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VA Loans

For veterans, active-duty service members of the U.S. Armed Forces, and surviving spouses, VA loans present a highly beneficial opportunity for purchasing a home. These loans are designed to provide an affordable mortgage solution to those with qualifying military service, as well as to surviving spouses who are able to secure a Certificate of Eligibility (COE).

Guaranteed by the U.S. Department of Veterans Affairs, VA loans facilitate access to home financing with more forgiving credit requirements, enabling individuals to obtain an affordable mortgage even if their credit history is less than ideal. This program underscores the nation's commitment to assisting those who have served and their families in achieving homeownership on favorable terms.

What Are VA Loans?

VA loans are mortgage loans that are partially guaranteed by the U.S. Department of Veterans Affairs. Only military service members, veterans, and qualifying surviving spouses are eligible for VA loans. VA-backed mortgages offer the following unique advantages to eligible homebuyers:

No down payment
Can be transferred to other VA-eligible buyers
No mortgage insurance
Lower closing costs
Less stringent qualification standards than other mortgages

How Does a VA Home Loan Work?

VA home loans are facilitated by private lenders, such as banks, credit unions, and mortgage companies, rather than being issued directly by the Department of Veterans Affairs (VA). The VA establishes the eligibility criteria for these loans and approves the lenders that can offer them. The backing of the VA reduces the lenders' risk in case of default, making them more inclined to approve loan applications.

Being non-conforming loans, VA loans do not adhere to the conventional mortgage guidelines set by Freddie Mac and Fannie Mae. This designation allows for more lenient qualification standards, making it easier for eligible borrowers to secure financing. VA loans stand out from conventional mortgages by offering several key benefits:

Lower Interest Rates: Generally, VA loans come with more favorable interest rates, reducing the cost of borrowing.
Flexible Credit Requirements: The VA's more accommodating credit criteria facilitate easier access to loans for veterans and active service members.
No Down Payment Required: One of the most significant advantages is the ability to finance 100% of the home's value without a down payment.
Capped Closing Costs: The closing costs that lenders can charge are limited to 1%, potentially lowering the total cost of securing the loan.
No Monthly Mortgage Insurance: Unlike many conventional loans, VA loans do not require monthly payments for mortgage insurance, further reducing monthly expenses. However, there is typically an upfront funding fee, which varies based on various factors, including the borrower's military service, the loan amount, and whether it's the borrower's first VA loan.

These features make VA loans a highly attractive option for those who have served in the military, offering an accessible path to homeownership with benefits tailored to their unique needs.

Understanding the
VA Funding Fee

The VA funding fee serves as a one-time payment that acts as the VA's form of mortgage insurance, which supports the loan guarantee provided by the VA. This fee is determined by several factors, including the borrower's down payment amount, the loan type, and whether it's the borrower's first time using a VA loan. The fee ranges from 1% to 3.6% of the loan amount and is designed to offset the costs to taxpayers should a borrower default.

The funding fee can often be financed along with the loan amount, allowing veterans to purchase homes with little to no upfront cost, while still contributing to the sustainability of the VA loan program. Different rates may apply for other types of VA loans, such as Interest Rate Reduction Refinance Loans (IRRRLs) or VA Cash-Out Refinance Loans.

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VA Loan Types

The following are the different types of VA loans:

VA home purchase loan – VA-backed mortgage to purchase a home
VA jumbo loan – a VA loan that is above the conforming loan limits
VA renovation loan – VA mortgage plus additional funds to renovate a home
VA cash-out refinance loan – a VA loan used to convert the equity of a home into cash
VA rate or term refinance loan – Refinance loan for people who have non-VA loans and want to refinance into VA loans
VA interest rate reduction loan (VIRRL) – Refinance loan for people with existing VA loans who want to refinance to get a lower rate of interest

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Who Qualifies for a VA Loan?

Eligibility for a VA loan is determined by specific service criteria for military service members and qualifications for surviving spouses of veterans. Here's a breakdown of who qualifies:

Service Criteria for Military Service Members

To be eligible for a VA loan, military service members need to meet at least one of the following conditions:

Active Duty During Wartime: A minimum of 90 consecutive days of service.
Active Duty During Peacetime: At least 181 consecutive days of service.
Reserves or National Guard: Completion of at least six years of service.
National Guard or Reserves Under Title 32: At least 90 days of full-time duty, with at least 30 of those days being consecutive.

Qualifications for Surviving Spouses of Veterans

Surviving spouses of veterans can also qualify for a VA loan, but must first obtain a Certificate of Eligibility (COE) to present to their lenders. To be eligible for a COE, surviving spouses typically need to remain unmarried and meet one of the following criteria:

Missing in Action (MIA): The veteran spouse is officially designated as missing in action.
Prisoner of War (POW): The veteran spouse is officially designated as a prisoner of war.
Killed in the Line of Duty: The veteran spouse died while serving in the line of duty.
Died from a Service-Connected Disability: The veteran spouse passed away due to a disability related to their service, and the surviving spouse has not remarried.
Total and Permanent Disability:The veteran spouse was totally and permanently disabled due to service, passed away (regardless of whether the disability was the cause of death), and the surviving spouse has not remarried.

These criteria ensure that VA loans are accessible to those who have served in the military and their families, providing them with the opportunity to own a home under favorable terms as a form of gratitude for their service.

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Certificate of Eligibility for a VA Loan

Obtaining a Certificate of Eligibility (COE) is a crucial step in the VA loan process, serving as proof of your eligibility for this benefit. The VA offers a straightforward online system for requesting a COE through VA.gov, where, in many cases, the COE can be issued automatically if the VA has all the necessary information on file. If further information is required, you will need to fill out and submit a Request for a Certificate of Eligibility form to the VA.

