When World War II concluded in 1944, the United States Congress passed the Servicemen’s Readjustment Act, which provided a wide variety of benefits to eligible veterans. In addition to rewarding them for their service, these were designed to help veterans who served in the War to become re-integrated into American society.
Of all the aids provided to veterans through the Act, one of the most popular and enduring 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 with extremely attractive and affordable terms.
The VA Home Loan Program
The United States Department of Veterans Affairs' (VA) mortgage loan program helps veterans and their families obtain home financing. Despite popular misconceptions about the program, the federal government is not a direct lender, but simply guarantees the loans made by private sector mortgage lenders, after eligible veterans make their own arrangements, through typical financial channels.
The VA , however, does determine the eligibility requirements and terms of the mortgages offered, as well as insure the loans against default, once approved.
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, as are spouses of service members who passed away while on active duty, or as the result of a service-related disability.
- Current active duty members are eligible to apply for the VA home loan program after completing six months of service. National Guard members and reservists must wait six years to become eligible, if they have no combat or active duty experience.
- Veterans who served during a war are able to access the VA mortgage program after just 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, in order to help them purchase properties without a downpayment. 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 a number of benefits, including helping homeowners to maintain an emergency fund, which can be crucial to financial wellbeing. Not having to make a downpayment can also allow people to make repairs or renovations on their home, which may not have been previously possible.
- The VA loan allows veterans to finance 103.3 percent of the purchase price of their home without having to pay for private mortgage insurance (PMI).
- Not having to pay PMI significantly improves a borrower’s monthly cash flow and 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 downpayment is $424,100, although this amount may rise to as much as $721,050 for properties in so-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,” to help pay the guarantees on VA loans that go into default. For regular military veterans taking out a home purchase VA loan for the first time without a downpayment, the funding fee is 2.15% of the loan amount, essentially a closing cost that doesn't contribute to home equity. Members of the reserves or National Guard generally have a funding fee of 2.4% of the loan amount. The funding fee jumps to 3.3% for borrowers who are not using their VA entitlement for the first time.
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.
Despite the funding fee, the possibility of no downpayment or PMI 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 needs & requirements, compare our mortgage editor's rankings of the best VA home loan companies of the year.