The Benefits of VA Loans
Qualifying veterans, active-duty service members, and surviving spouses may be eligible for VA loan benefits that can help them get into their dream homes, such as zero money down, lower interest rates, and more flexibility.
VA home loans were created in the 1940s and have drastically changed over the last 70-plus years as they have become one of the most popular veteran benefits. The goal of the VA loan was to ease the economic and sociological problems of men and women who served in the military while helping the economy by providing investment opportunities for more individuals.
As time passed, VA loan benefits, loan types, and limits changed, but now, more service members and veterans can use their benefits to purchase a home. Even many years after the program began, it continues to benefit those who have served their country and surviving spouses.
VA loan benefits have helped millions of veterans, service members, and families purchase homes, offering significant financial benefits that make home buying possible for veterans who may not qualify for traditional home loans. This article will discuss everything you need to know about VA loans and their benefits.
What is a VA loan?
A VA loan is a mortgage program guaranteed by the U.S. Department of Veterans Affairs (VA) and offered through various lenders.
The loan is available to qualified borrowers, including active-duty service members and veterans, as part of their military benefits. VA loans have less stringent requirements than traditional home loans; borrowers can often put little to no money down on a home, get lower interest rates, and have lower closing costs, making them a great option for surviving members.
VA loans work similarly to other home loans but have unique requirements. For example, to qualify for a home loan, a borrower must meet the minimum military service history, pay a VA funding fee, and request a Certificate of Eligibility (COE) from the VA while meeting the criteria of a private lender.
Benefits of VA loans
VA loans offer several benefits compared to traditional home loans and make a great option for first-time buyers. A few VA home loan benefits include the following:
Little to no down payment
One of the most significant benefits of VA loans is that they do not require a down payment. Therefore, borrowers can purchase a home with $0 out of pocket aside from closing costs.
Lenders typically look for a down payment of at least 3.5% or more on traditional loans, so a VA loan can help you purchase a home without spending years of savings for a down payment.
Consider, for example, that you’re looking to purchase a home with an asking price of $500,000. If you use an FHA loan and put down 3.5%, your down payment will equal $17,500. However, with a VA loan, your down payment is 0% and will equal $0. VA loans can save borrowers tens of thousands of dollars on out-of-pocket expenses, helping them fulfill their dreams of homeownership.
It takes people many years to save for a down payment, but qualifying VA borrowers don’t have to worry about saving money after leaving the service or while they’re still in it.
While there’s no down payment required for these loans, there are advantages to making a down payment. You can pay lower VA funding fees and monthly payments with a down payment on a VA loan. Since the more you put down on a home upfront, the less you’ll need to borrow, you can expect to pay less in interest over the life of your home, helping you potentially save thousands of dollars. Even a down payment as low as 5% can help you save tons of money instead of occurring interest over the life of your loan.
Additionally, a down payment can provide instant home equity if you need to take out a home equity line of credit (HELOC), which may allow you to tap into your home’s equity sooner rather than later.
Competitive interest rates
Military loan benefits often discuss the zero down payment option with a VA loan. However, qualifying borrowers can also get competitive interest rates, which may mean lower interest rates.
Lenders typically charge lower rates for VA loans than conventional loans. While borrowers will still have to pay interest, lower rates mean saving thousands of dollars over the life of the loan.
Your interest rates depend on your lender. If you’re unsure whether something is a competitive interest rate, you can shop around for rates and prices to help you make the best decision for yourself and your family.
No PMI required
Private mortgage insurance (PMI) is insurance required by lenders if borrowers get conventional loans. This insurance is a premium added to mortgage payments when borrowers make a down payment of less than 20% and applies to most loans except VA loans.
For example, on the same $500,000 house we discussed before, to avoid PMI, a borrower would need to put $100,000 down on a home. The down payment is a significant amount of cash most people don’t have available for a home.
As part of the military loan benefit, qualifying veterans and active duty service members don’t have to worry about PMI insurance because lenders don’t require it. In addition, since annual mortgage insurance can add thousands of dollars to the total cost of a home loan, borrowers can save even more money with a VA loan.
However, it’s important to note that there are other fees associated with VA loans, such as funding fees. Funding fees go to the VA, but some exceptions exist, such as having a service-connected disability. The funding fee helps ensure the program has enough funding to continue to support the veteran community by offering these loans.
Better debt-to-income ratios
A borrower’s debt-to-income (DTI) ratio compares your monthly debts to your monthly income to help lenders determine your ability to repay the loan. Comparing the percentage of your income before taxes to expenses, such as rent, mortgage, credit cards, student loans, and other debts, lenders can determine if you make enough for a particular loan. Most lenders look for a debt-to-income ratio of 28 to 36% for conventional loans, but it can vary based on the lender.
