If you want to become a homeowner and you serve or have served in the U.S. military, a Veterans Affairs (VA) loan can be an excellent option. Not only do VA loans have easier qualification requirements than most other types of mortgages, but you can potentially get a VA loan with no money down and no mortgage insurance.
Here’s a quick introductory guide to VA loans, including eligibility, benefits, drawbacks, and the application process, to help you determine whether a VA loan could be the best option for you.
What is a VA mortgage?
The VA mortgage is a type of home loan available to veterans and active service members and their spouses (we’ll get into the specific eligibility requirements in a bit). It was created at the end of World War II to help returning soldiers buy homes. Many of them didn’t have any money for a down payment or an established credit history.
Let’s clear up one common misconception: When you get a VA mortgage, the Department of Veterans Affairs doesn’t actually loan you money. The VA simply backs your mortgage. That mortgage is originated by a private lender, like a bank.
If you don’t make your loan payments, the VA will repay the loan. This is why VA mortgages generally aren't too risky to a lender and have favorable interest rates and down payment requirements.
The eligibility requirements for VA mortgages
There are a few requirements for VA mortgages. For our purposes, we’ll separate them into three groups -- service qualifications, personal qualifications, and the price of the home you want to buy.
You can meet the military service qualifications in several ways. As long as one of the following applies, you can be eligible for a VA loan:
- 90 consecutive days of active service during wartime.
- 181 days of active service during peacetime.
- 6 years of service in the National Guard or Reserves.
- Your spouse died in the line of duty or because of a service-related disability.
If you meet one or more of these requirements, you can obtain a Certificate of Eligibility (COE) for a VA loan. You don’t necessarily need to get the certificate before you apply for a loan, and your lender should be able to instantly request it electronically.
Personal qualifications come down to your credit score and debt-to-income (DTI) ratio. These can vary from lender to lender.
Most lenders want a minimum FICO Score of 620, which is in the realm of "fair credit." As far as debt-to-income, Quicken Loans advises borrowers to have a DTI ratio of 60% or less, including the new mortgage payment. This is significantly higher than conventional lenders will consider -- the general maximum DTI is 45% of pre-tax income.
Besides personal qualifications, the loan must conform to the VA loan limit. For 2019, the limit for a VA mortgage is $484,350 in most parts of the country, but there are higher loan limits in certain high-cost areas.
You can use a VA loan when buying a more expensive home, but you’ll need to come up with the difference as a down payment. In other words, it’s possible to buy a $500,000 home with a maxed-out VA loan and $15,650 down.
Advantages of VA mortgages
The biggest advantage of a VA mortgage is its down payment requirements. Borrowers who qualify don’t have to put any money down at all. There are few 0% down mortgage programs anymore, so this is a big draw for eligible borrowers.
To make the low-down-payment characteristic even more appealing, VA loans have no private mortgage insurance (PMI) requirements whatsoever. Homebuyers who put less than 20% down typically have to pay for mortgage insurance to protect their lender if the buyer can’t pay back the loan. PMI is typically the biggest disadvantage of low-down-payment conventional and FHA loans, so this is a big differentiator.
And, as mentioned previously, VA loans have easier qualification standards when it comes to credit history than other major loan types. More lenient debt-to-income requirements help, too.
Finally, because they're guaranteed by the VA and represent little risk of loss to lenders, VA loans generally have low interest rates compared to other types of mortgages, especially for borrowers with less-than-ideal credit scores
As I write this in September 2019, I’m seeing APRs of about 3.5% for 30-year VA mortgages, while the national average 30-year APR is 3.91%.
Potential drawbacks of VA loans
One drawback to VA loans is that they have a "funding fee" that's paid to the Department of Veterans Affairs. This fee is 2.15% of the purchase price of the home for first-time VA loan program participants and 3.3% for people who have used a VA loan previously.
The fee can be rolled into the loan, so it’s not necessarily an out-of-pocket expense. If you buy a home for $200,000, this would translate to a funding fee of $4,300, so you’d get a loan for $204,300.
This is similar to how the FHA mortgage program works, but can be significantly more expensive than the fees attached to conventional loans. The 0% down payment and lack of PMI can more than offset this cost, but it’s still something you should be aware of.
Also, VA mortgages are (usually) only for primary residences. One of the main requirements for obtaining a VA loan is that you plan to live in the home. In other words, you typically can’t obtain a VA loan to buy a vacation home or investment property.
However, there’s one big exception to this rule that’s worth mentioning. VA loans can be used to purchase a multifamily property with as many as four residential units if you plan to live in one of them. This is known as "house hacking" in the real estate investment world and can be a great way to get your first investment property with an easy and low-down-payment mortgage process. My first real estate investment was a duplex where I lived in one side and rented out the other.
How to apply for a VA mortgage loan
The first step (although it’s technically not a requirement) is to get preapproved with a lender that offers VA mortgages. With a VA preapproval letter in your hand, you'll be a much more attractive buyer when making offers on homes.
This essentially involves filling out a mortgage application, verifying your military service, income, and employment, and agreeing to a credit check.
Next, you’ll find a home. VA loans can be used to purchase pretty much any type of residential home -- single-family, condos, new constructions, modular homes, and even multifamily properties (up to four units).
Once you have a home under contract, the underwriting process starts. The lender will order a VA appraisal to assess the property’s value and condition, and the appraisal will need to show that the home is worth at least as much as you agreed to pay for it.
Be prepared to handle frequent information requests from the lender during the underwriting process, and try not to get frustrated if your lender asks you for seemingly trivial documentation several times -- it’s a normal part of the process.
When I got an FHA loan years ago, my lender asked me to write a letter explaining why I deposited an "unusual" $200 check into my bank account a few months before.
If all goes well in underwriting, your loan will be cleared to close. Your lender will likely pull your credit and verify your employment one last time before you close. It’s a good idea to refrain from making any major purchases or opening new credit accounts before closing day.
The VA mortgage process isn’t that much different from most other mortgages, but it’s important to know that you qualify before walking into a lender’s office.
The bottom line on VA mortgages
In a nutshell, VA mortgage loans can be the best way to buy a house if you qualify. You don't necessarily need to put zero money down to take advantage of the low interest rates and lack of mortgage insurance, either.
If you're a veteran or active member of the U.S. Armed Forces, a VA mortgage should definitely be on your list.
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