The U.S. Department of Veterans Affairs offers what are called VA Loans to people who currently serve or have served in the armed forces, or their surviving spouses. These loans can save them money and make the home-buying process go a little smoother.
VA loans can help veterans save money and make the mortgage process a bit more accessible to people who otherwise might have difficulties finding the right deal. But as with any aspect of the home buying process, securing a VA loan has its own complexities, as not every former service person is going to qualify for the program, and there are, as ever, documents that are going to need to be acquired before you can apply for one. To make acquiring a VA loan easier, we talked to leading experts about what former service people need to know about VA loans.
VA loans and how they differ from a regular loan
A VA loan is a mortgage loan reserved for service members, veterans, reservists, National Guard members, and in some cases, their spouses. Although originated by private lenders, the U.S. Department of Veterans Affairs (VA) backs a portion of these loans, allowing lenders to offer more favorable terms for both new home purchases and refinancing,” says Rashalon Hayes, Assistant Vice President of Field Mortgage at Navy Federal Credit Union.
There are several benefits to a VA loan, but the biggest one, and the main difference between a VA loan and a more traditional one, is “that it requires no down payment, so the veteran may finance 100% of the sale price of the home,” says Lu Graham, Senior Loan Officer at Fairway.
Benefits of a VA loan
Prospective home buyers often have to spend years saving up for a down payment. A VA loan that eliminates this step makes it so that people can get into a home much quicker.
But that’s not the only benefit to a VA loan. “They also don’t require private mortgage insurance,” says Hayes, “and there are strict limits on the amount of closing fees a borrower can pay.”
Additionally, VA loans offer some of the best interest rates on the market. Interest rates refer to the amount of money you pay on top of the principal, i.e. the amount you are borrowing for your home. The lower your interest rate, the less money you’re borrowing.
The interest rate a borrower might qualify for will vary according to several factors, including their credit score and the national interest rate. According to VeteransUnited, “VA interest rates are typically 0.5 to 1 percent lower than conventional interest rates.”
A VA loan will offer you some protection “in the event the home goes into foreclosure,” says Graham, adding that “the VA covers up to 25% of the loan amount. This is the amount the VA would pay to the lender if the home sold for less than the amount owed on the loan.”
VA loans restrictions
The main restriction on VA loans is that, for the most part, you can only use them “for a primary residence, not a rental property or second home,” says Aaron Vaita, Military Mortgage Advisor and Licensed Mortgage Loan Originator at AAFMAA Mortgage Services (AMS) LLC.
While not common, it is possible to have two VA loans at the same time. Should you have enough entitlement remaining, you may be able to use the remaining VA home loan benefit without paying off the loan or selling the previous home. You would still have to qualify with income and credit.
VA loans fees
There is a one-time payment, called the VA funding fee, that you will have to pay, either upfront, at the closing of your home or over time with a financing plan.
According to the U.S. Department of Veterans Affairs, the funding fee will be calculated by the type of loan you get and the total amount of the loan. You also might be able to get the fee waived if any of the following conditions apply to you.
- You’re receiving VA compensation for a service-connected disability.
- While eligible to receive VA compensation for a service-connected disability, you’re receiving retirement or active-duty pay instead.
- You’re receiving Dependency and Indemnity Compensation (DIC), and are the surviving spouse of a veteran who died from a service-connected disability or in service, or who was
- You’re a servicemember with a proposed or memorandum rating saying you’re eligible to get compensation because of a pre-discharge claim, before the loan closing date.
- You’re a service member on active duty who provides evidence of having received the Purple Heart before or on the loan closing date.
Additionally, Vaita says that “like any loan, you can lower your rate by putting even a small down payment down. For VA home purchase loans if you put down at least 5%, it will reduce your VA funding fee as well. If you put 10% down, the VA funding fee is reduced even more.”
VA loans are available to active-duty service members for regular military, Coast Guard, veterans, reserve, National Guard members, and service-connected family members. Graham provided the following list of service requirements, “but it’s always best to check with the VA Administration to determine eligibility,” she says.
