VA Home Loans: Benefits and Costs for Veterans in 2021
- VA Home Loans
VA loans offer a simple and effective pathway to homeownership for military members and veterans. By taking advantage of this type of loan, those who have honorably served or are currently serving in the U.S. military can open the door to their next home without a down payment, private mortgage insurance or even a perfect credit score.
Eligibility requirements are strict, and VA loans have a few unique characteristics. So it’s essential to understand the qualification process, how a VA home loan works and what you will need for closing. That way, you’ll be able to avoid unnecessary delays and get the keys to your new home quickly and easily.
VA loans are available to active-duty service members and veterans who have any discharge other than dishonorable.
They are backed by the Department of Veterans Affairs, but you'll still need to go through a private lender to get one.
VA loans can be used for more than new home purchases: borrowers can use them for construction and other real estate transactions.
What Is a VA Home Loan?
The VA loan was one of the many veterans’ benefits created by the Servicemen’s Readjustment Act of 1944, more commonly known as the “G.I. Bill.” The American Legion campaigned for the bill, citing the need to acknowledge all wartime veterans for their service. When Franklin D. Roosevelt signed the bill into law, it was the first sweeping package for veterans transitioning from military to civilian life.
Guaranteed by the Department of Veteran’s Affairs — or “VA” for short — VA loans are available to all veterans who have any discharge other than dishonorable. This includes those who have served in virtually any uniformed service:
- U.S. Army
- U.S. Navy
- U.S. Marine Corps
- U.S. Air Force
- U.S. Coast Guard
- U.S. Space Force
- Army National Guard and Air National Guard
- Reserve members of any military branch
- Cadets in the U.S. Military Academies
To meet VA loan eligibility requirements, active-duty service members, National Guard members and reservists must meet service minimums. The time-in-service requirements are:
- 90 days during a time of war
- 24 months of continuous active duty during peacetime
- Completion of 181 days of active duty before a discharge for hardship
- Completion of the full period of which one was called to active duty
- Completion of 20 months of a two-year enlistment before discharge for the convenience of the government
Veterans discharged for a service-connected disability, a service-connected compensable disability, or a pre-existing condition unrelated to service may also qualify. Finally, spouses of veterans may be eligible for a VA home loan if their spouse was killed in action and they have not remarried, their spouse is listed as a prisoner of war for more than 90 days, or their spouse is listed as missing in action.
Since its introduction, the VA home loan has helped veterans achieve a high rate of homeownership. It has also helped narrow the racial homeownership gap. According to data from the Urban Institute, while there is still a disparity, the gap between homeownership rates for whites, Blacks, Hispanics and Asians — both veterans and active-duty service members — is smaller than for the general population. And the three cities with the smallest gap between black and non-Hispanic white homeowners are those with the nation’s largest military bases: Killeen, Texas; Fayetteville, North Carolina; and Charleston, South Carolina.
VA loans are backed by the Department of Veterans Affairs, but they're not funded or issued by the government. You'll still need to go through a private lender. Most, but not all, lenders issue VA loans, and the terms and fees can vary. So it pays to compare offers and shop around for the best VA loan rates.
How Does a VA Loan Work?
Before you can sign the deed and get the keys to your new home, you need to understand how a VA home loan works. To apply, you will need to get a certificate of eligibility, select a lender and go through the underwriting process.
How To Get a VA Loan
The VA home loan process begins with a close look at your available resources. You will need to determine your eligibility, work with a lender to get the best option for your situation and put a successful bid on a home.
Determine your eligibility.
Before you can apply for a VA loan with a lender, you will have to establish your VA loan eligibility. The good news is if you have honorably served in any branch, you more than likely qualify for a VA loan.
Apply for Certificate of Eligibility.
You will need to apply for a Certificate of Eligibility (COE) from the Department of Veteran’s Affairs. Without a COE, your chosen lender cannot verify your service or eligibility for a loan. To get a COE, you will need to prepare documents about your service (such as your DD214, NGB Form 22, or papers signed by your current command) and apply online through the VA website.
