VA loans, or Veteran Loans, are a benefit offered to Veterans of the U.S. Armed Forces on behalf of a grateful nation to facilitate the process of homeownership. The VA loan program was established in 1944, providing opportunities to millions of service members. VA loans offer an attractive $0-down payment and favorable terms that aren’t available to the general public.
VA loans are offered through private lenders, much like a traditional mortgage, but are guaranteed by the U.S. Department of Veterans Affairs. Since the VA backs VA loans, these loans typically offer more flexibility than is available to the average homeowner, such as looser credit requirements and no firm loan limits.
How Do VA Loans Work?
VA loans are provided by private lenders like banks and mortgage companies for veterans looking to build or buy a home that will serve as their primary residence. These loans differ from traditional loans in that the Department of Veterans Affairs guarantees a portion of the loan amount if the borrower defaults. This security allows lenders to be generous with their terms and makes them willing to work with veterans when possible.
Who Qualifies For A VA Loan?
First, you’ll need to verify that you or your spouse qualifies for the VA loan program. Verification is accomplished by obtaining a VA loan Certificate of Eligibility (a COE). A COE is granted to:
- Active duty military members who have served 90 continuous days.
- Veterans who meet ‘length-of-service’ requirements (at least 90 consecutive days or during peacetime for 181 consecutive days).
- National Guard or Selective Reserve members who have completed 90 days of active duty or six credit years of service.
- The surviving spouse of active duty service members who died in the line of duty or from a service-related disability and have yet to remarry (or surviving spouse who remarried after the age of 57 or Dec. 16, 2003).
- The spouse of service members who are prisoners of war or missing in action are also eligible.
It’s possible that you may still be eligible for a VA loan if you don’t meet the ‘length-of-service’ requirements under certain circumstances, such as an honorable discharge for a service-related disability.
Dishonorable discharge or ‘other than honorable’ discharge may prevent you from qualifying for eligibility. In some cases, you may apply with the VA to upgrade your discharge status.
How Are VA Loan Entitlements Determined?
Your VA entitlement is basically how much the VA is willing to guarantee to the lender on your behalf if you default on your VA loan. The concept of the VA entitlement can be a rather confusing one, but it generally consists of two types: basic and secondary entitlement.
Basic Entitlement: Your basic entitlement is usually 25% of your total mortgage or $36,000. This is the VA’s maximum guarantee for loans up to $144,000.
Secondary Entitlement: The secondary entitlement, sometimes referred to as a bonus entitlement, is up to 25% of the current FHFA (Federal Housing Finance Agency) conforming loan limit (which varies by county and depends on where the house to be purchased is located), less the amount of the basic entitlement.
If the house you are looking to purchase costs more than four times your basic entitlement (above $144,000), you can tap into your secondary or bonus entitlement. The secondary entitlement is 25% of the FHFA conforming limit. For 2020, that is $510,400 in most areas, resulting in a secondary entitlement of $127,600 less than the basic entitlement, which equals $91,600 as a secondary entitlement.
If you’re looking at a house that costs less than $144,000, the basic entitlement guarantee may help. Lenders are often willing to provide loans that are up to four times the value of the entitlement. Knowing your entitlement determines the amount of the loan that you can choose to obtain.
How Do You Apply for a VA Loan?
Applying for VA loans can look much different from the standard mortgage process.
First, gather the necessary information you’ll need to apply for your COE in order to verify your eligibility. Once your eligibility has been confirmed, you will be given an ‘entitlement,’ which is the amount of your loan that the VA will back.
Next, you’ll need to qualify for the loan by applying through a VA lender. It’s helpful to contact a VA home loan lender to begin the preapproval process. A preapproval letter from a qualified and trusted VA lender will benefit you when it’s time to place an offer on a home. As with other mortgages, you’ll need to prove that you can make the mortgage payments by showing sufficient income and carrying a minimal debt load. While there is no minimum credit score for a VA loan, private lenders may have their own minimum credit score requirements.
Then your lender will request a VA appraisal of the house that you plan to buy. The appraisal isn’t a home inspection, but it will make sure that your new home is worth what you plan to pay and that it meets the VA’s minimum property requirements. The appraisal process ensures that undertaking the loan is a sound investment for you and the lender, offering you both an extra layer of security.
Last, you need to sign all of the necessary paperwork at closing to make everything official.
What Are The Advantages of VA loans?
No Down Payment
A $0-down payment is a welcome departure from the typical down payment, which can typically vary up to 20% of your new home’s cost, thereby reducing upfront costs. However, you’ll be responsible for paying a VA funding fee that goes to support the program. When you pay no down payment, the VA funding fee for the first time that you use the program amounts to 2.30% of the amount financed. This fee drops to 1.65% of the amount financed if you put down 5-10%, and down to 1.40% if you put more than 10% down on your purchase.
VA Loans Are Reusable
If you pay off one loan, you can obtain another full VA entitlement again and again, as long as you continue to pay it off. You may also qualify for another VA loan if you have an existing VA loan or lost one of them to foreclosure in some cases.
VA Loans Don’t Require PMI
Since the VA guarantees that a substantial part of your loan will be covered in the event of default, you aren’t required to carry PMI (private mortgage insurance). Eliminating the need for PMI can save your household hundreds, even thousands, of dollars, depending on your property’s value.
Faster Acceptance Process
Due to the reduced risk to lenders since the VA is backing all or part of the loan, VA loans tend to move faster from start to finish. It can often be a quicker and easier process to secure a VA loan than to obtain a standard home loan.
Individuals who qualify for VA loans are deemed safe borrowers by banks and credit agencies, casting a more favourable light on these applicants. Consequently, as a VA loan borrower, you receive preferential treatment in the form of more lenient requirements and highly competitive rates. If you have poorer than average credit, you may still qualify for a VA loan, since the VA guarantees what you borrow. Veterans with a history of foreclosure or bankruptcy can apply if enough time has passed.
VA Loan Financing Flexibility
You can lower your interest rate by refinancing your VA loan. There are also other types of VA loans, including cash-out financing or home construction. You can also use VA financing with the Native American Direct Loan program if eligible.
No Loan Limits
As of January 1, 2020, there are no loan limits on VA loans for veterans and service members with full entitlement to VA loans.
VA loans are designed as a way to thank active-duty military personnel and veterans. If you qualify for the VA lending program, you may be able to enjoy an almost pleasant mortgage application process thanks to the U.S. Department of Veterans Affairs’ backing.
Even though private mortgage lenders offer the loans provided through the program, they usually go the extra mile to lend to veterans because the VA will back a portion of the loan in the case of default. The part of the loan that the VA will guarantee is called your entitlement, which is at least partly determined by the FHFA loan limits for the location of your future home.
The fact that you begin the loan application process with this entitlement goes a long way in securing the lender’s position, predisposing veterans to streamlined processes, fast answers, competitive rates, and the chance to purchase a primary residence without a down payment. While applicants are still subject to traditional financial review, lenders are willing to work with veterans applying through the program. Many find that VA loans have a welcome degree of flexibility compared to their conventional counterparts.
A and N Mortgage is Here to Help
You can apply for a VA loan with us here at A and N Mortgage, as we are one of the top VA-approved mortgage brokers Chicago has to offer. Please don’t hesitate to get in touch with us today to find out more or apply for a mortgage – our friendly, skilled team is waiting here for you and will help you get the information you need.