VA Home Loan Financing for Veterans & Military Personnel
At the conclusion of World War II in 1944, the United States Congress passed the Servicemen’s Readjustment Act, which provided a wide variety of benefits to eligible veterans. All of the benefits were designed to help veterans who served in the War to become re-integrated into American society, in addition to rewarding them for their service.
Of all the benefits provided to veterans through the Act, one of its most popular and enduring benefits has been the VA Loan Guarantee Program. Over 20 million loans have been insured by the government since the program’s inception, which has allowed eligible veterans to purchase or refinance a home on extremely attractive and affordable terms.
The VA Home Loan Program
The United States Department of Veterans Affairs (VA) has established a mortgage loan program to help veterans and their families obtain home financing.
Despite popular misconceptions about the program, the federal government does not make the loans directly. The government simply guarantees the loans made by private sector mortgage lenders after eligible veterans make their own arrangements for the loans through typical financial channels.
However, the VA does determine the eligibility requirements; the terms of the mortgages offered, and upon approval, it insures the loans against default.
There are many lending institutions that participate in the VA home loan program, but for the borrower, the process to obtain a VA mortgage is relatively similar to the process for obtaining other types of home loan applications:
- Prospective buyers must ensure they meet eligibility requirements
- Borrowers must identify a VA mortgage lender
- Borrowers must pre-qualify for a new mortgage loan
- Buyers must find a home to purchase
- Buyers must apply for a VA loan
- Buyers must meet all loan processing requirements
- Borrowers close on their new home purchase
- Most active duty, veteran and reservist members of the military and National Guard are eligible to apply to the VA home loan program. In addition, spouses of service members who passed away while on active duty, or as the result of a service-related disability, are also eligible.
- For current active duty members, they are eligible to apply for the VA home loan program after completing six months of service. National Guard members and reservists have to wait six-years before becoming eligible, if they have no combat or active duty experience.
- However, veterans who served during a period of war are able to access the VA mortgage program after 90 days of service.
Based on the above criteria, the prospective home buyer must obtain a Certificate of Eligibility (COE). This certificate provides lenders with the necessary information to determine if an applicant is eligible for a home loan insured by the VA.
To obtain a COE, borrowers are required to provide evidence of eligibility, such as:
- A current State of Service document signed by the personnel office or commander of the service member's unit
- DD Form 214 – used for certification of military service for active-duty members and members of the Reserves
- NGB Form 22 – used for certification of military service in the Army and Air National Guard
Finding a VA-Approved Lender
While a number of private lenders are able to provide prospective home buyers with traditional kinds of mortgage loans, not every lender is VA-approved or able to offer VA loans. Borrowers must make sure whether a potential lender has VA-approved status before deciding to work with them, because VA loans follow guidelines that differ somewhat from traditional mortgage options.
A VA-approved lender should have comprehensive knowledge of the VA home loan process and the available mortgage options. Additionally, a VA-approved lender should have the capacity to fully explain the process and requirements to its borrowers.
Benefits of a VA Loan
- The basic intention of a VA loan is to supply home financing to eligible active duty and military veterans to help them purchase properties with no down payment. This allows veterans, without the necessary reserve in savings, to qualify for a home loan, which they otherwise would not be able to afford.
- Not having to make a down payment offers other benefits as well. It will help a home owner to maintain an emergency fund, something that is crucial to most home owners. And not having to make a down payment might also allow them to make repairs or renovations on their home, which may not have been previously possible.
- In addition to no down payment, there are several other financial benefits that make a VA loan appealing to eligible borrowers.
- The VA loan allows veterans to finance 103.3 percent of the purchase price of their home and they do not have to pay for private mortgage insurance (PMI).
- Not having to pay PMI significantly improves a borrower’s monthly cash flow and it also decreases the long-term cost of owning a home.
- In addition, since there is no monthly PMI, more of the mortgage payment can be allocated towards qualifying for the loan amount, allowing for larger loans with the same payment.
Due to these circumstances, VA loans allow borrowers to qualify for loan amounts larger than traditional kinds of loans. VA will insure a mortgage where the monthly payment of the loan is up to 41% of the gross monthly income vs. 28% for a conforming loan, assuming the veteran has no monthly bills.
However, the maximum amount of the VA loan guarantee varies by county. As of January 1, 2017, the maximum VA loan amount with no down payment is $424,100, although this amount may rise to as much as $721,050 for properties in designated "high-cost counties".
VA loans are only allowed to finance primary, owner-occupied residences. They cannot be used to finance an investment or vacation property. Also, VA loans cannot be used to finance a construction loan.
Funding Fee Required
The biggest disadvantage of a VA loan is that it requires the payment of a “funding fee.” For home buyers taking out a VA loan for the first time and not making a down payment, the funding fee is 2.15% of the loan amount for regular military veterans. For members of the reserves or National Guard, the funding fee is 2.4% of the loan amount.
For borrowers who are not using their VA entitlement for the first time, the funding fee jumps to 3.3%. Since this cost is a fee, it doesn't contribute to home equity; it is essentially a closing cost. The VA requires funding fees to help pay the guarantees on VA loans that go into default.
Few borrowers are exempt from the funding fee. If they are unwilling to pay the fee, they might try asking the seller to pay it, just like they might ask the seller to pay any other closing cost.
If that approach is unsuccessful, it is possible to include the funding fee into the loan, which is a reasonable short-term solution, but not the best solution in the long run. If the funding fee is rolled into the loan, then the borrower will pay interest on the amount for the life of the loan.
However, despite the funding fee, the lack of a down payment and the fact that PMI is not required, make VA loans a very attractive option for qualified active and retired military service veterans.
To see which VA home loan provider is right for you, given your own particular set of needs & requirements, compare our mortgage editor's rankings of the best VA home loan companies of the year.