You may have heard about a VA loan as a possible mortgage option. These loans are available through a mortgage program provided by the U.S. Department of Veteran Affairs (VA). They benefit qualifying military veterans, active-duty service members, and their surviving spouses to purchase or refinance homes. 

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The following is a guide on these government-backed loans, covering everything from who qualifies for them, how much they cost, and when and where to apply for them. 

A Basic Understanding of VA Loans

A VA loan is a low-cost mortgage option for active service members, veterans, and their surviving spouses. This program helps such individuals become homeowners by offering loans with little to no down payment, no private mortgage insurance, and often with a competitive interest rate. Providing up to 100 percent financing on the value of a home, eligible borrowers can use VA loans to their advantage by purchasing a new home, making repairs to an old house, or refinancing.

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The Department of Veteran Affairs establishes the requirements for eligibility, defines the terms, and insures the loan. Yet, the VA does not provide the funding. Instead, private lenders like banks and mortgage firms agree to do so with the assurance of the government’s backing. That often results in lower mortgage rates.

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The Government National Mortgage Association (GNMA), often known as Ginnie Mae, facilitates the securitization of all loans insured by U.S. government agencies such as the Federal Housing Administration (FHA), the Department of Agriculture (USDA), and more. The government guarantees insurance on these securities if a borrower defaults.

Types of VA Loans

Eligible borrowers can choose from several housing and refinance loan types. Consult with an expert to learn more about each option. Below is an overview of each type:

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• Purchase Loans: A standard mortgage insured by the VA that allows veterans to buy a home without a down payment or mortgage insurance.
• Jumbo Loans: A VA mortgage loan that exceeds the conforming loan limits set by the Federal Housing Finance Agency (FHFA).
• Renovation Loans: VA-backed mortgage for purchasing or refinancing a fixer-upper home and includes the repair and remodeling costs.
• Rate/Term Refinance: Enables qualified borrowers to refinance to lower the interest rate, shorten ar mortgage duration, or both.
• Cash-Out Refinance Loans: VA mortgage holders may convert up to 90 percent of their equity into cash and get a larger mortgage.
• Interest Rate Reduction Refinance Loans: Also referred to as a VA Streamline, this option is for refinancing to lower interest rates.
• Native American Direct Loans: Qualified Native American veterans can fund the purchasing, building, or remodeling of homes on federal trust land.

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Who is Eligible for a VA Loan?

Despite the programs' broad acceptance of current and former service members, not everyone who has served in the Armed Forces qualifies. To be eligible, veteran borrowers or their spouses must meet the service requirement and possess a certificate of eligibility (COE). 

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Find out more about these specific conditions and what is needed to verify such qualifications below.

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VA Minimum Service Requirement

According to the Eligibility Requirements for VA Home Loan Programs, borrowers must meet one of the following service provisions:

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• Service Members must have at least 90 continuous days of active duty service. 
• Veterans must meet minimum active-duty conditions based on when they served.
• National Guard and Reserve Members must also meet active-duty requirements based on dates of service. 
• Discharged Service Members might be eligible if released for select reasons.

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For a VA mortgage, loan applicants must also meet the lender’s requirements on credit standing, income, and other factors.

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Certificate of Eligibility (COE)

A certificate of eligibility (COE) is a document that proves to a mortgage lender that a borrower’s VA benefits qualify them. As an indemnity for their service, every Armed Forces member receives a VA entitlement. That is money that the agency guarantees to reimburse a lender if the service member defaults.

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Alas, the amount depends on how much one has already utilized. Having the COE makes it more accessible. This document declares the amount available for a VA loan as well as when and how it was used. A lender may retrieve one’s COE, or borrowers may request it on the VA website or by mail using the VA Form 26-1880.

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Qualification Requirements for a VA Loan

After confirming eligibility, other conditions remain. That includes having good standing with credit, income, assets, and the property can also play a factor. Each lender’s prerequisites vary, but the following are the common aspects.

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Property Type

To comply with VA loan occupancy standards, the property must be the owner’s principal residence within 60 days of purchase. A VA loan cannot be used to buy a second home or investment property. However, qualified borrowers may purchase a one-to-four-family home as long as they intend to live there full-time.

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Also, while VA loans can be used on manufactured homes and condos, some lenders may finance one or the other. Discuss with the creditor what type of property you plan to purchase to ensure clarity.

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Creditworthiness

The criterion varies by the lender because the Department of Veteran Affairs does not specify a minimum credit score. Despite the VA not defining a standard minimum score, many traditional financiers have decided on a score of 620 as a cutoff. Nonetheless, it should be simple to locate lenders who would accept credit scores as low as 500.

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Proof of Income

Lenders also considers a borrower’s debt-to-income ratio (DTI) when evaluating their loan repayment ability. DTI is an indicator of how much of a homeowner’s income goes toward paying the debt. Once again, the VA does not impose limits, but lenders may. The VA recommends a maximum DTI of 41 percent, but exceptions are made depending on the credit score, down payment, residual income, or equity size. 

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Reserve Funds

To be eligible for a VA loan, borrowers may need to demonstrate they have cash or liquid assets. Proof of reserve funds ensures the borrower can afford payments after the loan closes. 

