What is a VA Loan?
The VA loan remains one of the few mortgage options for borrowers who don’t have the money for a down payment. VA loans are somewhat easier to qualify for than conventional mortgages.
The U.S. Department of Veterans Affairs is not a direct lender. The loan is made through a private lender and partially guaranteed by the VA, as long as guidelines are met.
If you think you may be eligible for a VA loan, here are some things you must know about the program.
1. Eligibility requirements
Most members of the regular military, veterans, reservists and National Guard are eligible to apply for a VA loan. Spouses of military members who died while on active duty or as a result of a service-connected disability also can apply.
Active-duty military personnel generally qualify after about six months of service. Reservists and members of the National Guard must wait six years to apply, but if they are called to active duty before that, they gain eligibility after 181 days of service.
“Most reservists are qualifying under active duty,” says Michael Frueh, chief of staff of the Veterans Benefits Administration of the VA.
Reservists, members of the National Guard and active-duty members generally are eligible after 90 days of service during a time of war.
“If you were on any type of foreign soil, more than likely you are eligible,” says Grant Moon, a veteran and president of VALC Enterprises Inc., a loan referral company.
Potential VA loan borrowers must obtain a Certificate of Eligibility, or COE.
“But you don’t need the Certificate of Eligibility in hand to start the mortgage process,” says Chris Birk, director of education at Veterans United Home Loans. “Lenders, in many cases, can get this document for borrowers during the preapproval phase.”
2. Advantages of a VA loan
Loans guaranteed by the VA can be obtained without any down payment. “That’s a huge plus,” Frueh says.
Another plus: A VA loan doesn’t require mortgage insurance, as do Federal Housing Administration (FHA) loans and conventional loans with less than 20 percent down. The benefit translates into significant monthly savings for VA borrowers. For instance, a borrower who makes a 3.5 percent down payment on a $200,000 FHA-insured mortgage pays $100 a month for mortgage insurance alone.
“And with a VA loan, you don’t have to save all the money you would have to save for a conventional loan,” Moon says.
3. Funding fee
Although the costs of getting a VA loan are generally lower than they are for other types of low-down-payment mortgages, they still carry a one-time funding fee that varies, depending on the down payment and the type of veteran.
A borrower in the armed forces getting a VA loan for the first time, with no money down, would pay a fee of 2.15 percent of the loan amount, Frueh says. The fee is reduced to 1.25 percent of the loan amount if the borrower makes a down payment of 10 percent or more. Reservists and National Guard members normally pay about a quarter of a percentage point more in fees than active-duty members pay.
Those using the VA loan program for the second time, without a down payment, would pay 3.3 percent of the total loan amount.
“And if you receive disability compensation, the fee is waived,” Frueh says.
4. Underwriting requirements
The VA does not require a certain credit score for a VA loan, but lenders generally have their own internal requirements. Most lenders want an applicant with a credit score of 620 or higher, Moon says.
“There are players that would go lower, but they would probably charge a higher interest rate,” he says.
Borrowers must show sufficient income to repay the loan and shouldn’t have a heavy debt load, but the guidelines are usually more flexible than they are for conventional loans.
“We always tell underwriters to do their due diligence, but this is a benefits program, so there is some flexibility,” Frueh says.
VA guidelines allow veterans to use their home-loan benefits a year or two after bankruptcy or foreclosure.
“We look at the whole credit picture, what was the reason for the credit bankruptcy and where the borrower is now,” says John Bell III, deputy director at the VA.
VA loans are available only to finance a primary home. A VA loan cannot be used to purchase or refinance vacation and investment homes.
The VA says there is no cap on the amount you can borrow. “However, there are limits on the amount of liability VA can assume, which usually affects the amount of money an institution will lend you,” the agency says. “The loan limits are the amount a qualified veteran with full entitlement may be able to borrow without making a down payment. These loan limits vary by county, since the value of a house depends in part on its location.”
The limit on VA loans varies by county, but the maximum guaranty amount for 2018 is $453,100 and up to $679,650 in high-cost areas in the continental United States and even higher in parts of Hawaii.
5. Help for struggling VA borrowers
Another advantage of a VA loan is the assistance offered to struggling borrowers. If the borrower of a VA loan can’t make payments on the mortgage, the VA can negotiate with the lender on behalf of the borrower.
“We have dedicated staff nationwide committed to helping veterans who are experiencing financial difficulty,” Bell says.
VA’s financial counselors can help borrowers negotiate repayment plans, loan modifications and other alternatives to foreclosure, he says.
Regardless of whether they have VA loans, veterans who are struggling to make their mortgage payments can call (877) 827-3702 for assistance.