A VA loan allows veterans, active-duty service members, and eligible spouses to finance a house without any down payment or mortgage insurance. Plus, its credit requirements are also quite lenient. In this article, we take a closer look at VA loans and how they work so you can decide if they're suitable for your home purchase or refinancing plans.Get a Free VA Loan Quote,
What Is a VA Loan?
A VA loan is a mortgage loan available through a program created by the US Department of Veteran Affairs (previously known as the Veterans Administration).
VA loans can make it easier for veterans, service members, and their surviving spouses to purchase a house as it generally does not require a down payment. It also does not require private mortgage insurance, and the interest rates on these loans are also fairly competitive.
How Does a VA Loan Work?
VA loans allow veterans, active service members, and their eligible spouses to own a house. They offer up to 100 percent financing on a house's value. Qualified candidates can use a VA loan to build, repair, or make improvements to a home.
While the US Department of Veteran Affairs has set the eligibility criteria, outlined the mortgage terms, and backs this loan, it does not provide the financing. Private lenders such as credit unions, mortgage companies, and banks offer VA loans.
When you apply for this loan, you must submit an eligibility certificate from the VA to the lender. You can get this certificate from the VA website. However, to obtain the VA loan, you will have to share service-related documents that can differ depending on whether you're a veteran or are on active duty.
VA loans, like Federal Housing Administration loans and other loans backed by US government departments, are secured through the Government National Mortgage Association (GNMA). These securities carry the US government's guarantee against default.
Benefits of a VA Loan
There are plenty of reasons why the VA loan is so special. Some of its significant benefits include:
1. No Down Payment
One of the biggest benefits of a VA loan is that it does not require a down payment. This can be a huge advantage if you're an eligible borrower who doesn't have enough saved for a down payment.
2. Lower Interest Rates
VA loans often have lower interest rates than other types of loans, saving you a significant amount of money over the life of the loan.
3. No Need for Private Mortgage Insurance (PMI)
Because the VA guarantees a portion of the loan, you do not have to pay for private mortgage insurance. This can again save you a large sum of money throughout the loan.
4. Lenient Credit Requirements
VA loans are generally more forgiving of credit issues than other types of loans. This means that even if your credit history is less-than-perfect, you may still be able to qualify for it.
5. No Prepayment Penalty
VA loans do not impose a penalty on prepayment. This means that you can pay off your loan early without facing any additional fees or charges.
6. Assistance with Foreclosure Prevention
If you are experiencing financial hardship and are at risk of foreclosure, the VA can help you negotiate with your lender to avoid foreclosure.
VA Loan Limitations
While VA loans offer several benefits, there are some restrictions that you need to be aware of. Here are some of the most common VA loan restrictions:
VA loans have specific property requirements that you need to meet. For example, the property must be your primary residence and meet particular safety, sanitation, and structural requirements. Specific properties like fixer-uppers or vacation homes may not be eligible for VA financing.
VA loans have loan limits that vary by county and can change yearly. These loan limits represent the maximum amount you can borrow without a down payment. If you want to borrow more than the loan limit, you will need to make a down payment.
Eligibility Criteria for VA Loans
Everyone who has served in the military is not automatically eligible for a VA loan. Here are the eligibility criteria for a VA loan:
- You are an active service member and have served for 90 days in a row.
- You are a veteran who fulfills the length-of-service requirements, typically 181 days in peacetime and 90 days in wartime.
- You have completed 90 days of active service or six creditable years in the National Guard or Selected Reserve.
- You are the surviving spouse of a veteran who passed away during service or due to a service-related disability and hasn't remarried or remarried after the age of 57. Spouses of prisoners of war or service members who are missing in action are also eligible.
You might still be eligible for a VA loan in some instances even if you do not meet the length-of-service requirements. This can include getting discharged due to a service-related disability. You might also not be eligible if you got bad conduct, dishonorable, or "other than honorable" discharge. Nevertheless, you can request the VA to change your discharge status.
Requirements to Obtain a VA Loan
Now that you have an idea of the VA loan and whether you're eligible, let's take a look at its requirements. Here are some standard conditions you need to fulfill for a VA loan application.
Your credit history plays a critical role in helping you secure a VA home loan. Note that while the VA does not set a minimum credit score to qualify for a loan, VA mortgage lenders can set their own minimum standards. These credit scores are usually in the low- or mid-600s. Lenders will also review your credit report, especially your history of making payments on time.
Your debt-to-income ratio is another key factor in VA loans. The precise DTA you need to get your loan approved depends on your personal circumstances and the lender. However, in most cases, the maximum acceptable debt-to-income ratio for a VA loan is 41 percent.
Note that you can get your VA loan approved even if you have a higher DTI ratio through "residual income." This is the money left to cover basic living expenses, such as clothing and food after you have covered housing, debts, and other obligations.
VA loans typically do not require a minimum down payment. However, if the house's purchase cost is higher than its appraised value, you might have to cover some percentage of the difference.
Moreover, if you're subject to VA loan limitation and the price of the house is higher than the county loan limit, you will have to make a down payment. A major benefit of making a down payment is that it is going to lower the VA funding fee.
Types of VA Loans
The VA provides multiple kinds of mortgage loans to eligible borrowers. These include:
1. Home Purchase Loans
You can use home purchase loans to purchase a home at competitive interest rates. This might include a single-family home, a multi-unit property, a condominium, or a manufactured home.
2. Cash-Out Refinance Loans
Cash-out refinance loans allow you to take cash out of your home's equity. You can use this to pay off debt, make home improvements, fund school, etc. Cash-out refinance loans can be up to 100% of the home's value, and there is no limit to the amount that a borrower can borrow.
3. Interest Rate Reduction Refinance Loans (IRRRLs)
These loans allow you to refinance your existing VA loan to obtain a lower interest rate. This can help you save money over the loan period. Note that you can only use an IRRRL to refinance an existing VA loan, and you must be able to demonstrate a benefit from the refinance.
4. Native American Direct Loans (NADLs)
If you are a Native American veteran, you can get this loan if you wish to purchase, build, or improve a home on Federal Trust Land. NADLs do not require a down payment, and there is no limit to the amount that you can borrow.
5. Adapted Housing Grants
The adapted housing grant is for veterans with certain service-connected disabilities who want to modify their homes to make them more accessible. There are several different types of adapted housing grants, including Specially Adapted Housing grants, Special Housing Adaptation grants, and Temporary Residence Adaptation grants.
VA Funding Fees Exemptions
Veterans who are eligible to receive or are currently receiving compensation for a service-related disability might be exempt from paying the funding fees. The eligible surviving spouses of veterans who passed away during service or due to a service-related disability might also be exempt from paying the fees.
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