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The cash required varies by the proposed mortgage payment. Most single-family homes do not need funds over the upfront costs. It is still prudent to have reserve funds equal to at least two months’ worth of mortgage payments. 

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Down Payment

A VA loan is a lending option that does not mandate a down payment. A zero-down payment VA loan may be subject to conditions set forth by the lender. For instance, if putting down less than 10 percent, a higher credit score may be required. For a loan within conventional limitations, a credit score of 580 is the typical cutoff. Even with zero percent down, there are additional fees with VA loan closing costs. 

VA Loan Limits

Other than cases of limited entitlement, the VA does not cap the amount eligible homebuyers can borrow. If lending limits apply, it is most often the conventional loan restrictions, which as of 2023, sit at a minimum of $726,200 for contiguous U.S. states. 

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Expect higher limits in costlier locations. A VA jumbo loan, which does not require a downpayment and a cheaper rate than ordinary jumbo loans, may be an option if in need of a loan more extensive. Likewise, creditors often use conventional loan limits as the lower restrictions.

How to Apply for a VA Loan

Applying for a VA loan is similar to applying for every other mortgage. Once eligibility is confirmed, the home-buying process can begin. Consider the five steps below as a general guide: 

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1. Obtain Your COE and Prepare Other Financial Documents: A COE is necessary as it provides proof and status of military service. VA-approved lenders can assist members in obtaining their COEs. Just mention this in the application process. Borrowers will also need to furnish further paperwork, common for the home-buying cycle. 
2. Find a VA-Approved Lender and Get Pre-Approved: Not all creditors provide VA loans; therefore, not all loan officers know about this procedure. The VA limits lender fees to one percent of the loan, so avoid lenders whose costs exceed that. Get pre-approved as soon as possible. Use that to determine how much you can afford. Also, sellers often prefer offers with pre-approval.
3. Shop Around and Make an Offer On a House: A VA loan can be used to purchase a home just like other financing methods. The VA's Minimum Property Requirements, or MPRs, must be met to ensure the house is sanitary, safe, and well-built. These specifications change depending on the location. After locating a suitable place within your price range, submit an offer. The seller may accept it, reject it, or make a counteroffer. A real estate agent or attorney can assist in creating a sales agreement when a price has been decided.
4. Undergo the Underwriting Process and Await Approval: After a sales agreement is made, the underwriters examine the borrower’s finances. An appraisal is another need for the VA before they approve the loan. Compared to standard loans, VA appraisals are more stringent. The appraiser will verify that the house satisfies the VA's MPRs, is clean, structurally sound, and ready to move into with minimum renovations.
5. Close on the New Home: It is time to sign for the new home, obtain financing, and get the keys to the new property. The closing often occurs in person at a title company, escrow agency, or lawyer's office. The property title is recorded in the buyer's name after the lender has reviewed the closing package and the loan has been wired.

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What Are the VA Loan Costs?

VA home loans are a popular mortgage option for eligible service members and veterans because of the expense efficiency benefits. The ability to secure a home loan with no money down, plus without the burden of insurance, can cut costs. Alas, as with all loans, there are associated charges. The following is a breakdown of what costs VA borrowers can expect:

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• Interest Rate: Mortgage rates offered for conventional and FHA loans are often higher. However, comparing APRs, which account for the additional fees along with the interest rates, is recommended because the VA requires funding fees, unlike the other home loan counterparts.
• Funding Fees: VA loan applicants must pay a one-time funding fee. This fee varies between 0.5 and 3.6 percent, with most veterans paying 2.3 percent. Funding costs are waived for surviving spouses, veterans on disability, and Purple Heart recipients. 
• Origination Fees: The lender charges the processing and underwriting. This fee pays for administrative costs, such as credit checks, appraisals, and loan origination costs. The current limit is one percent of the loan, but some lenders have more specific regulations. 
• Closing Costs: Closing costs vary based on details such as property type and the loan. Budgeting between three and six percent of the total at closing is recommended. Alas, VA lenders' fees should not exceed one percent of that. 

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The Pros and Cons of VA Loans

Veterans, active duty service members, and their families have become more familiar with VA loans. They can simplify buying a house. However, some potential disadvantages should be considered. 

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Benefits

• The VA program is one of the few home loan programs that does not require down payments.
• Since they are backed by the government and involve less risk, VA loans have lower interest rates.
• Conventional and FHA lenders may require insurance depending on the down payment, whereas the VA does not.
• The VA has few income restrictions and loan limits, making it easier for borrowers to qualify.
• VA lender fees are restricted to a maximum of 1 percent of the loan amount

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Drawbacks

• Borrowers must be eligible based on military service and status.
• Not permitted for the purchase of a second home or investment property.
• Funding fees may take up to 3.6 percent of the loan amount. 
• VA home appraisals have more stringent requirements and can take longer. 
• VA home appraisals cost more than conventional or FHA loans.

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Conclusion

A VA loan is a fantastic option for veterans and active military personnel who want to buy a house. It enables qualified individuals to purchase a home without paying hefty down payments or excessive interest rates. A VA loan can offer the financial security necessary to realize the dream of homeownership because of its affordable rates and adaptable conditions.

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For more information or questions about what other mortgage products are available, contact a Wesley Mortgage representative today.

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