What Is a VA Home Loan?
A VA Home Loan is for veterans and active duty military personnel and certain members of the reserves and National Guard. VA’s program provides an excellent product and benefit for those individuals who have served or are serving to protect our families and our nation.
There are several advantages to using VA’s Home Loan Program. The VA allows a veteran who qualifies income and credit-wise to purchase a primary residence without putting money down towards the sales price, as long as the sales price does not exceed the appraised value. Veterans do, however, need money towards closing costs and the earnest money deposit, which the seller generally requires when a sales contract is signed. Closing costs may be paid by the seller, which is an item to consider when the sales price is being negotiated.
Does my entitlement guarantee that I will get a home loan?
No, VA cannot compel a lender to make a loan that would violate their lender policies. Lenders must also comply with VA income and credit standards.
Is there a maximum loan limit?
There is no maximum VA loan. Lenders will generally lend up to 4 times the amount of a veterans entitlement without requiring a downpayment.
How do I get a Certificate of Eligibility?
For assistance with obtaining a Certificate of Eligibility. Just click here.
How do I obtain a VA Home Loan?
- Prequalify for your VA loan. Obtain your Certificate of Eligibility.
- Select a home and discuss the purchase with the seller or selling agent. Sign a purchase contract conditioned on approval of your VA home loan.
- Give your Certificate of Eligibility to your mortgage company and complete a loan application.
- The lender will develop all credit and income information. They will also request VA to assign a licensed appraiser to determine the reasonable value for the property. A Certificate of Reasonable Value will be issued. Note: You may be required to pay for the credit report and appraisal unless the seller agrees to pay.
- The lender will let you know the decision on the loan. You should be approved if the established value and your credit and income are acceptable.
- You (and spouse) attend the loan closing. The lender or closing attorney will explain the loan terms and requirements as well as where and how to make the monthly payments. Sign the note, mortgage, and other related papers.
- The loan is sent to VA for guaranty. Your Certificate of Eligibility is annotated to reflect the use of entitlement and returned to you.
What are the benefits of a VA home loan?
- Equal opportunity.
- No downpayment (unless required by the lender or the purchase price is more than the reasonable value of the property).
- Buyer informed of reasonable value.
- Negotiable interest rate.
- Ability to finance the VA funding fee (plus reduced funding fees with a downpayment of at least 5% and exemption for veterans receiving VA compensation).
- Closing costs are comparable with other financing types (and may be lower).
- No mortgage insurance premiums.
- An assumable mortgage.
- Right to prepay without penalty.
- For homes inspected by VA during construction, a warranty from builder and assistance from VA to obtain cooperation of builder.
- VA assistance to veteran borrowers in default due to temporary financial difficulty.
What can VA not do?
- Guarantee that a home is free of defects. VA guarantees only the loan. It is your responsibility to assure that you are satisfied with the property being purchased. The VA appraisal is not intended to be an “inspection” of the property. You should seek expert advice (a qualified residential inspection service), as necessary, BEFORE legally committing to a purchase agreement.
- If you have a home built, VA cannot compel the builder to correct construction defects although VA does have the authority to suspend a builder from further participation in the home loan program.
- VA cannot guarantee that you are making a good investment.
- VA cannot provide you with legal services.
Is a guaranteed loan a gift?
No, it must be repaid, just as you must repay any money you borrow. If you fail to make the payments you agreed to make, you may lose your home through foreclosure.
Can I get a loan for a home outside of the United States?
Unfortunately, the law only allows VA to guarantee loans on property in the United States, its territories, or possessions.
Can I get a VA loan if I have had a bankruptcy in the last few years?
The fact you and/or your spouse have been adjudicated bankrupt does not in itself disqualify you for a VA home loan. The following rules apply:
- If the bankruptcy was discharged more than 2 years ago, it may be disregarded
- If the bankruptcy was discharged within the last 1 to 2 years, it is probably not possible to determine that you and/or your spouse are a satisfactory credit risk unless both of the following requirements are met:
- you and/or your spouse have reestablished satisfactory credit, and
- the bankruptcy was caused by circumstances beyond your and/or your spouses control (such as unemployment, medical bills, etc.)
- If the bankruptcy was discharged within the past 12 months, it will not generally be possible to determine that you and/or your spouse are satisfactory credit risks.
Why do I have to pay a fee for a VA home loan? Since I paid a fee for my first loan, why is there a larger fee for my second loan?