Choose a lender.
Once you have a COE issued from the VA, you can begin shopping for your VA home loan lender. While many major banks, credit unions and other mortgage lenders offer VA loans, it's essential to do your homework on each of them. Check references and ratings with the Better Business Bureau and the Consumer Financial Protection Bureau. Then make sure your lender or loan officer is qualified to participate in the VA Lender Appraisal Processing Program (LAPP) and verify which category of VA lender they are.
Get preapproved for a loan.
Once you are satisfied with your lender, it’s time to get preapproved for a loan. During the pre-approval process, your loan officer will evaluate your credit to determine if you are “a satisfactory credit risk” and help you identify your maximum mortgage. You can use our mortgage calculator to determine how big a loan you can afford and what type of loan may serve you best.
Submit an offer once you find a home.
The hard work begins when you start hunting for a home. Working with a real estate agent, you may go through several showings and offers before your bid is accepted. Although a successful offer puts you one step closer to getting the keys to your next home, you will still have to go through appraisal, underwriting and closing.
Begin the appraisal and underwriting process and (possibly) obtain a termite report.
Once your bid is accepted, the appraisal and underwriting process begins. During this phase, your home will be inspected by an appraiser to determine if your mortgage amount matches the home value. Depending on the age of the home, you may also be required to submit a termite report. Meanwhile, underwriters will examine your financial paperwork, such as tax returns, pay stubs and bank statements, to make sure you can afford your home.
Once the underwriters are satisfied and your home meets appraisal requirements, you will be cleared to close on your home. During closing, you will pay any remaining costs not paid by the seller, sign all the paperwork required by the local government and your lender and receive the keys to your new property.
What Types of VA Loans Are There?
While many associate VA loans with new home purchases, borrowers can use them in numerous real estate transactions. In fiscal year 2020, the VA guaranteed over 1.2 million home loans totaling over $363 billion, ranging from first mortgages to construction loans and even reverse mortgages.
- First mortgage on a primary residence:
VA home loans are popular for those taking out their first mortgage on a new home. The VA loan guaranty offers qualified veterans and active-duty service members an affordable path towards homeownership while also providing lenders assurance in case of a default.
- Second mortgage on a primary residence:
Every family runs into financial difficulties throughout their life. If unexpected bills or expenses come up, the VA loan program offers an option to take out a second mortgage on your home as a “junior lien,” meaning it can’t exceed the borrowed amount of the first loan.
- Mortgage on a secondary/rental property:
Secondary homes or rental properties may offer a strong investment option to build wealth or leave a legacy. Under the rules, qualified homeowners can use the VA home loan program to purchase a second property to use as a rental property or a second home.
Qualifying homeowners have two options to refinance VA home loans. Those seeking to reduce their interest rate can do an Interest Rate Reduction Refinance Loan streamline refinance without going through the usual process. And those seeking to get cash out or convert a conventional mortgage or FHA mortgage into a VA mortgage can do a rate-and-term VA home loan.
- Construction loans:
Although they aren’t as popular, VA home mortgages can be used to construct a new home or rebuild and renovate an existing home. Many lenders do not offer this option because of the challenges in managing builder budgets.
- Reverse mortgages:
Although the VA does not insure reverse mortgages, any VA home loan can be converted to a reverse mortgage through a qualified lender under the Home Equity Conversion Mortgage (HECM) program administered by the U.S. Department of Housing and Urban Development.
Advantages of VA Home Loans
Without a doubt, the VA home loan program offers some of the most generous benefits to qualified cadets, service members and veterans buying a home. Between the loose credit requirements to the generally lower interest rates, there are many reasons to start your mortgage search with VA-qualified lenders.
- No down payment: VA mortgages allow first-time homebuyers to finance 100% of their loan, with no limits on the total loan amount. Under the right circumstances, homeowners can get into their homes quicker without having to save up tens of thousands of dollars for a down payment. If you're a second-time homebuyer, however, you may be subject to loan limits.
