Buying a home is one of the biggest financial decisions most people make in their lives. The process can be daunting, especially for first-time homebuyers. Fortunately, the government offers several types of mortgage programs to help people achieve their dream of homeownership. One of the most popular options is a VA loan. In this article, we will cover everything you need to know about government-backed mortgages, specifically VA loans.
Government-Backed Mortgages: A Comprehensive Guide to VA Loans
What is a VA Loan?
A VA loan is a mortgage loan that is guaranteed by the United States Department of Veterans Affairs (VA). The program was created in 1944 to help veterans and their families buy homes with affordable and accessible financing options. VA loans are issued by private lenders, such as banks and mortgage companies, but are guaranteed by the VA.
Who Qualifies for a VA Loan?
VA loans are available to active-duty service members, veterans, and certain surviving spouses. To be eligible, you must have served in the military for at least 90 days during wartime or 181 days during peacetime. National Guard and Reserve members may also be eligible after six years of service, and surviving spouses of service members who died in the line of duty may also be eligible.
What are the Benefits of a VA Loan?
One of the biggest benefits of a VA loan is that you may not have to make a down payment. Additionally, VA loans have no mortgage insurance requirement, which can save borrowers thousands of dollars over the life of the loan. VA loans also have competitive interest rates and flexible credit requirements.
VA Loan Requirements
While VA loans have flexible credit requirements, lenders still look at a borrower’s credit score, debt-to-income ratio, and employment history. In addition, borrowers must obtain a Certificate of Eligibility (COE) from the VA to prove their eligibility for the program.
VA Loan Limits
VA loans do have limits on the amount you can borrow. The VA determines these limits based on the conforming loan limits set by the Federal Housing Finance Agency. The limit varies by county, but in most areas, the limit for 2023 is $726,200.
How to Apply for a VA Loan
To apply for a VA loan, you will need to find a lender that participates in the program. You can obtain a list of approved lenders from the VA. Once you find a lender, you will need to provide your COE and other documentation, such as income and employment verification.
Steps to starting the process and finding a home
Apply for your VA-backed home loan Certificate of Eligibility (COE)
You’ll need to show your COE to your lender as proof that you qualify for the home loan benefit.
Find out if you qualify for a COE
Apply for your COE now
Look at your current finances
Go over your credit profile, income, expenses, and monthly budget to make sure you’re ready to buy a home. Decide how much you want to spend on a mortgage—and be sure to include closing costs in the overall price.
To learn more:
Find out current VA home loan limits
Read about the VA funding fee and other loan closing costs
Get more advice from the Consumer Financial Protection Bureau (CFPB)
Use CFPB’s mortgage calculator
Choose a lender
Remember, you’ll go through a private bank, mortgage company, or credit union—not through us—to get your loan. Lenders offer different loan interest rates and fees, so shop around for the loan that best meets your needs.
Be prepared to pay lender fees. Many lenders charge Veterans using VA-backed home loans a 1% flat fee (sometimes called a “loan origination fee”). Lenders may also charge you additional fees. If you don’t know what a fee is for, ask the lender. In some cases, lender fees are negotiable.
To learn more:
Read about the VA funding fee and other closing costs
Choose a real estate agent
Get recommendations for potential real estate agents online or from relatives, friends, and neighbors. Then meet with several agents to find one you like.
Read all agreements before signing with an agent. Make sure you understand any charges, fees, and commissions as well as your rights and obligations in the buyer-agent relationship.
Shop for a home
Look at houses in your price range until you find one that works for you. When comparing homes, be sure to consider what factors are most important to you and your family. These may include factors like how far you’ll need to commute to work and the quality of local schools.
Steps to buying your home
Once you’ve found the house you want to buy:
Work with your agent to put together and sign a purchase agreement
Be sure the sales contract includes the “VA escape clause” or “VA option clause.” This provides an option to void the contract if the property doesn’t appraise for the contract price.
Ask your real estate agent for advice on other options for voiding the contract you may want to include, such as if the property fails a home inspection. These options are called contingencies.
To learn more, watch this helpful video:
Using your VA home loan benefit: working with a Realtor and lender
Have the house inspected and appraised
We strongly recommend that you get an inspection to check for any major defects before you purchase your home. A VA-approved appraiser will also appraise the house to make sure it meets basic property condition requirements (called minimum property requirements, or MPRs), and will provide an opinion of value on the house. Please note that an appraisal isn’t the same as an inspection.
