VA loans are mortgage loans offered by banks, credit unions and other financial institutions that provide mortgages. VA-backed loans for veterans are guaranteed by the U.S. Department of Veterans Affairs, which makes it possible for service members and veterans to obtain home financing with special terms. These include purchasing a home with no down payment or mortgage insurance requirements.
The VA also provides additional services that include refinancing home loans, housing grants to complete accessibility renovations and loans to help Native Americans build or purchase homes on federal trust land. Most veterans are eligible for loans, but you must obtain a certificate of eligibility from the VA before pursuing a VA loan. It will provide your maximum loan amount. It is set after the VA assesses the amount of time you spent in the armed services, how you were discharged and the type of service you completed.
What are VA loans?
VA loans help veterans and service members buy or build a home. While most borrowers utilize a private lender such as a local bank, with VA loans it is the U.S. Department of Veterans Affairs that backs the loan. The additional security afforded to lenders by the guarantee makes it possible for veterans to buy without a large down payment or mortgage insurance.
In fact, many veterans are able to buy without any down payment. In 2019, the maximum financing for a VA loan was $484,350. For 2020, the total is bumped up to $510,400. If you live in a designated high-cost area, such as New York, San Francisco or portions of Hawaii, the total climbs to $765,600. You can still buy a home for more than the loan limit, but you need to be able to pay the difference to make the maximum amount financed equal to or less than the limit.
Types of VA loans
Home purchase loan
The home purchase loan is the traditional VA-backed loan. To apply for a VA loan, you must obtain your certificate of eligibility to show lenders that you qualify for the loan and what your maximum eligibility is. After you receive your certificate of eligibility, you must qualify for the loan via conventional means, such as meeting debt-to-income and credit score criteria specified by your lender. For most home purchases, a 43% debt-to-income ratio is the maximum allowed for a mortgage. A credit score of at least 620 is also preferred. You can calculate your debt-to-income ratio by dividing all of your monthly debt payments by your gross monthly income.
For traditional borrowers who make less than a 20% down payment on a home, private mortgage insurance, or PMI, is required until 20% of the loan amount is paid off. PMI is not required on a VA loan, though, even though VA loan borrowers are able to purchase with reduced or no down payments.
With the absence of the down payment, borrowers are required to pay the VA funding fee, which is a one-time cost. The amount of the fee varies based on whether your loan use is the first or a subsequent use and whether you put down a down payment. On a first use of the VA benefit, such as your first home purchase, with a down payment of less than 5%, the VA funding fee is 2.15% through September 2028. With a down payment of 10% or more, the fee drops to 1.25%. By comparison, your second loan use would have a 3.3% or 1.25% fee, respectively.
Native American direct loan from the VA
An exception to the VA-backed loan is the Native American direct loan, or NADL, a loan provided by the Veteran’s Administration to Native American veterans. It allows for improvements, builds and purchases of homes on federal trust land. Borrowers must still meet standard credit criteria established by the VA.
Like the home purchase loan, the NADL does not require a down payment or PMI. Closing costs are limited and 30-year fixed mortgages are offered. Also like the direct loan, the NADL can be reused in the future and requires the payment of VA funding fees.
Interest rate reduction refinance VA loans
VA loans can be refinanced just like any other mortgage. Whether you want to secure a lower interest rate than you obtained at purchase or lower your monthly payments, the VA offers the interest rate reduction refinance loan, or IRRRL, to meet your needs. To qualify you must have an existing VA home loan and certify that you live in the home.
In addition to lowering interest or monthly payments, the IRRRL also provides an opportunity to switch up your mortgage, such as moving to a fixed rate from an adjustable rate. Always review potential closing costs to determine if a refinance works for you. It’s possible for closing costs to absorb many of the potential savings you hope to realize. The IRRRL carries a flat VA funding fee of 0.5% and additional lender-based costs.
Cash-out refinance VA loans
For veterans or service members with a non-VA loan who want to refinance with a VA loan, the cash-out refinance is an option. It is also the loan type that allows VA loan holders to tap into home equity. On a cash-out refinance loan, the VA funding fee is 2.15% for the first use and 3.3% for each subsequent use. You are also required to pay closing costs.
What are VA grants?
VA grants are funding that does not have to be repaid. For homeowners or home buyers, VA grants are intended for service members with service-connected disabilities and injuries that require in-home modifications. These can include add-ons such as building a wheelchair ramp, or larger renovations like expanding doorways, adjusting cabinet heights and building accessible bathrooms. Other considerations include adding concrete and asphalt surfaces outdoors and installing home security systems. Grant programs can be used up to three times.
Types of VA grants
Specially Adapted Housing Grant
The maximum Specially Adapted Housing Grant is set by law and adjusted regularly to match construction costs. As of fiscal year 2020, the maximum grant is $90,364. The SAH grant covers new construction on property to be purchased, new construction on owned property and remodeling a home. For builds on existing property and remodels, the property must be able to accommodate accessibility features. The SAH grant can also be applied retroactively toward a mortgage balance when you adapt a home without a grant. It is designed to help veterans with disabilities live independently.
Eligibility criteria specify certain injuries and specific combinations. These include loss of both legs or both arms or the loss of use, blindness in both eyes and loss of one leg or use of one leg, loss of one lower or use of one lower leg with residuals of organic disease, loss of one leg and one arm or the loss of use, and certain severe burns.
Thirty grants per year are also available to post 9/11 veterans who lost one or more lower extremities and cannot walk or move without braces, crutches, a cane or a wheelchair.
Special Housing Adaptation Grant
The SHA grant is available for up to $18,074 and can be used to adapt an existing home, purchase an adapted home or adapt a house that is being purchased. It can be used for a home you purchased or own but is also available to households where a family member is buying a house where a veteran will live.
SHA grants are available for blindness in both eyes with 20/200 visual acuity or less, loss of both hands or loss of use, certain burn injuries and certain severe respiratory conditions.
Temporary Residence Adaptation Grant
For veterans who are temporarily headquartered with family members while recuperating or searching for a home, the TRA grant provides a portion of the funds available in the SAH/SHA grant programs for modifications. For a temporary SAH grant, the maximum amount offered is $39,669 while the SHA temporary maximum is $7,083. Taking a temporary residence grant does not reduce the funding available in subsequent grant applications but does count toward the three grant maximum.
VA loans vs. grants
VA grants related to homes are available for veterans with very specific injuries and are to be used for specific qualifying renovations. They do not have to be repaid. Most veterans are eligible for a VA loan certificate of eligibility simply by serving. This document is then used to obtain a VA-backed loan through a traditional lender. The loan is repaid like any other mortgage.
A service member with a qualifying disability may use the VA loan program to purchase a house and use VA grants to make the home more accessible. A VA grant may also be used to cover all or part of the expense of building a home, and a loan can cover the remaining costs.
The bottom line
For disabled service members who qualify, VA grant programs provide an opportunity to reduce the amount of financing required for building or buying an adapted home. For everyone else, the VA loan is the way to go for a home loan without a down payment. The guarantee of the VA loan makes it possible to avoid the costly PMI associated with other reduced down payment loan programs.
When you start considering a home purchase, obtain your certificate of eligibility. Pull your credit report and check your debt-to-income ratio and credit score to see if you will qualify for a home loan. After you review the basics, shop around with multiple lenders to find the best terms.