- Two years for regular service members
- Six years for Reservists and National Guard members
- 90 days active duty during wartime
- 181 days active duty during peacetime
Additionally, “spouses of deceased veterans who died on active duty or as a result of a service-connected disability or spouses of veterans who are missing in action or prisoners of war,” are eligible for a VA loan, says Wayne Brown, a retired United States Air Force Captain and a Senior Partner at Dugan Brown. “In the second case, even then the benefit is forfeit if they remarry before the age of 57. To be clear, this means that children, siblings, and parents or service members cannot use a VA loan.”
A full eligibility list is available on the VA website.
Applying for a VA home loan
“The application process for a VA loan is much like for any other mortgage, except the veteran or surviving spouse will need a Certificate of Eligibility (COE), which is the VA Administration’s way of letting the veteran and lender know how much entitlement is available to ensure the loan,” says Graham. “The entitlement is used to determine the maximum loan amount available to the Veteran when financing 100% of the sales price.”
Once the COE has been obtained, Graham says the next step is to “gather all income and asset documents including the Certificate of Eligibility or DD214, which is the Veteran’s official discharge document. The DD214 is very helpful to the lender in obtaining the COE if the borrower does not have it handy,” she says. “Next step would be to reach out to a lender who is knowledgeable about VA financing to make an application. Working with a knowledgeable lender is key to having a successful loan approval experience.”
Getting pre-approved for a VA loan
Before you start looking for your dream home, it’s usually best to talk to a few different mortgage lenders to find the right fit, and then get a pre-approved loan. This is a provisional agreement, usually good for 60 to 90 days, establishing that a lender will back you if you find a place you like, assuming it’s within your budget. The benefit of a pre-approval loan is you’ll know exactly how big of a loan amount you might qualify for, and you can act quickly if you find a place you like.
“Getting pre-qualified for a VA loan may happen within 24 hours of application, [it] just depends on the borrower’s situation. The determining factor is tied to the credit profile of the borrower and the documents provided to support income, assets, etc,” says Graham. “The better prepared the borrower is going into the process, the quicker the response. If the borrower needs to provide additional information, then the pre-approval process may take a little longer.”
Below is a basic list of documents to have ready, while “your lender will advise of any other documents that may be needed.”
- Income Documents: For example, most recent paystubs, W2s, tax returns, VA disability awards letter, Social Security Awards letter, etc.
- Asset Documents: For example, most recent 2 bank statements… all pages. This would also include brokerage accounts, 401 K accounts, etc.
- Photo ID: Certificate of Eligibility or DD214.
Qualifying for a VA home loan with bad credit
Your credit score will determine what loans you might qualify for, and at what rate. Your credit score is an assessment of your credit history, and lenders will use it to determine how much of a risk it might be to lend to you. The higher your credit score, the more likely you are to qualify for a loan with a low interest rate, because lenders will feel they can trust you to make payments on time.
If you have a low credit score, lenders might be a bit wary, and you would likely qualify for a loan with a high interest rate, which will be more expensive. If your credit is especially low, you might not be able to qualify for a loan at all, though fortunately, there are steps you can take to improve your score.
“VA loans are an attractive option for individuals with lower credit scores. Traditionally, the majority of lenders qualify a VA candidate with a low score between 580-620. The VA does allow scores as low as 500-580, but check the lender’s policy — each one has its own internal overlays which inform the lower end of the credit score range they will accept,” Vaita says. “Of course, the lower the score, the less favorable your interest rate, pricing, and lender options will be.”
But you don’t have to settle for less favorable rates if you are willing to take the time to work on your credit score. “The good news is there are solutions for borrowers who are credit-challenged. Sometimes it’s a pretty quick fix, such as paying down a credit card to raise the credit score 20 points, or opening a credit card, or setting up a payment plan on a collection account,” Graham says. “I recommend partnering up and speaking with a lender one or two years out from the client’s anticipated closing date. Ask the lender to take a quick look at your credit and advise of any credit-correction steps they’d suggest. This approach reduces stress and places the borrower in the driver’s seat when planning to purchase.”