If you find you need assistance during this process, ensure you have the appropriate documentation ready, which may include:

For Veterans: A copy of your DD-214, which serves as evidence of your discharge or separation from military service.
For Active Service Members: A statement of service signed by your commanding officer that includes your full name, date of birth, Social Security number, date you entered service, any instances of lost time, and the signature of the commanding officer.
For Former Members of the National Guard or Reserves: Your DD-214, indicating your history of service.
For Surviving Spouses Receiving Dependency and Indemnity Compensation (DIC): The veteran's DD-214 along with a completed VA Form 1817.
For Unmarried Surviving Spouses Not Receiving DIC: You will need the veteran's DD-214, an application for DIC, the veteran’s death certificate, and a copy of your marriage license.

This documentation helps verify your, or your spouse's, military service and is essential for the VA to determine your eligibility for a VA loan.

How to Get Pre-Approved for a VA Loan

Securing pre-approval for a VA loan is a crucial step in the home-buying process, offering a more concrete indication of your financial standing to sellers and real estate agents. Pre-approval is more substantive than prequalification, as it involves a thorough check of your financial background, including eligibility, income, credit, and debt levels. Here’s what the pre-approval process entails and how to prepare for it:

Pre-Approval Process

Credit Check: The lender will conduct a hard inquiry on your credit to assess your creditworthiness.

Verification of Income: Active-duty service members will need to provide a statement of service as proof of income.

Employment Verification: You'll be asked to provide employment verification documents such as W-2s and recent pay stubs.

Assets Verification: The lender will request documentation of your assets, including bank statements, investment accounts, retirement accounts, etc.

Identity Verification: You will need to provide your Social Security number and driver’s license number to verify your identity.

Preparation Steps

Review Your Credit: Obtain free credit reports from all three major credit bureaus at AnnualCreditReport.com. Correct any inaccuracies you find. Knowing your FICO scores is also crucial. If your scores are low, work on improving them by paying down debts to improve your DTI ratio.

Obtain Your COE: Secure your Certificate of Eligibility either through VA.gov or with assistance if necessary. This document is essential for moving forward with a VA loan.

Gather Necessary Documents: Compile all required documents, including:

W-2s for income verification
Bank statements to verify assets
Recent pay stubs as proof of current income
Your driver’s license and Social Security card for ID verification

Apply for Pre-Approval: With your credit reviewed, COE in hand, and documents gathered, you’re ready to apply for pre-approval. This step solidifies your readiness to engage in the housing market.

Pre-approval puts you in a stronger position when making an offer on a home, showcasing your serious intent and financial capability to sellers, thereby making your bid more competitive.

How Much House Can I Afford With a VA Loan?

Minimum Loan Requirements for a VA Loan

For those eligible for a VA loan based on service requirements, there are additional minimum criteria that need to be met to secure loan approval:

Employment

Applicants usually need to demonstrate consistent employment for the past two years.

Credit Score

Although the VA doesn't mandate a minimum credit score, lenders typically do, with many requiring a minimum of 620. However, it's possible to secure a VA loan with a credit score as low as 500 to 619.

Debt-To-Income (DTI) Ratio

Your DTI ratio should ideally be 41% or lower, though exceptions can be made if you have sufficient residual income.

Loan Limits

There are no loan limits for those with full entitlement. Those with partial entitlements may face limits.

Residual Income

You must have enough residual income remaining after monthly expenses, which varies based on the location of the home and the size of your family.

Reserve Funds

Reserve funds may be required in specific scenarios, such as impending military separation, purchasing a multifamily property, or using rental income to qualify.

Occupancy

The home bought with a VA loan must be your primary residence.

Federal Debt

Applicants must not be in default on any federal loans or must bring such debts current.

Home Appraisal

A VA-approved appraiser must evaluate the home.

Minimum Home Requirements

The home must provide basic living necessities such as adequate space for cooking, sleeping, and sanitation, adhere to local building codes, ensure proper drainage, and have a functional sewage system. For rural homes, private road access is necessary.

Positive Compensating Factors

Lenders may consider compensating factors to bolster an application that's borderline, including excellent credit history, minimal debt, stable long-term employment, receipt of military benefits, a low DTI ratio, significant savings, or a sizable down payment.

Negative Compensating Factors

Factors potentially detrimental to your VA loan application include a history of late payments, recent bankruptcy, foreclosure, and unpaid collections, among others.

These guidelines are designed to ensure that veterans and service members receive loans that are sustainable and affordable, reflecting their ability to repay while meeting their housing needs.

VA Loan Limits for 2024

Eligible service members and veterans with full entitlement have the advantage of not facing loan limits on VA mortgages exceeding $144,000. Should you default on a VA loan under full entitlement, the VA guarantees to cover 25% of the loan amount for the lender.

Full Entitlement is available under any of these conditions:

You have never utilized your VA home loan benefit.
You have repaid a previous VA loan in full and sold the property.
You have previously used your VA home loan benefit, experienced a short sale, and fully reimbursed the VA.

Remaining Entitlement comes into play when:

You are currently repaying a VA loan.
You have repaid a VA loan in full, but still own the home.
You have refinanced a VA loan into a non-VA loan type and retain ownership of the property.
You had a short sale on a VA loan and have not repaid the VA in full.
You executed a deed in lieu of foreclosure to avoid foreclosure on a VA loan.

If I Have Full Entitlement, Does That Mean I Can Get Any Size of Mortgage I Want?

If you have full entitlement, the VA won’t set a loan limit on your mortgage. However, your lender will still need to approve your loan application based on how much you can afford. Your lender will determine the amount you can afford based on your credit history, assets, and income.