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How Does a VA Home Loan Work?

Many lenders offer VA home loans and the U.S. Department of Veterans Affairs (VA) guarantees them. You may qualify for this type of mortgage if you are buying a home and are a current or former member of the US military or an eligible surviving spouse of a service member. Members and former members of the Army, Marines, Coast Guard, Air Force, National Guard, and Reserve may all qualify. If you do qualify, there are a number of advantages VA mortgage offers, which is why you might want to consider it when shopping for a home.

VA loans were created in the United States in 1944, when service members returning from World War II needed assistance buying homes without perfect credit or large down payments. To date, over 22 million mortgages have been guaranteed by the VA. They continue to stay important for military families who wish to buy a home.

To date, over 22 million mortgages have been guaranteed by the VA.

VA Home Loan Benefits

For those who qualify, VA home loans offer several benefits, such as:

  • A choice between purchase loans and cash out refinance loans
  • An option for buying a home with no down payment, as long as the cost of the house is not higher than a specific set limit
  • No need for private mortgage insurance
  • Limited closing costs (the VA sets the limit for these costs)
  • In some cases, closing costs are covered by the seller
  • No early payment fee if you repay the loan early
  • Some programs offer support and assistance if you qualify and you run into problems making your mortgage payments

Since the government guarantees VA home loans, lenders are free to offer more competitive interest rates on these mortgages. Your proposed interest rate will depend on many factors, including your credit history, your credit risk, your lender, the home you are purchasing, and more. However, getting a VA loan may help you save on your home loan interest rate, all other factors being equal.  Overall, a VA home loan can result in significant savings because of the savings on closing costs, mortgage insurance, down payment, and prepayment fees.

VA Home Loan Requirements

While a VA home loan’s intention is to make buying a home easier for veterans, service members and surviving spouses, the requirements remain similar to the requirements for any mortgage. To qualify, you will need to show a lender that:

  • You have good credit
  • You have the income to pay your mortgage
  • You are a good credit risk
  • You are buying a home for your personal occupancy

Before seeking any mortgage, you may wish to work on improving your credit score and on saving some money in an emergency fund so you can pay your mortgage payments. You will also want to show you have a stable work history with the income to pay for housing costs. If you cannot show lenders you are a good credit risk, you may not qualify for a VA loan, even if you have served.

In addition to the above, you must also prove you are eligible for a VA loan through your military service. The good news is that since the government guarantees VA home loans, they are easier to qualify for than many traditional home loans.

Who Is Eligible for a VA Home Loan?

To qualify for a VA home loan, you must secure a valid Certificate of Eligibility (COE). To secure this, you must be able to show you were not discharged dishonorably and you meet service requirements. Service requirements mandate that you served in qualifying war and peacetime periods for the required minimum period of active duty with qualifying active duty dates.

For example, the Gulf War is a qualifying wartime period. If you served in this conflict, you must have served after 8/2/1990 and must have served for 24 continuous months or must have served for the entire period for which you were called to active duty (and this full period must be no less than 90 days).

All active duty service members who have served for at least 90 days also qualify for a COE.

All active duty service members who have served for at least 90 days also qualify for a COE. In addition, members of the National Guard and Reserve qualify if they served for at least 90 days in active service after 8/2/1990 and service for at least six years of service in the National Guard or Selected Reserve and meet one of the following conditions:

  • Still serve in the Selected Reserve
  • Were honorably discharged
  • Offered honorable service and were transferred to Ready Reserve or the Standby Reserve
  • Were placed on the retired list

Some veterans may still qualify for a COE and a VA loan, even if they do not meet basic service requirements. A veteran may be eligible even if they do not meet service requirements but were discharged because of:

  • Eligible medical conditions
  • Hardship
  • A disability caused by their service
  • Government orders
  • A reduction of the force

In addition to veterans and active duty service members, spouses may qualify for VA loans if:

  • Their spouses are prisoners of war or missing in action
  • They are the surviving spouse of a veteran who died from a disability caused by their service or who died while in service

Remarriage after surviving a spouse can affect eligibility, so remarried spouses of veterans will want to review their eligibility before applying for a VA home loan.

Who Finances VA Home Loans?

Like all mortgages, your lender finances VA home loans. A lender is the one who will forward the money for the home purchase. However, the VA guarantees the loan, offering the lender some assurance. That is, if a homeowner defaults on the loan, the VA guarantees up to a quarter of the loan amount so the lender will not lose all the money.

What Is VA Home Loan Basic Entitlement?

A VA home loan basic entitlement refers to the maximum guarantee of money the VA offers to the lender. In other words, this is the total amount the VA guarantees your loan. Your VA home loan basic entitlement appears on your Certificate of Eligibility (COE). In many cases, the basic entitlement is $36,000.

What Is My VA Home Loan Entitlement?