However, as we’ve mentioned, one of the most significant benefits of VA loans is that they have more flexible requirements. For example, instead of a DTI of 36%, most VA loan lenders want to see a DTI of 41%.
However, some lenders offer DTIs as high as 55% or more, depending on your credit score, income, and other factors. A higher DTI means that your monthly expenses versus income are less likely to affect your chances of getting a loan and becoming a homeowner.
Lower credit requirements
Most loans have strict credit requirements. However, you can get a VA loan with bad credit, making it significantly easier for military members to become homeowners.
To qualify for a conventional loan, borrowers typically need a minimum credit score of 620. However, the higher your credit score, the lower your interest rate, so borrowers should aim for a credit score of at least 740 when applying for a loan.
You can qualify for VA loans with a lower credit score of 500. That said, lenders will offer better interest rates for credit scores of at least 620 or higher.
Limited closing costs
Closing costs are a part of every loan. They’re the fees you pay to the lender for creating your loan and cover a wide range of services. Borrowers pay the closing costs when signing the final paperwork to obtain the loan, but VA loan closing costs are slightly different from those for traditional mortgages.
Lenders don’t require you to pay non-allowable fees when you use a VA loan. However, your lender may require allowable fees, such as the VA funding fee, loan origination fees, title insurance, credit report fees, and discount points.
Additionally, lenders charge origination fees for the underwriting process, but there are limits on how much they can charge. For example, lenders can’t charge VA borrowers more than 1% of the total loan amount in origination fees.
The amount you’ll have to pay in closing costs will vary by lender, the home you purchase, and loan details. However, they’re typically 3%-6% of the value of the home.
VA Interest Rate Reduction Refinance Loan
VA home loan benefits don’t just cover purchasing a home. For example, VA borrowers can reduce their interest rates with a VA Interest Rate Reduction Refinance Loan (IRRRL), which can be used to refinance an existing VA loan for lower interest rates.
To be eligible for an IRRRL loan, borrowers must already have a VA-backed home loan and use it to refinance it, and they must prove that they currently live in the home or used to use it as their primary residence.
One of the biggest advantages of a VA loan is that VA loan benefits last a lifetime, which means you can use this military benefit more than once throughout your life with no maximum number of times you can use it.
However, this benefit may vary based on your entitlement. Your VA entitlement is a specific amount the VA will repay to the lender if a borrower defaults on the loan, with qualifying veterans having two levels of entitlement they can use to purchase a home.
Eligible veterans and service members can restore their full entitlement after repaying their home loan in full or using any remaining entitlement on their first home and purchasing a second one with the same benefits as their first VA loan.
Types of VA loans
The most significant benefit of a VA loan is that it makes homeownership more accessible and affordable for veterans and active duty service members. However, you can use several types of VA loans to purchase or refinance a home.
A few options include the following:
- Native American Direct Loan (NADL) Program: The NADL program helps eligible Native American veterans and their spouses use their VA loan benefits to purchase homes on federal trust land. You may also use the loan to refinance or improve the home, or for construction to allow borrowers to build their own homes. To qualify for this loan, the trivial organization must participate in the VA direct loan program and have a signed Memorandum of Understanding with the VA that determines the program’s conditions.
- VA-Backed Purchase Loan: A VA-backed purchase loan is the most common option and helps veterans buy, build, improve, and refinance homes. These loans have competitive interest rates and don’t require a down payment or PMI. With a VA purchase loan, borrowers can secure better financing terms than conventional mortgages, but terms vary by lender, and not all private lenders offer VA loans. Additionally, with these loans, you can choose an adjustable or fixed-rate mortgage to help you find the best option based on your financial situation.
- Cash-Out Refinance Loan: VA-backed refinance loans allow individuals with VA loans to reduce their monthly payments and the overall total cost of the loan. These loans reduce interest rates while letting borrowers replace their current loan with a new one to take cash out of home equity or refinance a non-VA loan into a VA loan. With a VA cash-out refinance loan, borrowers can use up to 100% of the home’s equity for anything from bills to other expenses and investments, allowing borrowers to access their home’s value.
- Interest Rate Reduction Refinance Loan (IRRRL): IRRRL loans allow borrowers to switch mortgage plans and payments to lower their monthly interest rates or chance repayment terms. To qualify, borrowers must have an existing VA loan. However, the VA will only approve these loans if new terms provide a financial benefit, such as lower monthly payments.
