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The VA Loan

What is a VA loan?

A VA loan is a mortgage that is made by private lenders, but partially backed by the Department of Veterans Affairs. There are no limits on how much you can borrow, but there are limits on how much the VA will guarantee.

One of the benefits of VA loans, also known as Veterans Affairs mortgages, is that they consistently offer lower rates than traditional bank financing, according to Ellie Mae.

Eligible borrowers may only use VA loans for their primary residence. You can’t finance an investment property or vacation home with a VA loan.

The main draw of a VA mortgage is that they make it easier to get financing by offering no down-payment loans and more lenient credit and income requirements than conventional mortgages. Once you have your certificate of eligibility or COE, you can apply for a VA home loan.

What are the VA loan eligibility requirements?

Most members of the regular military, veterans, reservists and National Guard are eligible to apply for a VA loan. Spouses of military members who died while on active duty or as a result of a service-connected disability also can apply.

Active-duty military personnel generally qualify after about six months of service. Reservists and members of the National Guard must wait six years to apply, but if they are called to active duty before that, they gain eligibility after 181 days of service.

You may qualify if you:

  • Served 90 consecutive days of active service during wartime
  • Served 181 days of active service during peacetime
  • Have been an active member of the National Guard or Reserves for 6 years or more
  • Are married to a service member who died in the line of duty or as a result of a service-related disability

It’s important to note that getting a COE doesn’t mean veterans qualify for a mortgage — these are two separate processes. Once you qualify for a COE, you can shop for a home loan. However, you still have to meet lender requirements which include things like income verification, credit (FICO) score, and debt-to-income ratio.

Do VA loans require PMI?

Unlike other low down-payment mortgage options, a VA loan doesn’t require private mortgage insurance (PMI).  Federal Housing Administration (FHA) loans and conventional loans with less than 20 percent down require PMI, which can end up costing the borrower thousands over the life of the loan.

The benefit translates into significant monthly savings for VA borrowers. For instance, a borrower who makes a 3.5 percent down payment on a $200,000 FHA-insured mortgage would pay $100 a month for mortgage insurance alone.

What are VA loan funding fees?

Although the costs of getting a VA loan are generally lower than other types of low-down-payment mortgages, they still carry a one-time funding fee that varies, depending on the amount of the down payment and military category. This fee helps offset taxpayers’ costs since there’s no PMI or down payment required.

A borrower in the armed forces getting a VA loan for the first time, with no money down, would pay a fee of 2.3 percent of the loan amount. The fee is reduced to 1.25 percent of the loan amount if the borrower makes a down payment of 10 percent or more. Reservists and National Guard members normally pay about a quarter of a percentage point more in fees than do active-duty members.

Those using the VA loan program for the second time, without a down payment, would pay 3.6 percent of the total loan amount.

Can existing VA borrowers lower their interest rates?

The Interest Rate Reduction Refinance Loan (IRRRL) gives existing VA loan holders the opportunity to get a lower interest rate. This option requires borrowers to refinance their current VA loan into another VA loan.

The advantage of the IRRL is that credit and appraisal underwriting packages are not required. Additionally, you won’t have to pay cash out of pocket for an IRRL. It’s structured so than any fees are rolled into the new loan or the interest is adjusted so that the lender’s costs are covered.

Are there VA loan home occupancy requirements?

VA loans typically require borrowers to move into their home within 60 days of purchase and to use it as their primary residence. However, exceptions can be made depending on the circumstances, says Chris Birk, director of education at Veterans United.

Lenders will evaluate occupancy scenarios on a case-by-case basis. For active duty service members, a spouse can fulfill the occupancy requirement when the military member cannot. A service member’s minor child can also satisfy occupancy in some cases.

Borrowers can’t use VA loans to buy investment properties or second homes.

What are VA loan underwriting requirements?

The VA doesn’t require a minimum credit score for a VA loan, but lenders generally have their own internal requirements. Most lenders want an applicant with a credit score of 620 or higher.

Borrowers must show sufficient income to repay the loan and shouldn’t have a heavy debt load, but the guidelines are usually more flexible than for conventional loans.

VA guidelines allow veterans to use their home-loan benefits a year or two after bankruptcy or foreclosure.

Help for struggling VA borrowers

Another advantage of a VA loan is the assistance offered to struggling borrowers. If the borrower of a VA loan can’t make payments on the mortgage, the VA can negotiate with the lender on behalf of the borrower.

VA’s financial counselors can help borrowers negotiate repayment plans, loan modifications and other alternatives to foreclosure. Regardless of whether they have VA loans, veterans who are struggling to make their mortgage payments can call (877) 827-3702 for assistance.

How to apply for VA Loan Certificate of Eligibility

Before you can apply for a VA loan, you must prove you are eligible. Applicants must get a Certificate of Eligibility (COE).

Eligible service members, veterans and spouse must meet one of the following criteria:

  • You’ve served 181 days of service during peacetime.
  • You’ve served 90 days of service during war time.
  • You’ve had six years of service in the Reserves or National Guard.
  • You are a surviving spouses of a service member who died in the line of duty.

There are three ways to apply for the COE:

Request a COE from your lender. Lenders have access to a database which can produce your COE within minutes.

Apply for the COE online at VA.Gov. You’ll have to log into your account and navigate to the COE application page.

Mail in your application. Print out this form, fill it out and include applicable proof of eligibility.

Documents required for COE:

Veterans and current or former National Guard or Reserve members in Federal active service

DD Form 214 – This must include a copy showing the type of service and the reason for leaving.

Active duty service members, Current National Guard or Reserve members who have never been Federal active service

An up-to-date statement of service signed by the adjutant, personnel office or commander of the unit or headquarters. It must include your name, Social Security number, date of birth, entry date of active duty, duration of lost time and the name of the command providing the data.

Current National Guard or Reserve member who has never been Federal active service

An NGB Form 22, report of separation and record of service for each period of National Guard service.

An NGB Form 23, Retirement Points Accounting and proof of the character of service.

Discharged member of the Selected Reserve who has never been activated for Federal active service

A copy of your latest annual retirement points statement and evidence of honorable service.

How to apply for a VA loan

Once you have your certificate of eligibility (COE), you can apply for the VA loan. The application process is straightforward, however, keep in mind that not all lenders originate VA loans. Here’s what you’ll need to do to apply:

Talk to a VA lender. Apply for the VA loan through the lender.

Other uses for VA loan

Buying a house is just one way you can use a VA loan. Borrowers can also use VA loans in the following ways:

Cash-out refinance

Interest rate reduction refinance loan (IRRL)

Native American Direct Loan program

Adapted housing grants

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