What Is a VA Home Loan?
A VA home loan is a type of mortgage that is issued by private lenders and at least partially guaranteed by the U.S. Department of Veterans Affairs. Through the VA home loan program, eligible military borrowers can buy a home, build a home, or refinance a home loan.
In the vast majority of cases, the VA itself is not providing the funds directly to borrowers. Instead, it provides a guarantee on a portion of the loan. The guarantee is a promise to the private lender that the VA will cover the guaranteed losses. Since the VA is willing to offer a guarantee, lenders are more willing to issue loans that other lenders may consider risky.
Additionally, there are direct VA home loans available. In this case, the VA would serve as your mortgage lender.
Whether you pursue a direct VA loan or a VA-backed home loan, these mortgages are designed to provide military borrowers with an affordable financing opportunity. If you meet the military service requirements, you may be able to close on a VA loan with as little as $0 down.
VA Home Loan Requirements
First and foremost, you’ll need to meet military service requirements in order to qualify for the VA loan. You must meet at least one of the following criteria:
You served 181 days of active service during peacetime.
You served 90 consecutive days of active duty during wartime.
You served with the National Guard or Reserves for at least 6 years or served 90 days of active duty.
You are the spouse of a service member that died in the line of duty or as the result of a service-related disability. But in most cases, you cannot qualify if you’ve remarried.
Without meeting one of the criteria above, you won’t be able to obtain a VA loan.
Beyond military service, lenders may require you to meet specific financial criteria. The VA itself doesn’t set particular standards on your financial details. But in general, a lender will want to see a lower debt-to-income ratio and a reasonably fair credit score. Many lenders are willing to work with borrowers that have credit scores as low as 580.
VA Property Limitations
You can use the VA loan to purchase a primary residence with one to four units. The property itself can be a condo or a home deemed structurally sound and safe for habitation. If you use the VA loan, you’ll need to move into the property within 60 days.
Additionally, there is a limit on the VA’s guarantee. The VA will guarantee up to 25% of the loan amount. Although the lender will determine how much you qualify on an individual basis, many will enforce a maximum of $548,250 in the majority of the country to stay in line with conforming loan limits.
VA Funding Fee
A final component of the VA home loan that cannot be overlooked is the VA funding fee. The funding fee is a one-time expense. You can roll the cost of this fee into your loan or pay it in a lump sum at closing.
The fee helps to keep the costs of running this home loan program low for the U.S. taxpayers. But the exact amount you pay will vary based on the amount you put down and how many times you’ve used a VA loan.
Depending on your situation, you may pay between 1.4% to 3.6% of the loan amount. In some rare cases, you might be able to skip the funding fee altogether.
How to Apply for a VA Home Loan
Ready to make a commitment to real estate and apply for a VA home loan? The good news is that there are many lenders willing to work with you. Here are the steps you’ll need to take.
Obtain Your Certificate of Eligibility
The first step is to obtain your certificate of eligibility. Essentially, this certificate provides proof to the lender that you meet the military service requirements.
In many cases, the lender will be willing to help you get your certificate quickly. But you can also apply for your certificate of eligibility (COE) online.
Shop Around for the Right Mortgage Lender
Next up, you’ll need to shop around for the best mortgage lender. Although there are plenty of choices, you’ll want to compare interest rates and fees across several lenders before moving forward.
Beyond that, ensure the lender offers the type of communication style you are comfortable working with. Many lenders offer an online-only experience. But you can also find lenders willing to work with you over the phone or in-person to help guide you through the process.
Take your time to find the right fit for you.
Get Pre-approved for a Mortgage
Once you find a lender you are comfortable working with that offers the best rates, it is time to get pre-approved. With a pre-approval in hand, you can prove yourself to be a serious buyer who is ready to make an offer on a piece of real estate.
Shop Around
The fun part is shopping for a home to start the next chapter of your life. Keep your budget and your needs in mind as you explore the options in your area. Additionally, you’ll need to keep the minimum property requirements for a VA loan in mind.
Once you find the right home, you can make your offer.
Move Forward With a VA Appraisal and Underwriting
The lender will take a deep dive into your finances to ensure they are comfortable making the loan.
Additionally, the VA will require an appraisal before the loan can be finalized. It is worth pointing out that VA appraisals are more stringent than regular appraisals. With that, the property will need to be structurally sound, hygienic, and close to move-in ready to meet this high bar.
Once everything is approved, you can finalize the process by closing. Then it is time to enjoy living in your new real estate investment!
How Much Home Can I Afford?
Homeownership is an enticing dream. But take a look at your finances before you leap to determine how much home you can afford.
Most experts recommend sticking to a mortgage payment that is equal to or less than 30% of your net monthly income. For example, let’s say you earn a net income of $1,500 per month. With the 30% rule in mind, you shouldn’t spend more than $450 on a monthly mortgage payment.
However, you can choose a monthly mortgage payment that is lower than what a lender approves you for. Some may not be willing to spend more than 20% of their net income on a mortgage. But others might feel comfortable spending closer to 40%. Ultimately, the choice boils down to your personal comfort level and how much you’re able to borrow.
RELATED: Your Guide to Mortgages and Finding the Best Rates
References:
https://www.va.gov/housing-assistance/home-loans/loan-types/
https://www.va.gov/housing-assistance/home-loans/eligibility/
https://sgp.fas.org/crs/misc/R44826.pdf
