VA loans are federally backed loans available to eligible military service members who are looking to buy a house. In many cases it will be your best option, though, thanks to the perks like no down payment, competitive rates, limited closing costs and no private mortgage insurance premium. In other cases, simply qualifying for a VA loan does not always mean it’s the best fit for your upcoming home purchase. However, before you move forward with a VA loan application, you will want to weigh all of the mission-critical variables.
What is a VA loan?
A Veterans Administration (VA) loan is a mortgage loan backed by the federal government made available to qualifying men and women that have served or are serving in the armed forces. While the name of the loan might insinuate it is only available to those soldiers who have completed service, the loan is actually available to active duty as well as some members of the National Guard and Reserves. Additionally, the loan is available to some surviving spouses.
Active-duty soldiers are eligible for the VA loan after 90 days of continuous service. Veteran eligibility is based on different time in service requirements outline on the VA’s website. Additional eligibility may be extended to service members discharged for things like hardships, early outs, reduction of force or certain medical conditions. Exact details are available at the aforementioned link.
National Guard and Reserve members get access to VA loans after six creditable years of service plus meeting a few other requirements. The only way for a member of the Guard or Reserves to gain access to the VA loan prior to the six-year requirement is to serve 90 days of continuous active-duty service. TRADOC and training do not count toward fulfilling this requirement.
The main benefits of the VA loan include no down payment, lower closing costs, no private mortgage insurance, better interest rates and APRs and lenient guidelines for lower credit scores and unfavorable financial events.
How you should and shouldn’t use a VA loan
The VA loan is an incredible benefit offered to servicemembers by the federal government. While the loan is a good fit for many situations, it’s not always the right choice. There are several instances where you’d want to use a VA loan and others where you might be better off with a conventional FHA, or other type of mortgage loan.
When a veteran should use a VA loan
- When you don’t want to make a down payment. Mortgage loans typically require at a minimum 3% as a down payment, which can stop many people from being able to buy a home. With the VA loan, you don’t have to make a down payment at all.
- When you want to make a down payment less than 20%. Most lenders require private mortgage insurance (PMI)on loans with a down payment under 20%. PMI can add hundreds of dollars to your monthly payments with no real benefit to you. One of the best perks about using a VA loan is there is no PMI requirement regardless of the size of your down payment (or if you don’t make one at all).
- When you want a better deal. VA loans are touted by lenders as having lower closing costs and better interest rates. If you are eligible for a VA loan, you should, at the very least, see what rates and costs are available to you for an upcoming home purchase.
When a veteran shouldn’t use a VA loan
- If you’ve already used the VA loan once. Yes, you can use your VA loan benefits as many times as you want to. However, the second time you use the loan, there will generally be an additional 3.3% funding fee. While the loan still may be your best option, this may make the loan more expensive.
- If you’re buying an investment property. VA loans cannot be used to purchase investment properties. The home you are buying must be a home you are planning on living in.
- If you’re buying a more expensive home. One drawback to the VA loan is that there is a cap on how much you can use the loan for. Caps change annually and are also dependent on where you live in the U.S. In 2020, the maximum you can borrow with a VA loan in most areas is between $510,400 and $765,600.
How to get a VA loan
Much like getting a traditional loan, there is a process for getting approved for a VA loan. The main difference between the two processes is the VA loan will require an additional step to prove eligibility.
1. Ensure you meet the eligibility criteria.
Before proceeding with the VA loan process, you need to ensure that you’re eligible. The VA website breaks down eligibility for all military components by type and era of service (years).
2. Obtain a certificate of eligibility (COE).
Once you’ve determined you qualify, it’s time to obtain your certificate of eligibility (COE). This is the proof you’ll need to take to your lender to show them you qualify for the benefit. COEs can be obtained through the eBenefits web portal. You will need to be registered in DEERS before opening an account through the portal.
3. Apply through a lender offering VA loans.
With your COE in hand, it’s time to head to a lender. Commercial lenders are approved by the federal government to offer VA loans. Find a lender you’re comfortable working with that offers you the best rates and most favorable loan terms, and begin applying. You’ll complete the loan application in the same manner as you would with any other type of loan. Approval times will vary based on the lender you choose to work with.
Too long, didn’t read?
With no required down payment, no PMI, better rates, lower closing costs and more favorable approval for less-than-great credit profiles, VA loans are great. You’ll need to assess your current situation and your house-buying goals to see if the loan is the right fit. If it’s not, there are plenty of other types of loans available to help you purchase your first or next home.