VA Purchase : The Bottom Line

What Is a VA Loan?

VA loans are government-backed mortgages insured by the U.S. Department of Veteran Affairs, and are issued by private lenders like banks or mortgage companies. Because VA loans are a specialized loan product, they are only available to veterans, service members and even select military spouses. The U.S. Department of Veteran Affairs, formerly known as The Veterans Administration, was first established by President Hoover in 1930 to “consolidate and coordinate Government activities affecting war veterans”. The VA has since helped returning service members become home owners through the introduction of its VA loan program in 1944. VA loans are a great product for those who are eligible because not only can they be structured in a number of ways, but they have especially lenient criteria, while also providing great terms like 0% down payment, and no mortgage insurance.

VA Loan products

1. VA Purchase loans – The most common VA loan is the VA purchase loan, and it is a mortgage made available to veterans, active service members or their surviving spouses. VA loans offer to finance up to 100% of a home’s value, and come with great terms like 0% down payment, and no mortgage insurance/

2. VA Cash-Out Refinance - VA Cash-Out Refinances allow borrowers to take up to 100% of their home’s equity out to pay down debt, or other costs like school or home improvements. A VA Cash-Out Refinance can also be used to convert an existing non-VA loan into a VA loan.

3. VA Interest Rate Reduction Refinance Loan (IRRRL) – The VA IRRRL is also commonly known as a VA streamline refinance because it removes the need for an appraisal or additional income documentation thus making it a quicker process than other types of refinance loans. The VA IRRRL can only be done when the existing loan is already a VA loan, and used 

Note: These are just some of the VA loan products available and is therefore not a complete list.

What are the criteria for a VA Loan?

Military Service Requirements: To verify that the military service requirements are met, a Certificate of Eligibility and DD-214 will be needed. The Certificate of Eligibility is a document issued by the Department of Veteran Affairs, and not only provides verification of service, but also provides the VA loan entitlement and if the funding fee will need to be paid. The DD-214 also provides proof of service but also the classification of the vets discharge. 

VA Loan Entitlement: The VA loan entitlement is the amount guaranteed by the Department of Veteran Affairs on each VA loan. The entitlement amount indicates how much can be borrowed before requiring a down payment. Generally, the entitlement is either $36,000 or 25% of the loan up to the current conforming loan limit.

VA Funding Fee: Unlike most other loans, VA loans do not carry mortgage insurance, but instead carry a funding fee that is either paid up front or rolled into the loan. The VA Funding Fee goes straight to the VA and is used to finance future veteran and military homebuyers thus covering the cost to taxpayers. The amount of the fee depends on a number of factors like the type of service, size of down payment, what the loan is being used for and whether or not it’s the first time the VA loan program is being used. In some cases the VA will exempt borrowers from the fee entirely, like for those who receive disability or for the spouses of veterans who are either disabled or have died in service or from a service-connected disability.

Down Payment: VA loans are one of the few remaining mortgages on the market that have a 0% down payment for eligible borrowers, but this may change depending on the borrowers entitlement.

Credit score: Despite the fact that the VA itself does not have a minimum credit score requirement, most lenders will. Generally, most lenders will want to see a minimum credit score of 620, but this may vary as each lender has its own set of requirements.

Debt-to-income ratio: Your debt-to-income ratio, or DTI, is a percentage based off your total gross income being divided by the sum of your monthly debts. The max DTI ratio for VA loans is technically 41%, but can be exceeded if the borrower has an extra 20% or more in residual income.

Loan size: The max loan amount depends heavily on a number of factors such as the COE, credit history, monthly income, and list of assets. Each lender will have different requirements so it is best to compare.

How do I get a VA Loan?

The first step in acquiring a VA loan is contacting a lender who issues them, most lending institutions do and there are even lenders specifically made for the VA loan process. Once a lender is found applying for a VA loan doesn’t require for service members or vets to know whether they are eligible or not, as the pre-approval process for the loan will determine that through submission of the COE and DD-214. Once eligibility is determined, and all other necessary information has been provided, the loan process will move forward, and usually take between 30 to 45 days to close once a home is found.

Why should I get a VA Loan?

The VA loan program offers many benefits to those eligible, like more lenient credit requirements, lower interest rates, especially for those with credit issues, and not needing a down payment. Additionally, unlike the FHA or Conventional loan products that require a form of mortgage insurance, that is used to protect lenders, the VA does not. There are even added benefits for disabled vets like being exempt from the VA funding fee. There are even benefits when refinancing a VA loan like not requiring any equity, but also allowing up to 120% of the home’s value to be refinanced when changing terms or lowering the interest rate. Lastly, the VA loan program allows vets to qualify with higher DTI ratios than any other loan on the market, although a more in-depth analysis of their finances will be needed when a DTI of 41% is exceeded.

VA Loan: The Bottom Line

The VA loan program is a great specialized option for vets, service members and even military spouses who qualify and are willing to provide the additional documentation needed for proof of eligibility. Not only can the VA loan be structured in a variety of ways to provide a number of uses, but the VA loan’s core criteria make all of its different products more than competitive when compared to its FHA, Conventional or USDA counterparts. Despite having to provide two additional documents (COE and DD-214), the VA loan process is just as quick to close as other loan products on the market.