A Comprehensive Guide to VA Home Loans

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Updated: July 10, 2024

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VA home loans offer an advantage for eligible veterans and active military members seeking homeownership. With no required down payment or private mortgage insurance, they provide a more financially accessible option than conventional mortgages. We’ll explore how VA home loans work, their associated costs, rates, lenders and the steps to secure one.

Key Takeaways

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A VA home loan is a mortgage guaranteed by the Department of Veterans Affairs. They offer benefits like lower interest rates compared to conventional mortgages.

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Eligibility for VA home loans extends to veterans, active-duty service members, certain National Guard members and reservists and some surviving spouses.

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While VA home loans don’t require a down payment or private mortgage insurance, they include a VA funding fee, which may be waived for eligible individuals.

What Is a VA Home Loan?

A VA home loan, provided by private lenders like banks and mortgage companies, is insured by the VA, allowing eligible veterans, service members and certain spouses to purchase a home with no down payment and no private mortgage insurance (PMI). This setup, supported by a VA guarantee on the part of the loan, often results in more favorable terms like lower interest rates, easing financial burdens and streamlining the homebuying process.

Understanding how VA home loans work can empower you during the homebuying process. While opting for no down payment can get you into a home sooner, it could lead to higher total loan costs due to interest. Also, the VA funding fee — a one-time charge that helps sustain the program — should be factored into your planning. Being mindful of these elements will prevent any surprises during the process.

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MONEYGEEK EXPERT TIP

Be prepared. Most Veterans or service men and women think a 0% down payment means they can buy a home with $0 out of pocket or very little. Unfortunately, closing costs are still needed and are typically the most expensive part of buying a home. Make sure you have some savings, as you can not rely on getting the seller to cover your closing costs. Especially in the market we are currently in. — Ramsey Coulter, Credit and Mortgage Expert

Types of VA Home Loans

If you're considering a VA home loan, it’s helpful to understand the different types available. Knowing your options lets you tailor the loan to your specific needs, whether you're buying your first home, looking to refinance or living with certain unique circumstances. The right loan type can save you money and make the process smoother.

The table below explores some of the options:

Home Loan Option
Description
Ideal Borrower Profile

This loan type is designed for those buying a new home. It offers zero down payment, competitive interest rates and does not require PMI.

Ideal for first-time homebuyers or those planning to move and seeking low upfront costs.

This specialized loan is for Native American veterans and offers features like no down payment and minimal closing costs for homes on federal trust land.

Native American veterans who live or plan to live on federal trust land and want to buy, build or improve a home.

This refinancing option allows you to lower your interest rate or switch from an adjustable to a fixed rate. Simplified paperwork and potentially no out-of-pocket costs are key features.

Homeowners with existing VA home loans who want to lower their monthly payments or secure a more predictable payment schedule.

This loan replaces your current mortgage and allows you to take out extra cash from your home's equity. You can use this money for various purposes like debt consolidation or home improvements.

Homeowners who have built up significant equity in their homes and require additional funds for purposes like high-interest debt consolidation or renovations.

Choosing the right loan type hinges on your unique circumstances and long-term financial goals. Some people might start with a purchase loan and then switch to an IRRRL to get better terms later on. Understanding these options equips you to make smarter choices, maximizing the benefits of your VA home loan.

Pros and Cons of a VA Home Loan

Knowing the pros and cons of a VA home loan allows you to make a more informed decision. Benefits like no down payment and no private mortgage insurance are appealing — these can save you a lot upfront and in monthly costs. However, focusing solely on the upside can prevent you from seeing the potential drawbacks. For instance, the VA funding fee can be substantial if you're not exempt.

