VA loans can be a mystery for anyone who hasn’t actually gone through the process. There are all these policies and verbiage that sounds more like a foreign language than anything. However, with a little help, you can easily navigate the ins and outs of purchasing your new home with a VA approved loan.
What is a VA Home loan?
A VA home loan, simply put, is a loan that’s backed by the VA. This does not mean the VA is providing the loan to you. Instead, what they’re doing is taking responsibility for 25% of your home loan, in the case that you fail to make payments. This is one of the reasons that it’s so much easier to get a VA loan than it is a conventional loan because someone else is backing you. Lenders know that if you don’t come through, the VA will, for 25%, which you won’t find with a conventional loan.
Who qualifies for a VA loan?
Veterans and military personnel qualify for VA home loans. However, if you were dishonorably discharged, you will not be eligible for this particular loan. You must have left the military under anything other than dishonorable. Some spouses of military members who either died while on active duty or from a service-connected disability also qualify.
Other qualifications include:
- Member must have served at least 90 consecutive days of active service during wartime.
- Member must have served at least 181 days of active service during peacetime.
- Member must have more than 6 years of service, if in the National Guard or Reserves.
How to Obtain a VA Home Loan
If you’re ready to purchase your home, your first step is to get a Certificate of Eligibility, commonly referred to as a COE. This proves that you fall into one of the qualifications listed above. Once your lender has this, then you can officially apply for a VA approved loan.
However, it is important to keep in mind that lenders do not have to approve your loan application just because you qualify for a VA loan. No, there is not a required credit score for a VA loan, but many lenders will still have their own standards. Generally speaking, most lenders like you to have at least a 620, but this does not mean you can’t get approved for a loan if you have a 610.
VA Funding Fees
VA loans are known to be one of the easiest loans to obtain. You don’t have to make a down payment and there are restrictions on what you can and can’t pay for during closing. However, this does not mean you do not have to pay fees. The VA requires a funding fee, which most individuals choose to roll into their loan. You can, of course, pay this up-front. Doing so will help save money over the lifetime of your loan since you will pay interest on your funding fee by rolling it into the loan.
A funding fee is different from a down payment. You are not required to make a down payment on a VA loan, that’s part of what makes it so attractive. However, making a down payment will help you save money, since you won’t be paying interest on the amount you put down and your loan amount will be lowered, which means your monthly mortgage payment can be lower too.
Veterans who have a disability rating with the VA and/or receive disability compensation are exempt from paying a VA funding fee.
Origination fees are paid to the lender. However, the VA put a cap on that, and lenders are not allowed to take more than 1% of the loan amount. This is often a fee many qualifying service members and veterans don’t hear about because not all lenders charge this fee. If a lender does charge for originating the loan, then they are not able to charge any additional fees, such as fees for processing the loan or underwriting.
Currently, but not for too much longer, the VA invokes a loan limit based on what county a home is purchased in. This does not mean you can’t exceed the loan limit, it just mean that’s how much home you can buy before you have to make a down payment.
Starting in 2020, there will no longer be a loan limit for VA loans. Because of this change, service members and veterans can purchase a home that is more than the old loan limit without having to make a down payment.
For example, if the county you want to purchase a house in had a loan limit of $454,000, you could only buy a home without making a down payment for up to that amount. However, 2020 rolls around and you are looking at a home, in the same county, worth $500,000; the loan limit no longer applies, and you can purchase that home without a down payment, whereas you would have to if purchased before 2020.