What is the VA Home Loan Program?
Powerful, flexible, and quirky are three popular descriptions you’ll hear regarding the Veterans Administration loan program, more commonly known as the VA loan. Why? Powerful because the VA loan has lending powers backed by the U.S. government. Flexible because the Department of Veterans Affairs doesn’t require a down payment, minimum credit score, or maximum debt-to-income ratio. (Note that some VA lenders might.) And quirky because, unlike a conventional loan, a VA loan is only for primary residences. Forget about that fishing shack on a lake or a rental for your in-laws. However, for most military homebuyers, the VA loan benefit provides the ideal and most accessible route toward their goal of homeownership.
Despite the name, VA loans are not provided directly by the Veterans Administration. Through the VA Home Loan Guaranty Program, the VA guarantees a portion of the loan against loss and helps lenders provide borrowers with more favorable financing terms. The loans are issued by private lenders, such as banks and mortgage companies, like Aligned Mortgage. Borrowers can use a VA loan to buy their primary residence or even refinance an existing loan.
With competitive interest rates and no private mortgage insurance (PMI) requirement, a VA loan allows borrowers to save money on their monthly mortgage payment, making it hands down the most powerful government-approved home buying program available. And it is reserved exclusively for our nation’s veterans.
Who is eligible for a VA home loan?
To qualify for a VA home loan, you must be either active duty military, a veteran, or surviving spouse and meet specific eligibility requirements.
The VA Home loan program is available for single veterans, veterans and their spouses, or veterans who want to purchase a home with another veteran. Borrowers must intend to occupy the properties as their primary residences for one year. In the case of a veteran using the VA loan benefit with a non-veteran (not married), a down payment would be required, and the veteran must intend to occupy the property for one year.
Other VA loan requirements
The Veterans Administration insists you have satisfactory credit, sufficient income, and a valid Certificate of Eligibility (COE). Applying for your COE is only one part of the process for getting a VA direct or VA-backed home loan. What comes next depends on the type of loan you want — and on the lender you choose. At Aligned Mortgage, we can help you select which VA loan program would best suit your needs and benefit you the most.
11 perks and quirks borrowers should know about VA loans
- VA loans are assumable. An assumption is a purchase transaction where the buyer takes over the seller’s liability of an existing mortgage, including the interest rate, mortgage payment, and loan balance. But many borrowers aren’t aware that If you currently have a VA loan and are considering a loan assumption as part of a home sale, you must understand your rights and how this transaction can affect your VA loan entitlement. At Aligned Mortgage, we can help you perform your due diligence before deciding whether assuming a VA home loan is the best option for you.
- VA loans are available for eligible National Guard members and reservists. They are eligible if they have completed at least six years of honorable service, are mobilized for active duty service for at least 90 days or are discharged because of a service-connected disability.
- VA loans are reusable. Pay off your VA loan, and you regain your full VA entitlement to use on another VA loan. The news gets even better. Borrowers who qualify can use the VA loan benefit as often as they want for life. All they have to do is pay off the loan before applying for a new one.
- VA loans are only for specific types of homes. That ski chalet you have your eye on as a vacation rental is out. So is the ranch that bills itself as a yoga retreat with adorable baby goats. You can only use VA-guaranteed loans for residential purposes — think single-family homes, condos, mobile homes — not to purchase a business. They’re for primary residences only.
- VA loans are not issued by the Veterans Administration. Although the agency is committed to providing veterans the world-class benefits and services they’ve earned, The VA is not a lending institution. Instead, the Veterans Administration is there to issue a guaranty on every qualified mortgage loan.
- VA loans are guaranteed by the government. For borrowers with VA entitlements, the VA typically guarantees up to a quarter of the loan amount. The guaranty gives lenders confidence and helps service members secure more favorable terms and rates than they would find through a conventional loan.
- VA loans are available after foreclosure or bankruptcy. The VA allows service members who have gone through bankruptcies or foreclosures to bounce back and secure a VA loan. Borrowers who have had a VA loan foreclosed on can still avail themselves of their VA loan benefit.
- VA loans don’t require mortgage insurance. With most conventional loans, if you don’t put at least 20 percent down, you’ll end up paying mortgage insurance on top of your loan payment. The VA’s guaranty eliminates the need for mortgage insurance or mortgage insurance premiums. The bonus allows borrowers to save more money each month.
- VA loans come with a mandatory fee. Although VA loans don’t have mortgage insurance, there is the VA Funding Fee. This fee helps the VA keep the program running and is required on both purchase and refinance loans. It can be rolled into the loan amount and waived entirely for those with service-connected disabilities.
- VA loans now have no limit to how much you can borrow. As of January 1, 2020, a new law went into effect, stating that the Veterans Administration would not cap the size of zero-down loans for veterans with full entitlements. As part of the federal Blue Water Navy Vietnam Veterans Act of 2019, the change was made in response to today’s national rising housing costs. Now, qualified borrowers using VA loans can borrow any amount of money with no down payment. Previously, borrowers who wanted to take advantage of zero-down payment loans were constrained by their county-level loan limit. Only veterans without full VA loan entitlements have to deal with loan limits, which aren’t a cap on how much money they can borrow, but what down payment might be needed.
- VA loans don’t have a prepayment penalty. Some lenders charge borrowers extra if they pay off their loans early. It sounds unfair, but it makes business sense because paying back the principal over the full term allows lenders to collect all of that interest. However, with a VA loan, you can make extra payments at any time without incurring any penalties. You can pay a little or a lot above your monthly mortgage payment; it’s up to you. Even adding an extra $50 per month would knock off several years and thousands of dollars from the mortgage balance.