VA Home Loans
For certain qualified active duty members of the military and veterans have the ability to purchase a home using the VA home loan program. This program provides a no-money-down financing option at a low interest rate that is backed by the federal government. The VA home loan was created in 1944 to benefit returning service members who were looking to rejoin civilian life, purchase a home and settle down. Since that time, over 20 million veterans have purchased homes with these affordable loans.
The VA home loan program is one of the industry’s most unique loan options. It allows veterans to purchase a home loan with zero percent down, yet without any private mortgage insurance charge. Even with this benefit, the interest rate on these loans is quite competitive. Also, they are easier to qualify for because of the government backing. For those who are qualified, this is usually the most affordable loan option available.
VA home loans come from private lenders and have government backing. Like other government-backed loans, the VA home loan is considered less of a risk for the lender because the government promises to pay back the loan if the borrower defaults. This means many veterans who could not get a loan through traditional measures can qualify for a VA home loan, even with poor credit, because their trustworthiness as a borrower is less important to the lender.
The VA home loan is incredibly beneficial because of its excellent terms, but it is only available to a select few. In order to qualify for the VA home loan program, a veteran must have met certain service qualifications. These include serving 90 consecutive days of active service during wartime, 181 days of active service during peacetime or over 6 years of service in the National Guard or Reserves. In addition, the spouse of a service member who has died in the line of duty or dies as a result of a service-related disability is also eligible. In order to qualify, the veteran or member of the military must be in good standing. Those who received a dishonorable discharge may not be qualified. In order to prove eligibility, the applicant must apply for and obtain a VA Certificate of Eligibility from the VA.
These loans do not have any income requirements or credit requirements for eligibility. However, because they come from individual lenders, and not from the government directly, lenders are able to set their own criteria for approval. Debt, credit score and income can all play into the lender’s eligibility. Receiving the Certificate of Eligibility does not guarantee that the borrower will be approved by the lender.
TERMS AND LOAN LIMITS
VA home loans can be 30- or 15-year loans with either fixed or adjustable rates, depending on the borrower’s needs. Borrowers are only allowed one VA home loan guarantee at a time, with a few exceptions, and the loan must be for a home that the applicant or the applicant’s spouse intends to occupy at least six months and one day out of the year. This means that these loans cannot be used for vacation homes or investment properties, with the exception of multi-family homes in which the applicant will live. The interest rate on the loan will depend on the borrower’s credit score. The VA itself does not limit how much a borrower can borrow through the program. However, the VA limits the amount of liability it will cover, and lenders in turn limit the amount they will lend as a result. In 2016 the maximum guaranty amount was $417,000 for most parts of the country. In certain high cost counties where the cost of an average home exceeds this limit, the amount is higher. The highest area in the country has a limit of $657,800.
VA home loans are one of the most affordable zero or low down payment loan options, but the privilege of borrowing money without a down payment is not free, even with this program. Borrowers must pay a funding fee. This fee varies based on the veteran’s category and the amount of the down payment, but can be between 1.25 percent of the loan to 3.3 percent. Using a down payment can help lower the funding fee, and subsequent VA loans may have a slightly higher funding fee. This fee can be paid in one upfront payment or it can be rolled into the loan amount.
VA Purchase Loans
VA purchase loans are designed for qualified veterans who are purchasing their primary residences. They do not require any money down, provided the sale price is at or below the appraised value. Purchase loans can fall into three categories: fixed-rate, ARM and hybrid.
Fixed Rate VA Home Loans
A fixed rate VA home loan has a set interest rate that does not change over the life of the loan. These loans are typically 15- or 30-year loans and have the same payment each month because the interest rate does not change.
ARM VA Home Loans
Adjustable rate mortgages have an interest rate that can change. The rate starts lower than the going rate for fixed rate loans, but has the potential to increase after the initial fixed period. Over time, these loans can be more expensive, but at the outset they are more affordable.
Hybrid ARM VA Loans
A hybrid ARM starts with a fixed interest rate for several years, at least three for most loans, then switches to an ARM. This is a great choice for those who anticipate a move within three to five years, which is not uncommon in the military, as it provide the discounts of the ARM without the risk for a set period.
VA Streamline Refinance (IRRRL)
If interest rates have dropped since you applied for the first loan on your home, you can use the Interest Rate Reduction Refinance Loan (IRRRL) or VA Streamline Refinance loan to refinance your existing VA home loan to a lower interest rate. This is called a streamlined loan because the veteran is not required to apply for eligibility, but can refinance using the existing eligibility to the lower interest rate.
VA Cash Out Refinance
Cash out refinance loans are designed for those borrowers who have built up equity in their home that they wish to tap into. This equity could be used to pay down other debts, pay tuition and even fund a vacation. The VA cash out refinance allows borrowers to refinance an existing VA or traditional loan, pull out as much as 100 percent of the home’s appraised value and use that cash as they see fit.
I want to buy a vacation home. Can I use the VA home loan to purchase it?
VA home loans are designed to be the residential property of the owner, and that means the owner must occupy the property for over half of the year. This excludes the purchase of vacation homes or investment properties.
Can I have more than one VA loan at a time?
No, you cannot have more than one VA loan at a time. However, you can use the entitlement, or the privilege of having a VA home loan, more than once. If you have VA home loan on your existing property, which you have paid off, you are able to have the entitlement restored to purchase a new home in which you intend to live. You can then keep the first home. This is allowed one time, and is a common choice for those who have to PCS and wish to keep their existing home for retirement. Veterans who pay off and then sell their current home can have their entitlement restored as many times as they wish.
Can I pay my VA loan off early?
Yes, the VA home loan program has no prepayment penalty.
Can I use a VA home loan to build a home?
Yes, but it can be more challenging. A better option may be to negotiate a private home construction loan, then refinance to the VA home loan program.