If you’re a veteran of the military, National Guard, or Reserves, you might be eligible for VA loan financing. This lucrative financing program offers 100% financing to those who served our country.
Even if you have great credit and qualify for conventional loan financing, you might want to consider VA financing if you’re eligible for it.
Here’s everything you must know about VA loans and how they work.
What are VA Loans?
VA loans are government-backed loans for those who served our country. They don’t require a down payment and they have the most flexible underwriting requirements out of any loan program. VA loans make it easy for veterans to buy a primary residence without having a lot of cash on hand.
VA loans are only for veterans and their eligible spouses, though. The eligibility guidelines are different from any other loan, so it’s important to know how to tell if you’re eligible.
If eligible, you’ll find lenders that offer the VA’s flexible guidelines but also some lenders that add to the requirements to decrease the risk of default. It’s important to shop around to make sure you get the best loan for yourself.
Who Offers VA Loans?
You can only get a VA loan from a VA-approved lender. These are lenders that the VA approved to fund loans in their name. You don’t have to deal with the VA yourself – you do everything through your lender, making it an easy process.
You’ll find a variety of banks and lenders that offer VA loans including your local banks, online lenders, and mortgage brokers. If you have a unique financial situation, you might want to try a mortgage broker because they work with hundreds of lenders, giving you more options to get approved.
We always recommend that you shop with at least three lenders. This gives you a chance to see what offers are available to you. No two lenders offer the same rate and terms. Some might even have more flexible underwriting guidelines than others.
The key is to compare the offers provided to you, looking at the monthly payment, interest rate, and the bottom line – how much the loan will cost over its entire term.
Who is Eligible for a VA Loan?
To be eligible for a VA loan, you must be a current member of the military with enough time served or a veteran with an honorable discharge and enough time served.
Here’s how much time you must serve to be eligible:
- 181 days during peacetime
- 90 days during wartime
If you were discharged early, you might still qualify as long as it was an honorable discharge. If you’re a surviving spouse of a veteran who died in the line of duty or as a result of his/her time on duty, you might be eligible for your spouse’s benefits.
You might also qualify if you served in the National Guard or Reserves, but you must have served 7 years to qualify.
The VA loan program is available for veterans buying their first home and those buying a subsequent home. If you’ve used your benefits already, you might be eligible for a VA loan if you pay off your existing loan and sell the home. You must petition to reuse your benefits, but most borrowers are able to get it approved as long as they paid their current mortgage on time.
How to Qualify for a VA Loan
Being eligible and qualifying for a VA loan are two different things. If you’re eligible it doesn’t mean you automatically qualify. You must prove that you can afford the loan, just like you would with any other loan.
Here’s how to qualify:
- Minimum 620 credit score – This varies by lender since the VA doesn’t require a minimum credit score. Some lenders will accept a lower credit score and some will require higher scores.
- Meet the disposable income requirements for your area and family size – The VA requires a specific amount of disposable income (money left after you pay your bills) each month to ensure you don’t have to sacrifice. The larger your family is or the more expensive the area you live in, the more money you’ll need.
- Stable income for the last 2 years – The VA likes a stable income history but if you’re just leaving the military, you can use a job offer letter to help you get approved.
- No recent bankruptcies or foreclosures – The VA has the shortest waiting period between a bankruptcy/foreclosure and getting a new loan, but you should still have at least 2 years from the occurrence before applying for a loan.
Like we said earlier, lenders can have their own requirements. The better your qualifying factors are, though, the easier it is to get approved.
Down Payment Funds for a VA Loan
One unique aspect of the VA loan is that you don’t need a down payment. This doesn’t mean you can’t make a down payment, but it’s not required.
This means you can borrow 100% of a home’s purchase price. You’ll still need money for the closing costs, which can be 3% – 5% of the loan amount, but you don’t need money to put down on the home.
Any money you use for the closing costs (or a down payment), though, must be verified. In other words, you must prove the funds belong to you by providing the lender with your last 2 months of bank statements proving ownership of the funds.
The VA loan program does allow you to get help with the closing costs from the seller or even the lender themselves though, so it is possible to come to the closing with no money.
What about Mortgage Insurance?
Another great thing about VA loans is they don’t require mortgage insurance. You can put no money down on the home and still not pay mortgage insurance.
It’s a benefit for sure, but there is an upfront funding fee most veterans pay. The upfront funding fee is 2.3% of the loan amount for most veterans. This means for every $100,000 you borrow, you’ll pay a fee of $2,300.
You pay this fee upfront at the closing, but you can wrap it into your loan amount if you can’t afford to pay it upfront.
Once you pay the upfront fee, you don’t have to worry about any monthly insurance. However, if you use your VA loan benefits again, you’ll pay a higher funding fee as the cost increases with subsequent uses.
Pros and Cons VA Loans
Like all mortgage loans, there are pros and cons to FHA loans you should know.
Pros:
No down payment required
With no down payment required, it’s much easier to qualify for a VA loan. You don’t have to wait until you have 5% – 20% of the loan amount saved. Many people buy a home right out of the military, as long as they have a stable job that allows them to afford the payment.
No mortgage insurance
All other government-backed loans and even conventional loans with less than 20% down require mortgage insurance, but VA loans with no money down don’t require mortgage insurance. This helps keep your payment more affordable.
Flexible underwriting requirements
The VA has the most flexible underwriting requirements out of any program. They don’t have a minimum credit score requirement or maximum debt ratio requirement. As long as you meet the disposable income requirements and prove you can make the payments, you can qualify.
VA loans have low rates and fees
VA loans have some of the most competitive fees in the market and they greatly limit the number of fees borrowers can pay. The VA makes it easy and affordable for veterans to buy or refinance a home.
Cons:
Only veterans qualify
You can’t use the VA loan program unless you are a veteran or a surviving spouse of a veteran (not remarried). The program is one of the most affordable and flexible programs available today, but it’s not for everyone.
The VA appraisal is a little tough
Some sellers might avoid your offer if they know you have VA financing because they assume the VA appraisal is impossible to pass. While the VA does have Minimum Property Requirements a property must meet, they aren’t anything out of the ordinary and aren’t any harder to pass than a standard appraisal.
You might be limited by your entitlement
If you’ve used your VA entitlement before and didn’t pay the loan off in full or lost the home in foreclosure, you could lose some of your entitlement. When you try to use your benefits again, it might not be enough for you to get a loan with no down payment, you might have to make up the difference.
Key Takeaway
VA loans are one of the best options for veterans. Even if you want to put money down on your home, VA loans keep your costs and interest rates low and have the most flexible underwriting guidelines out of any loan program.
