A VA loan is a mortgage thatâ€™s guaranteed by the U.S. Department of Veterans Affairs. The loan is available to certain veterans, active duty servicemembers, and qualifying spouses. Since 1944, the program has helped make homeownership possible for more than 23 million veterans and their families.
The Department of Veterans Affairs does not issue VA mortgage loans. Rather, private lenders such as banks and mortgage companies provide VA loans to eligible applicants. The VA program guarantees loans up to a certain limit (more on those limits below).
The federal government agrees to back the loan if a borrower goes into default. This added protection enables lenders to provide more favorable terms to borrowers who are eligible to participate in the program.
To qualify for a VA mortgage, you first have to satisfy a lenderâ€™s qualification standards. Basic lender requirements generally include
In addition to satisfying a lenderâ€™s requirements, youâ€™ll also need to obtain a valid Certificate of Eligibility (COE) from the VA. To qualify for a COE, you generally need to fit into one of the following categories:
You can get more information by calling 877-827-3702.
Youâ€™ll provide your lender with your COE, which confirms that you are eligible to receive a VA-backed loan.
VA home loans are packed full of some great benefits for eligible borrowers. Hereâ€™s an overview of some of the best ones:
As long as the sales price doesnâ€™t exceed the appraised value of the home, VA loans offer 100% financing for eligible borrowers. Translation: You wonâ€™t need a down payment to qualify for a VA loan.
In contrast to an FHA loan, which typically requires a down payment of at least 3.5%, a VA loan can save home buyers thousands of out-of-pocket dollars at closing. That equals a $7,000 upfront savings on a $200,000 mortgage when you compare the two loan products.
VA loans donâ€™t have a cap on how much money you can borrow to purchase your home. However, the VA will only guarantee loans up to a certain limit. These liability limits may influence how much a lender is willing to loan you for your home purchase, and they change every year.
Liability limits vary based on the county where you are purchasing a home. They are the same as the loan limits for Fannie Mae and Freddie Mac conforming loans. In most of the U.S., veterans can borrow up to $484,350 without a down payment in 2019.
There is no minimum credit score requirement associated with VA loans. This may make VA loans a good choice for borrowers with a less-than-perfect credit history. Yet keep in mind that although the VA doesnâ€™t require a minimum score to qualify, most lenders impose credit score requirements of their own.
In an interview with MagnifyMoney, Tendayi Kapfidze, chief economist for LendingTree, recommended that borrowers with credit challenges shop around and compare offers before committing to a specific lender.
Kapfidze explained, â€śDifferent lenders will target different types of borrowers. The more lenders you talk to, the more likely you are to find one who may be willing to work with your particular circumstance.â€ť
The VA sets limits on the amounts lenders may charge VA borrowers for specific closing costs and fees. These limitations might lower the amount of funds required at closing.
Additionally, sellers are allowed to pay closing costs if the buyer can negotiate the agreement into their purchase contract.
A borrower should be prepared to pay the following potential fees and costs (plus maybe a few others) with a VA loan:
With certain loans, borrowers are required to pay for private mortgage insurance (PMI). PMI protects your lender if you default on your loan payments. If youâ€™re taking out a conventional mortgage and putting down less than 20% of the purchase price, PMI is typically required.
Because VA loans do not require private mortgage insurance, borrowers are able to save money on their loan payments every month. This can add up to thousands of dollars saved over the life of your mortgage loan.
Although VA home loans boast some of the best benefits available for homebuyers, the loans are not without their challenges. If youâ€™re thinking about using a VA loan to finance your home purchase, here are a few facts you should consider first.
As mentioned above, VA liability limits can influence how much money a lender is willing to extend to you for your home purchase. If the home you want to buy costs more than a lender is willing to offer you with a VA loan, consider a different loan option or see if another lender is willing to work with you.
Most VA borrowers pay what is known as a funding fee in order to help offset the costs of the program for taxpayers. The funding fee is a percentage of your loan amount and can vary based upon the following:
Borrowers may choose to pay their funding fees in cash at closing or opt to finance the fee into their mortgage.
Certain types of borrowers are exempt from funding fees, including:
Although closing costs associated with VA loans are often lower than those required for other mortgages, it can still be a challenge for some borrowers to come up with the necessary funds to bring to closing.
Mark Smith, director of programs and development for the PenFed Foundation in Alexandria, Va., explained why his nonprofit organization believes itâ€™s so important to help veterans overcome this common obstacle.
â€śOne of our missions is to help ensure that our veterans and active duty military members have the tools they need to build healthy financial futures,â€ť he said. â€śWe believe homeownership is a way to help those who have served become thriving members of their local communities.â€ť
Through its Dream Makers Program, the PenFed Foundation provides a no-strings-attached down payment assistance grant that VA borrowers may also use to help cover closing costs. The grant offers eligible applicants a 2-for-1 match (up to $5,000) of any funds borrowers put up personally for earnest money and closing costs.
According to Smith, around $6.5 million in grants has been distributed to help borrowers since the programâ€™s inception.
VA will guarantee loans up to 100% of the value of your home. As a result, if you also finance your funding fee requirements, thereâ€™s a chance that your VA loan amount could end up being higher than the value of your home.
Thankfully, there are a number of ways you can avoid this potential problem.
Although VA loans have been around for more than 70 years, they are surprisingly underused. Only 3.12 million veterans were actively participating in the VA Home Loan Guaranty Program as of 2018. This is remarkably low when you consider the total number of veterans is estimated to be somewhere in the neighborhood of 19.6 million.
Borrowers may not take advantage of VA loan benefits because of common misconceptions like:
Before you sign on the dotted line for any new home loan, itâ€™s important to do your homework first and make sure that you are ready for the commitment.
According to LendingTreeâ€™s Kapfidze, you should educate yourself, compare offers from multiple lenders and understand your finances completely. â€śTaking out a mortgage is a pretty big financial obligation,â€ť he said. â€śMake sure youâ€™re prepared for that.â€ť
This article contains links to LendingTree, our parent company.