While the basic entitlement on a typical VA home loan is about $36,000, you may also qualify for additional entitlement (known as bonus entitlement). If you have never used the VA program to buy a home before, you will generally also qualify for a bonus entitlement of $68,250. In general, for a new qualified borrower the VA offers a guarantee of $144,000 or enough to qualify for a mortgage of $417,000.

While the basic entitlement on a typical VA home loan is about $36,000, you may also qualify for additional entitlement.

If you are purchasing a home in an area where home prices are higher, your basic entitlement and bonus entitlement may be higher and you may qualify for a larger home loan. To determine how much home you can afford and how much home loan entitlement you qualify for with a VA loan, speak to a lender who specializes in VA mortgages.

What Is The VA Home Loan Process?

The loan process is similar to any mortgage. You will qualify for a VA home loan by going to a lender offering home financing. In addition to proving your eligibility for a home loan by showing your credit rating, proof of employment and other financial documents, you will need to prove your eligibility for a VA home loan specifically by showing a Certificate of Eligibility (COE) proving your status as an active service member, veteran,, or qualified spouse. You may also need to provide supporting documents for the loan, as required by the lender.

In order to apply for a VA home loan, you will need to apply with a lender who offers VA loans. If you are applying with a co-borrower, you will need to prove your co-borrower also qualifies for a VA loan. Unless the co-signer on the mortgage is your spouse or also qualifies, you may still need to pay a down payment.

Once you have spoken with a lender, you will apply for your VA home loan and will go through the process to pre-qualify. Once you are pre-approved, you can start looking for homes. Using an approved real estate agent may qualify you for cash back in some cases, so be sure to work with an agent experienced with VA buyers. Once you find a home you want, place an offer and sign a contract. Your lender can work to finalize the paperwork and ensure you have the financing in place before you sign your mortgage and take ownership of your new property.

What Does A VA Home Loan Cover?

VA home loans cover a variety of owner-occupancy home needs, including:

  • A building project to build a home
  • The purchase of a condo in a VA-approved building
  • The purchase of a house
  • The purchase of land and a manufactured home
  • Home improvements involving energy efficiency
  • Some multi-unit properties

In general, VA home loans work for move-in-ready private residences, although there are some exceptions. The good news is that you can use your eligibility for VA home loans repeatedly. If you qualify, you can purchase each of your homes with a VA loan, as long as you have paid off your previous home and continue to qualify. Even some homebuyers who have faced foreclosure on a VA home loan or have a home purchased with this type of home loan may qualify for a VA home loan.

In general, VA home loans work for move-in-ready private residences.

There is a limit to the size of home you can finance with a 0 percent down VA home loan. In most parts of the country, that limit is $424,100. If you live in an area with higher home prices, however, you may qualify for a larger VA home loan.

When To Use A VA Home Loan

In general, if you qualify for a VA home loan and are purchasing a personal residence (and not an investment property or property where you will not be living) you will want to consider a VA home loan. The cost savings on a down payment and mortgage insurance can save you money. Be sure to compare the costs of this financing option against any mortgages your lender can offer. For many veterans and service members, a VA home loan is one of the more affordable ways to purchase a home.

If you have previously faced foreclosure or bankruptcy, applying for a VA home loan may make especially good sense. You can apply for this loan even if you have had previous financial challenges and because the loan is government guaranteed, you may qualify for this mortgage even if you have trouble for qualifying for non-guaranteed home loans.

If you do not have at least 20 percent of a home’s asking price as a down payment, you will also want to consider a VA home loan if you qualify. If you cannot put down at least 20 percent of a home’s price as a down payment with most mortgages, you will need to pay mortgage insurance. Since you do not need to pay this insurance with a VA loan and do not require a down payment, you can save money with a VA loan, even if you do not have the savings for a significant down payment.

While a VA home loan does not require you to pay mortgage insurance, however, keep in mind you will have to pay 2 percent of the loan amount as a VA Funding Fee. Budget accordingly, as the VA program uses this expense. For qualified borrowers who have disabilities related to their service, this amount might not be required. For those who do need to pay, the amount can roll into the loan amount instead of paying separately.

Another reason to get a VA home loan is if you will want to pay off your mortgage faster. Most mortgages charge a penalty for prepayments and extra payments. With a VA home loan, you can set up your payments to pay off a little extra per month if you get an income increase. You can also add a little extra payment whenever you like with no penalty. Paying even a little extra on your mortgage can save you tens of thousands over the term of your home loan without the need for refinancing. If your income fluctuates and you would like to be able to put extra money towards your mortgage or if you plan to pay off your mortgage early, opt for a VA mortgage if you qualify.

Now that lenders have tightened requirements for buying a home, it is important to explore every advantage when buying a home. If you do not have a large down payment and excellent credit, it may be a challenge to qualify for homeownership. If you have served your country, however, the VA program can help you buy your own home.

If you already qualify for Vista College degree programs, you may qualify for a VA home loan. If you are interested in exciting new opportunities after your service or while on duty, check out the Vista College degree programs which allow you to train for new opportunities and consider a VA loan if you’d like to purchase a new home.

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