceptable to most VA lenders. If you are between 580-620 you may be able to still take advantage of a VA loan if you make a larger downpayment.
Credit makes the world go round. You should know your credit score and of any debts that are currently brining it down. For a free report of all of your credit scores (FICO, Experian, Equifax, TransUnion) go to AnnualCreditReport.com. They are authorized by the federal government to give you all three scores for free every 12 months. Your FICO score is arguably the most important one, when it comes to securing a loan and is the one I am referring to when I said you want at least a 620 credit score!
4. Low Interest Rates
The purpose of the VA loan is to empower our military men and women to be able to purchase a home. Low competitive interest rates allow you to pay less interest and lowers your monthly payments, in order to make home ownership more financially feasible.
5. Refinancing a VA Loan (IRRRL)
If you happen to secure a VA loan during a higher interest rate period and the average interest rates drop, you can conveniently and quickly refinance your loan for instant savings! They make the process fairly easy and painless with minimal paperwork.
6. Higher Debt to Income (DTI) Ratios Accepted
When banks lend money to clients, they are interested in minimizing risk (i.e. the likelihood of the client defaulting on their loan or being unable to pay it). If you already have current debts or loans, such as a car loan, it makes sense that they would make it harder for you to pay off your home loan.
With VA loans, you are able to have a higher DTI ratio than would normally be accepted because the VA is guaranteeing your loan. This guarantee reducesthe risk for the banks and allows them to take on additional risk in the form of a new client with a higher DTI.
7. Foreclosure Negotiation
In the unfortunate event of a foreclosure, the VA will negotiate with the lender on your behalf to come up with potential alternatives to foreclosure that will help you maintain ownership of your home.
Breakdown of the VA Home Loan Requirements
Once you have your VA Certificate of Eligibility, start shopping around from the different lenders. It’s important to compare, because their pricing could vary significantly. In general, the main requirements of a VA loan are:
- Certificate of Eligibility (COE)
- Sufficient Qualifying VA Income to Support Paying Off the Loan (W2 income, part-time jobs, seasonal positions, self-employed income, second job income)
- Debt to Income Ratio Less than 41% (generally speaking)
- FICO Credit Score of 620+
- Mandatory VA Appraisal: verifies that the value of the property is equal to or greater than the price you want to purchase it for. Typically costs between ~$300-$500.
VA home loans are an invaluable program for military women, men, and their families in their pursuit to home ownership. VA loans can be used regardless of whether you are a first-time homebuyer or not! In general, they offer no downpayment requirements, no mortgage insurance premiums (MIP), are within reach of those with 620+ credit scores, have lower interest rates, provide an easy refinancing option (IRRRL), allow buyers to have a higher debt to income ratio than normal, and will help negotiate with a lender to prevent foreclosure if the situation should arise. Once you get your Certificate of Eligibility from the VA, shop around and find the lender that works best for you!
Lastly, if you are an active member of the military or a veteran THANK YOU for your service! We have taken the time to provide as much easily digestible information to you on this topic to serve you.
Have a question or a comment? What do you agree or disagree with about this article? Comment below and our team will reach back out promptly! 🙂
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