Getting to a point in life where you can buy a home is a significant achievement, and it calls for a lot of hard work. For veterans or anyone serving in the military could be harder than it is for people who are not. Remember, if you are in the military, you do not get the time to engage in other income-generating activities that would enable you to realize your homeownership dream. So what options do you have as a veteran and planning on buying a home? Well, there is a mortgage package for military service veterans called the VA loan.
What Is a VA Loan?
A VA loan is a home loan given by private lenders and secured by the U.S department of veterans affairs. It enables U.S veterans, the active duty service members, and widowed service members spouses to home buying.
VA loans were introduced as part of the GI Bill in 1944 to help the veterans, and they have become popular over time. In early 2019, 8% of homes were acquired using a VA loan. This loan type has become increasingly popular because it is easy to qualify and does not need a down payment.
How Does a VA home Loan Work?
VA home loans are non-conventional home loans. They do not work like the conventional mortgage you get from banks and other lenders since VA loans are government-insured. This means that the U.S department of veterans affairs undertakes to repay a part of the loan to the lender if you are unable to make payments or if you face foreclosure. The non-conventional home loans are easy to get since the banks assume less risk than conventional loans.
What are VA home Loan Requirements?
To get a VA loan, you must be military personnel and meet the VA’s specific service needs. For you to be eligible, you must fall in any of the following three categories:
- You are an active duty service member or an honourably discharged veteran who has 90 consecutive days of active service during wartime or 181 days of active service during peacetime.
- You have served more than six years in the National Guard or the Selected Reserve.
- You are the spouse of a service member who died in the line of duty.
When applying for a VA loan, you need to get a Certificate of Eligibility (COE) to prove to lenders that you are qualified for a VA loan.
Types of VA Mortgage Loans
Various types of VA home loans are available for veterans to select from, and are classified into:
1. VA Purchase Loans
Purchase loans enable veterans to buy homes at a competitive interest rate, and they include; Fixed Rate Mortgage, Adjustable Rate Mortgage (ARM), and VA Jumbo Loan
Fixed-Rate VA Loan:
- The interest rate is fixed for the loan’s life, and it is not affected by the market interest rates, whether it increases or decreases.
- Monthly payments remain the same each month.
- No down payment is needed, except the purchase price is higher than the assessed value of the home.
- Don’t require private mortgage insurance.
- The closing costs are limited.
- It has competitive interest rates due to government backing.
Adjustable Rate VA Loan:
- The interest rate adjusts periodically by adding a margin to an index specified by the mortgage.
- Monthly payments change with changes in interest.
- ARM’s have limits on the amount of interest adjustment that can be made in given periods and across the loan’s life.
- No down payment is required unless the buying price is more than the assessed value of the home.
- Does not need private mortgage insurance.
- Closing costs are limited.
- Competitive interest rates.
VA Jumbo Loan
- Suitable if over the standard loan limit of $417,000 is needed
- Depends on the loan limit for the county.
- Requires a small down payment.
2. VA Refinance Loans
If you are already a homeowner and have built up equity in your home, you have options such as Refinance Loan or Streamline Refinance Loan
VA Refinance Loan
This is a cash-out refinance that allows you to get cash for home improvements or other cash needs such as college fees, paying off debts, etc.
VA Streamline Refinance Loan
- It is also known as an interest rate reduction loan (IRRRL).
- It helps lower the interest rate on your loan without incurring any out-of-pocket fees.
- You can use your original document of eligibility.
- Available only for existing VA Loans.
3. Native American Direct Loan (NADL) Program
If you’re an eligible U.S. Native American Veteran and your current or desired house is on Federal Trust Land, and this loan program can help you finance the purchase, construction, or improvement of your home.
4. Adapted Housing Grants
This VA home loan program is designed to help veterans who may have a permanent or total service-connected disability to build or purchase an adapted home or modify an existing house to accommodate their disability.
Advantages of VA Loans
Here are some of the benefits of VA loans:
- No down payment required
VA loans are among the last 0% home loans available on the market today for qualified veterans.
- No PMI required
Since VA loans are government-backed, banks do not require you to buy Private Mortgage Insurance.
- Competitive Interest Rates
The VA guaranty gives lenders a higher degree of safety and flexibility, which typically means a borrower gets a more competitive rate than non-VA loans.
- Easier to Qualify
Since the department of veterans affairs insures the mortgage, banks assume less risk and have less stringent qualification standards for VA loans, making them easier to obtain for those who are eligible.
- No minimum credit score requirement
Typically, lenders look for borrowers who have a credit score of 620 or more. However, the ideal credit record would be zero, meaning that you have no debt.
- No prepayment penalty
You will not be fined for paying off your loan early, before the loan term expiry.
- You do not have to be a first time homebuyer to qualify for a VA loan
So long as each time you borrow a VA loan, you pay it off you can get it over and over.
What Are the Drawbacks of A VA Loan?
Everything sounds fair up to this point, although some problems come with the loan.
- The zero down payment leaves you vulnerable
A small shift in the real estate market can leave you owing more on your home than its market value. That means you could get stuck with the home until the market recovers or take a financial loss if you have to sell the house quickly.
VA loan funding fee
As a borrower, you are supposed to pay a funding fee between 1.25% and 3.3% of the loan amount. The funding fee is usually included in the loan, so it increases your monthly payment and adds to the interest you pay over the loan’s life.
- Limited to primary residences or refinancing
A VA loan can only be used to buy or build a primary residence or to refinance an existing loan. So you cannot buy an investment property or vacation home with the mortgage.
VA Loan Limits
Qualified veterans with a full VA loan entitlement can borrow as much as a lender is willing to lend, all without a down payment. The VA loan limits are only applicable to borrowers with less than their full entitlement, either because they have other active VA loans or because they lost the previous one to foreclosure.
Eligibility Requirements for A Spouse of a Veteran
If you are a service member’s spouse, you can qualify for a VA home if you meet any of the following descriptions:
- You are a spouse of a prisoner of war or a military member missing in action.
- You are an un-remarried spouse of a veteran who passed away in service or from a service-related injury.
- You are a surviving spouse of a disabled veteran.
- You are a spouse of a deceased veteran who remarries at or after turning 57 years of age, on or after December 16, 2003.