To help you gauge whether a VA home loan is your best option, here are some pros and cons to consider:

VA Home Loans

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Pros

  • No Down Payment: This eliminates the initial financial hurdle, making it easier to enter the housing market immediately.
  • No Private Mortgage Insurance (PMI): You won't need to budget for this monthly cost, which is usually required when you put less than 20% down on a home.
  • Flexible Credit Requirements: VA loan lenders are generally more forgiving of lower credit scores, increasing your chances of approval.
  • Lower Interest Rates: VA loans often come with rates lower than conventional loans, reducing your monthly payment.
  • Assumable Loan: Future buyers can take over your loan under the same terms if they qualify, making your property more attractive.
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Cons

  • VA Funding Fee: This one-time fee can be a significant cost, although it can be rolled into the mortgage, reducing its impact on closing costs.
  • Primary Residence Requirement: The property must be a primary residence and cannot be a vacation home or investment property. Condos must be VA-approved, which may limit your options.
  • Limited to VA-Approved Properties: The VA has strict guidelines on property types, which may restrict your choices.
  • Possible Longer-Term Costs: No down payment could mean higher interest costs over the life of the loan, potentially offsetting short-term savings.
  • Equity Building Takes Time: Since you're not making a down payment, building equity in your home may take longer.
  • Refinancing Limits: You can only switch to another VA loan if you decide to refinance, which may limit your financial flexibility.

Eligibility for VA Home Loans

For service members, veterans and their families looking to take advantage of the benefits of a VA home loan, here are the criteria that determine if you qualify:

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    Active Duty Requirements

    Eligible with at least 90 consecutive days of service during wartime or 181 days during peacetime for active duty members; reserves or National Guard members need six or more years of service.

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    Spousal Eligibility

    Eligibility extends to un-remarried spouses of service members who either died in the line of duty or due to a service-related disability, as well as spouses of service members who are missing in action or prisoners of war.

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    Certificate of Eligibility (COE)

    Essential for verifying service requirements, this document can be obtained through most lenders during the loan application process. Alternatively, individuals can obtain the COE directly from the VA, or if they are on active duty or in the reserves, their commanding officer can assist in getting it.

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    Credit and Income Review

    Lenders assess borrowers' credit history and income to ensure repayment capability. Although the VA does not mandate a minimum credit score, it recommends a debt-to-income ratio of 41%, though lenders may have their own requirements.

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SPECIAL CASES FOR VA HOME LOAN ELIGIBILITY

Special eligibility for VA home loans includes service members discharged for reasons such as hardship, force reduction, certain medical conditions or a service-connected disability. You can still obtain a certificate of eligibility if you fall into any of these categories.

Understanding VA Home Loans Rates

As with any home financing option, understanding how VA home loan rates work is essential. Interest rates significantly influence your monthly payments and the overall cost of the loan over its lifetime.

Here are some factors that may affect your rate for a VA home loan:

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    Credit Score

    The better your credit score, the more trustworthy you appear to lenders. It could translate into a lower interest rate, saving you thousands over the life of the loan.

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    Loan Term

    Whether you choose a 15-year or 30-year loan can make a difference. A shorter term generally means lower interest rates but higher monthly payments. It's a trade-off between what you can afford each month and how quickly you want to pay off your home.

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    Economic Conditions

    The overall economy influences rates. For instance, if the Federal Reserve hikes the federal funds rate, expect your mortgage rates to rise. Conversely, rates often fall during economic downturns, which can be an excellent time to buy or refinance.

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    Down Payment

    In many loan types, a larger down payment could secure you a lower interest rate because you’re instantly providing a large chunk of the total home price. However, one of the perks of VA home loans is the possibility of zero down payment.

The VA Funding Fee

The VA funding fee is a mandatory one-time payment required when taking out a VA home loan, which is essential for maintaining the program's affordability since it operates without requiring down payments or monthly mortgage insurance. This fee can be financed into your loan or paid upfront at closing. The VA funding fee chart, updated as of April 7, 2023, provides the latest fee percentages based on your loan type and amount.

Breaking Down the Funding Fee

James, a Navy veteran, is ready to settle into a home after years of service. This is his first venture using a VA home loan, and he's chosen a house priced at $350,000. Aware of the benefits of the VA home loan program, James decides to make a 10% down payment, which amounts to $35,000, reducing his total loan amount to $315,000.