The VA funding fee is required by law. The fee is intended to enable the veteran who obtains a VA home loan to contribute toward the cost of this benefit, and thereby reduce the cost to taxpayers. The funding fee for second time users who do not make a downpayment is slightly higher. The idea of a higher fee for second time use is based on the fact that these veterans have already had a chance to use the benefit once, and also that prior users have had time to accumulate equity or save money towards a downpayment. Second time users who make a downpayment of at least 5 percent pay a reduced funding fee of 1.5 percent, the same as first time users making the same downpayment. For a 10 percent downpayment, the fee drops to 1.25 percent. The effect of the funding fee on a veteran’s financial situation is minimized since the fee may be financed in the loan. National Guard and Reservist veterans pay a slightly higher funding fee percentage.
I want to buy a house with a VA loan. Do I need to occupy the property?
The law requires that you certify that you intend to occupy the property as your home. This requirement is considered satisfied if you actually intend to occupy the property as your home and in fact so occupy it when the loan is closed or within a reasonable time afterward.
I am a single veteran stationed overseas and want to buy a home in my home town. My friends who are married can do this with their spouses occupying the property in their place, but VA says I can‘t do this with my parents or other relatives occupying on my behalf. Isn’t this discrimination against single veterans?
The law specifically provides that occupancy by the veteran’s spouse satisfies the personal occupancy requirement. The law makes no provision for occupancy by any other relatives as a substitute for personal occupancy by the veteran.
If a veteran dies before the loan is paid off, will the VA guaranty pay off the balance of the loan?
No. The surviving spouse or other co-borrower must continue to make the payments. If there is no CO-borrower, the loan becomes the obligation of the veteran’s estate. Mortgage life insurance is available but must be purchased from private insurance sources.
What are the steps in the VA Home Loan process?
There are five basic steps when obtaining a VA backed home loan. Although there are lots of details within each step and some may overlap, here is a basic overview of how the process works.
- The veteran should get Prequalified for his/her VA home loan. This prequalification identifies the price range of the home the veteran should be looking for.
- Veterans may also apply for a VA certificate of eligibility prior to looking for a home.
- The veteran selects a home he/she is interested in. The purchase and sales agreement should contain a VA option clause. Sample wording for a VA option clause:
It is expressly agreed that, notwithstanding any other provisions of this contract, the purchaser shall not incur any penalty by forfeiture of earnest money or otherwise of be obligated to complete the purchase of the property described herein, if the contract purchase price or cost exceeds the reasonable value of the property established by the Department of Veterans Affairs. The purchaser shall, however, have the privilege and option of proceeding with the consummation of this contract without regard to the amount of the reasonable value established by the Department of Veterans Affairs.”
- The contract must also allow the veteran to “escape” from the contract without penalty if he/she is unable to obtain a VA loan.
- Contact a lender to apply for the VA loan. At this point, if the veteran has not already obtained his/her VA certificate of eligibility, they will need to. The lender may be able to obtain it off the internet or the veteran may have to complete a form and send it to the appropriate eligibility center. In either case the lender will be able to assist in the procedures of how to obtain a certificate of eligibility. The lender will complete a loan application and gather supporting documentation, i.e., paystubs and bank statements. An important item for veterans to know is that lenders set their own interest rates, discount points and closing points.
- The lender will “process” (develop) all credit and income information. Lenders are allowed to use VA approved automated underwriting systems. The lender will also order a VA appraisal. VA’s appraisal is not a home inspection or a guaranty of value. It is an estimate of the market value as of the date the inspection is made comparing it to similar homes that have recently sold in that area. Although the appraiser does look for obviously needed repairs, VA does request that appraisers not address cosmetic items. VA does not warrant the condition of existing homes. The appraiser is a licensed individual who does not work for VA but is chosen by VA to assure his/her review is unbiased in any way. The lender can not request which appraiser to use, they are assigned on a rotation bases.
- Upon receipt of the appraisal and all supporting documentation on credit, income and assets, the lender will “underwrite” the VA loan. It is the lender who reviews all the data collected and decides if the VA loan should be granted, developed for additional data or if the veteran does not qualify and must be denied. Although VA does “underwrite” some loans, it is very rare. The decision on whether or not to approve the VA loan is generally made by the lender.
- The final step for loans that meet VA regulations and guidelines is the loan “closing” (when the transfer actually takes place). The lender chooses the title company, attorney or if their representative will conduct the closing. The title company, attorney or lender representative who will handle the closing will coordinate the date and time. If there are any questions during the process that the lender can not assist you with, please contact a VA representative.