What Are VA Loans?
As a way to honor and serve those who served the nation in World War II, the U.S. government created the VA Loan Guaranty program.
Since then, the Department of Veterans Affairs has helped more than 18 million veterans and their families achieve the dream of homeownership.
Faced with deployments across the globe and frequent domestic relocation, active duty military members and veterans have struggled at times to build the financial stability necessary to secure reasonable lending options. VA loans have served as a crucial bridge for this deserving demographic.
VA loans are guaranteed by the federal government. In essence, the Department of Veterans Affairs agrees to cover about one quarter of a borrower’s mortgage in the event of default. That fiscal safety net gives VA-approved lenders a greater degree of security, which often translates into excellent rates and loan terms for qualified borrowers.
VA loans are also one of the few remaining ways for borrowers to purchase a home without putting any money down. The no-down payment feature is routinely cited as the program signature benefit as it is also a cornerstone of the program's mission to make homeownership possible for as many veterans and military members as possible.
The VA Loan Guaranty Program backed more than $68 billion in single-family loans for the fiscal year ending Sept. 30, an 80-percent increase from last year.
Some Key Benefits of VA Loans:
VA loans feature some of the most powerful financial benefits of any loan product on the market, in large part as a tribute and service to America’s veterans and active duty military members.
VA loans are one of the few remaining avenues for qualified borrowers to buy a house without a down payment and the no-cost option is routinely cited by veterans as the program’s most compelling benefit. In most parts of the country, veterans who qualify can purchase a home worth up to about $729,000 without putting down a single dollar.
There are also several other key benefits that can make a huge financial difference for military members and their families:
No private monthly mortgage insurance, which is a staple of conventional loans when the buyer puts down less than 20 percent
No penalties for loan pre-payment
Higher debt-to-income ratio allowed than for most conventional loans
Sellers can pay up to 6 percent of closing costs
Veterans often have an easier time qualifying for a VA loan. In fact, about 8 in 10 VA borrowers could not have obtained a conventional loan. The program does not have income or credit restrictions. But remember that the VA doesn’t issue loans – it guarantees them.
Prospective borrowers should expect VA-approved lenders to examine an applicant’s financial standing and credit history. In general, borrowers with a credit score below 620 may struggle initially to obtain financing.
Who Is Eligible For VA Mortgage Loans?
Millions of American veterans and active duty military members are eligible for the VA Loan Guaranty Program. But fewer than 10 percent of the country’s 24 million veterans have taken advantage of their entitlement.
Many veterans think they’re ineligible for benefits. Others don’t know how to apply or where to look for information. In fact, a 2004 VA survey found that 20 percent of veterans weren’t even aware of the home loan program’s existence. The sad reality is millions of military members who bravely served our country are still missing out.
Anyone who meets the following criteria is eligible to qualify for a VA loan:
Military members who have served 181 days on active duty or three months during war time may be eligible.
People who have spent at least a half-dozen years in the National Guard or Reserves
Spouses of those killed in the line of duty
Prospective borrowers who meet the criteria must first obtain a Certificate of Eligibility from the VA. The COE is a formal military document that essentially verifies an applicant’s entitlement to participate in the program. These forms can be found online at the VA website or through qualified VA lenders and brokers.
Not everyone who qualifies will wind up obtaining a VA loan. But those who do qualify have access to one of the most flexible and powerful lending options in the country.
What Can VA Loans Be Used For?
VA loans are surging in popularity nationwide, as more and more veterans turn to these low-cost loans in the face of a hardened credit market and a declining economy. Qualified buyers can purchase a home with no down payment and enjoy an array of significant financial benefits, from no private mortgage insurance to closing costs paid by the seller.
While VA loans are flexible, there are some limitations. These government-guaranteed loans can be used for a range of purposes that fit the needs of most military members and their families. But veterans and active duty military cannot use their VA entitlement for certain types of purchases.
First, here’s a look at the acceptable uses of a VA loan:
To buy, build or refinance an owner-occupied residence
To refinance an existing VA-guaranteed or direct loan To repair, alter or improve a veteran-owned residence
To simultaneously purchase and improve a home
To buy a single-family residential unit in a VA-approved condominium development
To buy a farm residence owned and occupied by the veteran
So, VA loans are applicable for a range of uses for military members and their families. The main thrust of the program is home purchasing and refinancing. There are options for purchasing manufactured homes, but there are specific criteria regarding the units and lending institutions have become increasingly wary of these types of loans.
Now, here’s a look at the non-acceptable purposes of VA Loans:
Buying or building a combined residential and business property unless The property is primarily residential, with no more than one business unit and a nonresidential area that doesn’t exceed 25 percent of total floor space
Buying more than one separate residential unit or lot unless one is owner-occupied and there’s evidence that:
The units are not available separately
The units have a common owner, were considered one unit in the past or are assessed as one unit
How Much Can I Borrow With My VA Loan?
As with any home loan, the final loan amount will vary based on a number of factors, including an applicants financial standing and credit score.
Underwriters will generally seek to identify and verify income that can be used to cover the mortgage payment; other shelter expenses; debts and obligations; and family living expenses. They will also seek to verify that the income is stable, reliable and likely to continue.
The VA has a lending limit in place that varies by geography. In most parts of the country, the loan limit is $417,000. There are higher limits in some of the nation's more expensive real estate markets. In those markets, the VA Loan limit is 1,094,625.
In essence, qualified buyers who want to purchase a home above the loan limit are on the hook for covering the difference. There are also jumbo loan options available.