- No private mortgage insurance: While most mortgages require homeowners to purchase private mortgage insurance (PMI) until they have at least a 20% equity stake in their home, VA loans do not require PMI. This can save homeowners nearly $200 per month on their loan.
- No minimum credit score: Although the average credit score for VA homeowners is around 711, there is no minimum credit score requirement to take out a VA mortgage. Instead, the loan originator must determine the buyers are “a satisfactory credit risk.”
- Sellers can pay closing costs: In addition to allowing the seller to pay closing costs, the loan also enables them to offer concessions of up to 4% of the property sales price. This can include anything from vehicles to furniture to paying for discount points on the buyer’s behalf.
- Loans are assumable: If you want to sell your home or gift it to a family member, it’s easy to transfer the home over. VA loans are assumable by another party, allowing them to take on the full obligation of the loan from you under the original terms.
- Rates are generally lower than conventional loans: According to data from Ellie Mae, VA mortgage rates are usually lower compared to conventional mortgages and FHA mortgages — giving you more money in your pocket every month.
Disadvantages of VA Home Loans
Although there’s a lot to love about VA home loans, they also come with a strict set of rules. If you owe back taxes or other federal liens, or if you are looking to buy a condominium, another type of loan may suit your needs better.
- Zero flexibility for defaults or federal debts: If you are behind on tax payments or student loans, you may not qualify for a VA home loan. To get a VA-guaranteed loan, you must have all your federal debt resolved.
- VA loans require an upfront funding fee: In addition to closing costs, VA home loan recipients must also pay a one-time funding fee in place of PMI. The fees can be included in the loan or paid during closing.
- Condos may not be VA approved: Not all condominiums are VA-approved. If you are considering purchasing a condo instead of a traditional home, you will have to make sure it meets the VA home loan program requirements.
- VA loans require clear termite reports: In most of the United States, your future home will need a termite inspection before purchase. This fee can’t be rolled into the loan and must be paid by either the buyer or seller.
Frequently Asked Questions About VA Mortgages
You may still have questions regarding VA home loans and whether you should apply for one when buying your home. Here are some of the most common.
Not always. Those with a down payment of 10% or less will likely find VA loans to be the best option. But a buyer with excellent credit and a larger down payment might be better off applying for a conventional loan instead. Shop around and compare lenders, and remember to consider all of the costs of buying a home, such as the interest rate, insurance, fees, and other expenses, before choosing which loan to use.
If you've never used the VA loan program before, you likely have full entitlement, and there is no cap on the amount the VA guarantees. Regardless of the loan amount, the VA will guarantee up to 25% of the loan if you default.
But if you have previously used a VA loan, you may have to contend with a cap based on your county's loan limit. But take note: this only refers to the amount the VA will guarantee. How much you can borrow is determined by the lender.
Closing times vary and depend on each buyer's situation. But according to mortgage software company Ellie Mae, closing on a house with a VA loan takes an average of 45–50 days — a pace in line with doing so with a conventional mortgage. To help ensure a speedy closing time, have the proper documentation at the ready to complete your loan application.
It depends. When the market is competitive, you may find it more difficult. But getting preapproved for your loan will help overcome possible objections.
Buying may also be more complicated if the house is in poor condition, located in an area prone to termite damage, or part of a condominium project or planned unit development that is not VA approved.
There is no minimum credit score requirement to take out a VA loan. But lenders will need to decide whether you represent "a satisfactory credit risk." So while your credit score is taken into account, a low score may not automatically disqualify you. Many lenders look at a range of factors to determine your risk level.
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About the Author
- Urban Institute. "The Impacts of US Military Service on Homeownership and Income." Accessed February 12, 2021.
- U.S. Department of Veterans Affairs. "VA guarantees more than 1 million home loans in record year." Accessed February 12, 2021.
- Veterans Benefits Administration. "Lenders Handbook - VA Pamphlet 26-7, Chapter 4: Credit Underwriting." Accessed February 15, 2021.
- Ellie Mae. "Origination Insight Report: December 2020." Accessed February 15, 2021.