If the property doesn’t appraise at a value that’s high enough to get the loan, you have a few options. You can:
- Request a Reconsideration of Value (ROV). You can ask your real estate agent to provide the lender with valid sales data showing the property is worth more than its appraised price. The lender will ask the appraiser to reconsider based on this information.
- Renegotiate the sales price. Ask the seller to lower the price to match the appraised value.
- Pay the difference between the appraised price and the sales price. To do this, you’ll need to pay this cost at closing.To learn more, watch these helpful videos:
VA home loans: What are MPRs?
What’s the difference between VA’s appraisal process and a home inspection?
Review pre-closing paperwork and give your lender any other needed information
Your lender must give you a Closing Disclosure at least 3 business days before closing. Be sure to read it carefully. It includes loan terms, fees, closing costs, and your estimated monthly mortgage payments. Your lender may also ask you to provide more information or documents at this time.
Close on your new home
Your closing may be held at a title company, escrow office, or attorney’s office. Be prepared to sign a lot of documents—and be sure to take the time to read everything before you sign.
To learn more:
Go to Fannie Mae’s website
After closing, you’re ready to move into your new home. Congratulations!
Source: VA Home Buying Process
VA Loan Funding Fee
One of the unique features of VA loans is the funding fee. This fee is a one-time payment that helps to offset the cost of the program to taxpayers. The amount of the funding fee varies based on several factors, including the size of the down payment, the type of service, and the number of times you have used the program.
VA funding fee rate charts
Effective January 1, 2020, based on Public Law 116-23
Review the VA funding fee rate charts below to determine the amount you’ll have to pay. Down payment and VA funding fee amounts are expressed as a percentage of total loan amount.
For example: Let’s say you’re using a VA-backed loan for the first time, and you’re buying a $200,000 home and paying a down payment of $10,000 (5% of the $200,000 loan). You’ll pay a VA funding fee of $3,135, or 1.65% of the $190,000 loan amount. The funding fee applies only to the loan amount, not the purchase price of the home.
VA-backed purchase and construction loans
Rates for Veterans, active-duty service members, and National Guard and Reserve members
|If your down payment is…||Your VA funding fee will be…|
|First use||Less than 5%||2.3%|
|5% or more||1.65%|
|10% or more||1.4%|
|After first use||Less than 5%||3.6%|
|5% or more||1.65%|
|10% or more||1.4%|
Source: VA Funding Fee and Closing Cost
VA Loan Rates and Terms
VA loan rates are competitive with other mortgage programs. However, the terms of the loan may be more flexible than other programs. For example, VA loans may have longer repayment periods, and borrowers may be able to negotiate a lower interest rate.
VA Loan Refinancing
If you currently have a VA loan, you may be able to refinance your loan through the VA’s Interest Rate Reduction Refinance Loan (IRRRL) program. This program allows you to refinance your existing VA loan to a lower interest rate, which can help reduce your monthly mortgage payments. You may also be able to refinance your VA loan to a conventional or FHA loan through the VA’s Cash-Out Refinance program.
Frequently Asked Questions about VA Loans
- What is the minimum credit score required for a VA loan? A: There is no set minimum credit score for a VA loan, but most lenders prefer a score of at least 620.
- Can I use a VA loan to buy a second home or investment property? A: No, VA loans are intended for primary residences only.
- Can I use a VA loan to buy a mobile home or a condo? A: Yes, as long as the mobile home or condo meets the VA’s eligibility requirements.
- Do I have to pay the VA loan funding fee upfront? A: No, you can roll the funding fee into your loan balance.
- Can I use a VA loan to make home improvements or repairs? A: Yes, you may be able to use a VA loan to make improvements or repairs to your home through the VA’s Energy Efficient Mortgage (EEM) program.
VA loans offer an excellent opportunity for military service members, veterans, and their families to achieve the dream of homeownership. With no down payment requirement, no mortgage insurance, and competitive interest rates, VA loans can help make homeownership more affordable and accessible. If you think you may be eligible for a VA loan, contact a lender that participates in the program to learn more.
In summary, VA loans are a valuable resource for those who have served our country. They provide affordable and accessible financing options that can help make homeownership a reality. With flexible credit requirements, competitive interest rates, and a variety of options for refinancing and home improvements, VA loans are an excellent choice for those who qualify.