Demand has been sizzling for Veterans Affairs mortgages, better known as VA loans. These mortgages do not always require a down payment and are available to military veterans and active military members. VA loans are made through private lenders and are guaranteed by the Department of Veterans Affairs, so they do not require mortgage insurance. There’s no minimum credit score requirement.
What is a VA Loan?
A VA loan is a mortgage loan in the United States guaranteed by the U.S. Department of Veterans Affairs (VA). The loan may be issued by qualified lenders.
The VA loan was designed to offer long-term financing to eligible American veterans or their surviving spouses (provided they do not remarry). The basic intention of the VA direct home loan program is to supply home financing to eligible veterans in areas where private financing is not generally available and to help veterans purchase properties with no down payment. Eligible areas are designated by the VA as housing credit shortage areas and are generally rural areas and small cities and towns not near metropolitan or commuting areas of large cities.
The VA loan allows veterans 103.3 percent financing without private mortgage insurance or a 20 percent second mortgage and up to $6,000 for energy efficient improvements. A VA funding fee of 0 to 3.3% of the loan amount is paid to the VA; this fee may also be financed. In a purchase, veterans may borrow up to 103.3% of the sales price or reasonable value of the home, whichever is less. Since there is no monthly PMI, more of the mortgage payment goes directly towards qualifying for the loan amount, allowing for larger loans with the same payment. In a refinance, where a new VA loan is created, veterans may borrow up to 100% of reasonable value, where allowed by state laws. In a refinance where the loan is a VA loan refinancing to VA loan (IRRRL Refinance), the veteran may borrow up to 100.5% of the total loan amount. The additional .5% is the funding fee for an VA Interest Rate Reduction Refinance.
The U.S. Department of Veterans Affairs is not a direct lender. The loan is made through a private lender and partially guaranteed by the VA, as long as guidelines are met.
If you think you may be eligible for a VA loan, here are some must-knows about the program.
Most members of the military, veterans, reservists and National Guard members are eligible to apply for a VA loan. Spouses of military members who died while on active duty or as a result of a service-connected disability may also apply.
Active-duty members generally qualify after about six months of service. Reservists and members of the National Guard must wait six years to apply, but if they are called to active duty before that, they gain eligibility after 181 days of service.
“Most reservists are qualifying under active duty,” says Michael Frueh, chief of staff for the Veterans Benefits Administration within the Department of Veterans Affairs.
Reservists, members of the National Guard and active-duty members generally are eligible after 90 days of service during war periods.
“If you were on any type of foreign soil, more than likely you are eligible,” says Grant Moon, a veteran and president of VA Loan Captain Inc., a loan referral company.
Potential borrowers must obtain a certificate of eligibility. The form can be submitted online.
“But you don’t need the Certificate of Eligibility in hand to start the mortgage process,” says Chris Birk, director of education for Veterans United Home Loans. “Lenders in many cases can get this document for borrowers during the preapproval phase.”
Advantages of a VA loan
- No down payment is required in most cases. Conventional loans typically require a 5 percent down payment, and FHA loans require 3.5 percent.
- No monthly mortgage insurance premium to pay. FHA loans come with both an upfront and an annual mortgage insurance charge. Conventional buyers typically need to pay for private mortgage insurance unless they’re making a down payment of 20 percent or more.
- Limitation on buyer’s closing costs. Sellers can pay all of a buyer’s loan-related closing costs and up to 4 percent in concessions.
- Lower average interest rates than other loan types. VA loans continue to have the lowest average interest rates of all loan types.
- No prepayment penalties. VA buyers can pay off a loan early without any financial penalties.
- An assumable mortgage, typically subject to VA and/or lender approval. You may be able to have someone take over your mortgage payment, which can be a big benefit in an environment of rising interest rates.
- Foreclosure avoidance advocacy from the VA loan program. The VA has staff members who advocate on behalf of homeowners to find alternatives to foreclosure.
Generally, all Veterans using the VA Home Loan Guaranty benefit must pay a funding fee. This reduces the loan’s cost to taxpayers considering that a VA loan requires no down payment and has no monthly mortgage insurance. The funding fee is a percentage of the loan amount which varies based on the type of loan and your military category, if you are a first-time or subsequent loan user, and whether you make a down payment. You have the option to finance the VA funding fee or pay it in cash, but the funding fee must be paid at closing time.
You do not have to pay the fee if you are a:
- Veteran receiving VA compensation for a service-connected disability, OR
- Veteran who would be entitled to receive compensation for a service-connected disability if you did not receive retirement or active duty pay, OR
- Surviving spouse of a Veteran who died in service or from a service-connected disability
Veterans Affairs does not require a minimum credit score for a VA loan, but lenders generally have their own internal requirements. Most lenders ask for a credit score of 620 or higher, Moon says.
“There are players that would go lower, but they would probably charge a higher interest rate,” he says.
Borrowers must show sufficient income to repay the loan and shouldn’t have excessive debt, but the guidelines are usually more flexible than they are for conventional loans.
“We always tell underwriters to do their due diligence, but this is a benefits program, so there is some flexibility,” Frueh says.
VA guidelines allow veterans to use their home-loan benefits a year or two after bankruptcy or foreclosure.
“We look at the whole credit picture, what was the reason for the credit bankruptcy and where the borrower is now,” says John Bell, assistant director of loan policy at the VA.
VA loans are available only to finance a primary home. A VA loan cannot be used to purchase or refinance vacation and investment homes.
The VA says there is no cap on the amount you can borrow. “However, there are limits on the amount of liability VA can assume, which usually affects the amount of money an institution will lend you,” the agency says. “The loan limits are the amount a qualified Veteran with full entitlement may be able to borrow without making a down payment. These loan limits vary by county, since the value of a house depends in part on its location.
The limit on VA loans vary by county, but it’s $417,000 in most parts of the country and up to $625,500 in high-cost areas in the continental United States and even higher in four counties in Hawaii.
What if I stop paying the mortgage?
Another advantage of a VA loan is the assistance offered to struggling borrowers. If the borrower of a VA loan can’t make payments on the mortgage, the VA can negotiate with the lender on behalf of the borrower.
“We have dedicated staff nationwide committed to helping veterans who are experiencing financial difficulty,” Bell says.
VA’s financial counselors can help borrowers negotiate repayment plans, loan modifications and other alternatives to foreclosure, he says.