This is his first use of a VA home loan and, with his down payment, his funding fee rate is 1.25% of the loan amount. Therefore,

VA Funding Fee = $315,000 x 1.25% = $3,937.50

James opts to finance this fee into his loan, spreading the cost over the life of the mortgage, keeping upfront costs lower while he transitions to civilian life.

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CAN I BE EXEMPTED FROM PAYING THE VA FUNDING FEE?

Certain borrowers, including those with service-connected disabilities or surviving spouses of veterans, may be exempt from this fee. If you become eligible for disability benefits after closing, it's possible to get the fee refunded.

Finding VA Home Loan Lenders

Choosing the right VA home loan lender can significantly shape your borrowing experience, impacting everything from loan terms to closing speed. Here are several reputable lenders that offer VA loans, but remember, there are others that offer competitive options.

Mortgage Lender
State Availability
Online Application
BBB Rating
Homeowners Assistance Programs

50

Yes

A

Our America’s Home Grant® and Down Payment Grant

50

Yes

A+

Loss Mitigation Assistance

50

Yes

A+

ONE+

47

Yes

A+

Doctor Loan

Construction to Permanent Loans

Affordable Lending Options

Remember that lenders have unique VA home loan requirements. It’s best to contact lenders directly to understand what you’ll need to complete your application if you are interested in a particular program.

How to Apply for a VA Home Loan

Knowing the ins and outs of securing a VA home loan can be a game changer. It can streamline the process, reduce stress and set you up for financial success. Understanding each step makes you less likely to face surprises that can slow you down. Let's dive into the process.

1
Check Eligibility

Before anything else, make sure you qualify for a VA home loan. You'll need to fit certain service requirements or be the spouse of a service member who meets these terms. Collect all required service records upfront to avoid last-minute hassles.

2
Obtain a Certificate of Eligibility (COE)

This certificate is your ticket to a VA loan. You can apply for a COE through the VA's website, or your lender can request it on your behalf. Speed things up by using your lender's online resources for this step.

3
Assess Your Finances

Know how much you can afford by checking your credit score, calculating your debt-to-income ratio and setting a realistic budget. Using a mortgage calculator can help you get a good ballpark figure.

4
Select a Lender

Choose a lender with experience handling VA loans. This expertise can make your process smoother. Check lender reviews and ask for recommendations from friends or family who've gone through this process.

5
Pre-Approval

Getting pre-approved shows sellers you’re a serious buyer and can actually afford the home. Keep all your financial documents ready. The quicker you submit these to your lender, the faster you get pre-approved.

6
Property Requirements

Make sure the property you choose meets VA's minimum requirements by getting an appraisal. Keep an open dialogue with your real estate agent about VA property requirements.

7
Loan Application

Complete all the required forms. Your lender will then start the underwriting process. Make sure to double-check your application for any errors.

8
Closing

Once approved, you'll attend a closing meeting to sign paperwork and get the keys to your new home. Schedule the closing at a time when you can take time to look over everything. You'll be signing a lot of documents, and you'll want time to review them.

FAQ: VA Loans

We addressed common questions to provide clarity and enhance your understanding of how VA loans differ and how they benefit eligible borrowers.

What is a VA home loan?
What is the current interest rate for a VA home loan?
Who is eligible for a VA home loan?
How do I secure a Certificate of Eligibility (COE)?
How do VA home loan rates differ from conventional mortgage rates?
What is the VA funding fee, and do I have to pay it?
Can I refinance my VA home loan?

About Zachary Romeo


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Zachary Romeo is the Head of Loans and Banking at MoneyGeek, with over 10 years of experience and forthcoming certification as a Commercial Banking and Credit Analyst (CBCA). Previously, he led production teams for some of the largest online informational resources in higher education.

Romeo has a bachelor's degree in biological engineering from Cornell University. He geeks out on minimizing personal debt through people-first content.


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