Which type of VA loan is right for you depends on your eligibility and what you’ll use it for. However, with any type of VA loan, you can expect the following benefits:
- No down payment
- No PMI
- Lower interest rates & closing costs
How to Apply for a VA Loan
The process for how to apply for a VA loan is similar to applying for any other home loan. In most cases, you can do it online as long as you have your paperwork prepared. The process varies for everyone, depending on how prepared you are, but it typically looks something like this:
1. Find a Mortgage Lender
Always shop around for a mortgage lender to help you find the best interest rates for your loan. You can get quotes online or call lenders to help you understand your options in terms of VA loans and qualifications.
2. Obtain Your Certificate of Eligibility
To apply for a mortgage loan, you must have your Certificate of Eligibility (COE) from the VA. Some mortgage lenders can contact the VA on your behalf, or you can request your COE directly from the VA. It can take up to six weeks or more, so it’s best to make a request as soon as you know you want to purchase a home. Your COE tells lenders how much the VA will guarantee on your VA loan, which can affect how much you can afford.
3. Find Your Dream Home & Sign a Purchase Agreement
Once you find a home, you must sign a purchase agreement. Then, an agent will help you complete the application process to make it as easy as possible. To apply for the loan, you’ll need all the necessary paperwork, which includes bank statements, pay stubs, and your COE.
After completing your application, the VA will perform an appraisal to determine whether to grant the loan based on a valuation of the property and how much the home is worth.
Once the appraisal is complete and the loan is approved, you can close on the loan. During closing, you’ll review the paperwork with your agent, provide proof of homeowner’s insurance, sign documents, and pay closing costs. Then, once the loan is finalized, you can move into your new home.
VA Loans: Frequently Asked Questions
How can I use a VA loan?
You can use VA loans to purchase, refinance, construct, or improve a primary residence; borrowers can’t use them for investment properties or vacation homes.
Instead, they must be used to purchase an owner-occupied property. VA loans are typically used on single-family homes in residential neighborhoods. That said, they can be used for any type of primary residence, including any of the following:
- Townhomes and condos: As long as the VA has approved a townhome or condo development, borrowers can use their VA loans to purchase them. If the development isn’t approved, your lender can work with the Homeowner’s Association (HOA) to help them get approved. Unfortunately, this process can take several months, so it’s usually best to find already-approved communities if you don’t want to wait to become a homeowner.
- Manufactured and mobile homes: Veterans can use their VA loans to purchase mobile or manufactured homes, but not all lenders will finance these properties since they’re riskier investments. Usually, the values of these homes depreciate over time, unlike houses and condos that increase in value as the years go by. However, using a VA loan to purchase a manufactured home might be ideal if a borrower already owns the land.
How do I qualify for a VA loan?
Not all veterans or active duty service members qualify for VA loans. To qualify for VA loans, borrowers must meet one or more requirements set by the VA, such as serving for 90 consecutive days of active service during wartime.
Some spouses may also qualify for VA loans if they became widowed due to service or if their loved one has a service-related disability.
Unfortunately, not everyone who has served in the military meets these requirements, but they still may be eligible for a VA loan, depending on discharge type. For example, individuals discharged for hardship or at the government’s convenience may still qualify for a VA loan.
If you’re unsure whether or not you qualify for a VA loan, you can contact the VA. Then, if you qualify for the loan, you can obtain your COE to verify that you meet the minimum requirements set by the VA. Meanwhile, spouses can verify their VA loan eligibility using a COE and various other forms of documentation.
What is the maximum VA loan amount I can get?
In the past, there were limits on how much borrowers could receive through the VA loan program. However, this no longer applies to borrowers with their full entitlement. However, those with reduced loan entitlement must still follow loan limits. It’s important to remember that limits are not your maximum for how much you can borrow. Instead, they determine how much you can borrow without factoring down payments.
To have your full loan entitlement, you must have never used your loan benefit or paid a previous loan off in full. That said, if you have remaining entitlement, you have a loan limit based on the county loan limit where you live, which means potentially making a down payment if your loan amount is over $144,000.
Getting the best loan for you
VA loans can help qualifying veterans and active duty service members achieve their dreams of becoming homeowners at a fraction of the cost of using other loans. However, even though lenders have less stringent requirements, borrowers must meet the requirements of the VA and obtain a COE to ensure they qualify for the loan.
With a VA loan, borrowers can expect a 0% down payment, lower interest rates, and no PMI insurance requirement. However, even if you don’t qualify, Griffin Funding has many mortgage options to suit your needs and budget. Ready to become a homeowner? Apply with Griffin Funding today.
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