In the simplest terms, a VA (or Veteran Affairs) loan is a conventional mortgage backed by the VA’s loan program. What this means is that if for whatever reason, you default on your loan and the house goes into foreclosure, the VA will pay up to 25 percent of the loan. Having a VA-backed loan guarantees your lender that if you cannot pay for your home, the VA will pay the lender, making you a candidate for better rates. VA loans allow you to buy a home with zero down payment and usually do not require you to get private mortgage insurance, which means those who qualify can afford more house than they would with a conventional bank loan. So, here we will talk about eligibility and the home buying process associated with a VA loan.
Veterans Affairs loans are available to eligible active duty, retired military service members, reserve or national guard members, and their spouses. These main groups, and a few select others, can get a CoE (or Certificate of Eligibility) as long as they have not been dishonorably discharged and meet the requirements placed on that group. The specific requirements are below:
- Current active-duty members of the United States military, active for at least 90 continuous days before they can use the benefits of a VA loan.
- Retired military service members have specific requirements that pertain to different periods of time, which you can check on the VA website, but most require 90 to 181 days or the entire term of service.
- Selected Reserve and National Guard members need six years of creditable service, and one of the following must be true: discharged honorably, placed on the retired list, transferred to the Standby Reserve or an element of the Ready Reserve other than the Selected Reserve after honorable service characterized, or continue to serve in the Selected Reserve.
- A surviving spouse of a Veteran or a spouse of a Veteran who is missing in action or held as a prisoner of war may be eligible and should check the VA website.
The beginning of the home buying process will continue similarly to that of a conventional loan. First, you will want to get your finances together and get a preapproved letter from multiple lenders. It is important to shop around to several banks and lenders because the interest rates you will receive from them will vary based on the institution you are talking to and your current financial situation. You will be in a better position because of your VA loan in these situations; the guarantee of payment in the event of default is important to a lender. The limit placed on your loan is contingent on finances, but the fact that you have the CoE from the VA means that you can afford more home. Next, you pick the best offer and start looking.
This is where some of the VA loan-specific conditions come into play. The first, and most discussed, is the funding fee. While there are specific ways to be exempt from the funding fee, as the VA says on its website; “If you’re using a VA home loan to buy, build, improve, or repair a home or to refinance a mortgage, you’ll need to pay the VA funding fee unless you meet certain requirements.” This fee is a one-time payment the borrower pays on the loan to the VA. The funding fee is a percentage of your loan determined by two criteria: whether it is your first time using a VA loan and how much of a down payment you are providing. There is a chart, here, on the VA website that breaks this down, but let’s look at an example.
- Your loan is 400,000 dollars, you have 25,000 dollars to put down, and this your first time using a VA loan. So, your down payment is 6.25 percent of the loan, which means you will pay 1.65 percent of the remaining loan amount to the VA, or $6,187.50.
This is very simple to figure out, but remember that the higher down payment you provide, the lower the funding fee will be, not only because it is based on the remaining loan but because the percentage goes down as well. The fee can either be paid at closing or financed by adding it to the loan and paying it off over time.
The only other consideration is that the VA will need to appraise the home to make sure it meets basic property conditions and the value of the home. This appraisal is used to make sure that the home is worth its selling price. If it doesn’t, you will need to have the real estate agent prove it is worth more than the appraisal, renegotiate the sales price to make it match, or pay the difference at closing. Even with these requirements, a VA loan is a great option for veterans on their journey to owning a home!
