The Department of Veterans Affairs offers a variety of benefits to current service members and veterans of the Armed Forces. One of the most attractive benefits is the availability of VA loans, which make it possible for eligible applicants to qualify for low-cost mortgages. Keep reading to learn more about how these loans work and find out if you might be eligible.
VA Loans Defined
A common misconception about VA loans is that the federal government provides the funds. That’s not exactly true. If you qualify for a VA loan, you get your mortgage through a bank, credit union or another private lender. The government’s role is to guarantee the loan, which means the federal government is willing to pay back the loan if you default on it.
Lenders trust the government to follow through on its promises, so they’re willing to give loans to applicants with smaller-than-usual down payments or credit scores that would make it difficult to qualify for other types of mortgages.
Types of VA Loans
In addition to the standard VA home loan, you may qualify for one of the following types of VA loans:
- VA renovation loan: In some areas, it’s difficult to find a property in your price range that doesn’t require renovations. VA renovation loans give you access to funding that can be used to purchase a home and renovate it according to your needs.
- VA jumbo loan: Jumbo loans exceed the standard loan limits for your county. These loans are common in cities with high costs of living, such as San Francisco and Los Angeles.
- VA rate/term refinance loan: If you already have a non-VA mortgage, this type of loan allows you to refinance and take advantage of more favorable lending terms.
- VA cash-out refinance: This type of VA loan allows you to refinance your existing home loan and get cash back based on the amount of equity you have in the home. In financial terms, home equity is the difference between the value of the home and the balance on the mortgage. For example, if you have a home worth $300,000 and a loan balance of $200,000, you have $100,000 in equity.
- VA interest rate reduction refinance loan: If you already have a VA loan with a high interest rate, the IRRRL allows you to refinance at a lower rate.
Benefits of VA Loans
Because they’re backed by the government, VA loans have many potential benefits. One of the most significant advantages is that the interest rate on a VA loan is typically lower than the interest rate on a conventional mortgage. A lower interest rate can save you thousands of dollars over the life of the loan. Here’s an example.
If you took out a $200,000 mortgage with a 4% interest rate and a repayment term of 30 years, you’d pay more than $143,000 in interest by the time you made your final loan payment. With an interest rate of 6%, you’d pay nearly $232,000 in interest over the life of the loan, a difference of about $90,000.
Looser Lending Requirements
When you have the government backing you, banks see you as less of a risk. That means you may qualify for a VA loan even if you don’t have a top-tier credit score. You may also qualify for a VA loan if your debt-to-income ratio is too high to qualify for another type of mortgage. Debt-to-income ratio (DTI) compares the amount of debt you owe each month to your gross monthly income. For example, if you have $2,000 in monthly debt payments and a gross monthly income of $5,000, your DTI is 40%.
Low or No Down Payment
For a conventional mortgage, you typically need to put down 10% to 20% of the home’s purchase price as a down payment. It can be difficult to save that much money, which is why VA loans are advantageous. Your lender may not require any down payment at all, making it much easier to buy your own home.
No Private Mortgage Insurance
If you get a conventional loan and put down less than 20%, you typically have to pay private mortgage insurance (PMI), which increases your monthly mortgage payment and makes it more expensive to purchase a home. With a VA loan, you don’t have to pay PMI, saving you money and making it easier to buy your dream home.
To qualify for a VA loan, you must meet minimum active-duty service requirements. If you’re currently in the Armed Forces, you meet this requirement if you’ve served on active duty for at least 90 continuous days. For veterans, the active-duty requirement depends on when you completed your service. For example, if you served after the Korean War and before the Vietnam War (February 1, 1955, to August 4, 1964), you meet the requirement if you served for 181 continuous days or less than 181 days if you were discharged early due to a service-connected disability.
National Guard members may also qualify for VA loans. If you’ve served at least 90 days of active duty between August 2, 1990, and today, you meet the service requirement. For service during any other time period, you meet the active-duty requirement if any of the following apply:
- You completed a total of 90 days of active duty, with at least 30 of those days in continuous service.
- You completed at least 90 days of non-training, active-duty service.
- You spent at least six creditable years in the National Guard and were retired or honorably discharged.
The VA Loan Application Process
Follow these steps to apply for a VA loan:
- Obtain a certificate of eligibility (COE), which provides proof that you meet the active-duty service requirements.
- Choose a lender and fill out the loan application. Try to get approved so that sellers take you seriously when you make an offer.
- Find a home that meets the minimum property requirements established by the VA.
- Submit an offer. If the seller accepts, you’ll go under contract.
- Schedule an appraisal.
- Go through the underwriting process. This process ensures that you meet your lender’s financial eligibility requirements.
- Close the sale. During the closing, you’ll sign all the papers and arrange to have the property transferred into your name.
Additional Benefits for Disabled Veterans
If you have a service-connected disability, you may qualify for additional benefits, such as:
- Access to grant funds to build a home or modify an existing home to accommodate your needs
- Exemption from VA funding fees
- Property tax exemptions
- Access to grant funds to modify a property to make it easier to navigate
Choose Your Loan Carefully
Whether you are an active duty member or a veteran, you may qualify for the VA Home Loan. Applicants that do could enjoy low-cost mortgages, reduced interest, low down payment, and more. VA loans have many benefits, but it’s important to shop around for a mortgage with the most favorable terms based on your current situation.
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