What Are VA Loans?
VA or Department Of Veterans Affairs loans are advantages in the form of mortgage funds veterans receive for their service as an appreciation gift for the work they do for the country.
Veteran Affairs loans are loans to eligible veterans, active duty members, and their families. It is a loan made specifically for house purchases so that active duty members and their families do not have to worry about permanent residence.
This home loan has house-related loan programs and other options. These other benefits allow one to buy, construct, repair, and maintain a house.
VA loans offer a low mortgage or zero down payment to those falling in the eligibility criteria.
For instance, when purchasing a car or property, you must pay a percentage of the price as a down payment. The rest of the amount can be paid monthly, called a mortgage. However, Veterans Affairs home loans provide the advantage of zero down payment and low mortgage. Therefore, when looking for your dream home, you can make it yours without worrying about having a sum of money to pay as a down payment.
Furthermore, the low mortgage decreases the burden of paying large sums of money each month and instead creates a more economical rate to be paid. But, it should be kept in mind that this low mortgage will increase the time frame (number of months) in which it is supposed to be paid.
The government backs VA loans by up to 25 percent. The Department of Veterans Affairs, or VA, is a government department that helps provide these house loans for those that fall within the eligibility criteria.
Even though the government backs it, the loans are still provided by privately owned companies, banks, and mortgage lending companies. Government backing helps make the loans genuine and easily acquirable, reducing the risk of scams. These companies provide more favorable terms, and the loan gives more flexibility while selecting and purchasing a home, provided you are eligible for it. VA loans also remove any restrictions regarding the house’s value or location. Therefore, you can select a house anywhere according to your preference.
The best benefit to Veteran affair home loans is that it is often a lifetime benefit and, therefore, can be used multiple times for different homes.
Who Are Veterans? And What Is VA?
The term veteran is defined by the US code, under title 38, as someone who served in the military in any of the US military forces, namely, naval, air force, active military, marine corps, space service, or coast guard who was discharged or released for any reason other than dishonorable.
Veterans affairs decide which person falls under the category of a veteran. Various factors are considered when giving someone a veteran status:
- The period in which the person was in service
- The length of time for which the person was on active duty
- Type of service
- The reason and type of discharge
These conditions make each veteran different from the others. Currently, it is estimated that about 19 million people (men and women) have served in the different branches of the US military.
The basic step in considering someone a veteran is their being on active duty or the reason for discharge from active duty. The different conditions of being classified as active duty include; full-time duty as an armed officer in any of the military service, serving as a cadet in any of the military, air force, naval, or coast guard academies, enlisted service members, and many more.
The VA also considers the type of discharge before considering the serving members veterans and eligible for any advantages. Dishonorable discharge or bad conduct discharge is considered a hard limit and often a reason which eliminates anyone from the veteran status.
Another aspect is the time duration of being in the service. If a person was in service before September 8, 1980, a minimum length of service is required to be considered a veteran. But for those enlisted after September 8, 1980, the minimum time of service is at least 24 months or two years.
In case of receiving any disability in the way of service, the minimum time service requirement is considered null to be classified for VA benefits.
The term VA stands for the US Department of Veteran Affairs. The main job of this department is to provide different services to the people currently in service, veterans, and their families.
These services include educational opportunities, rehabilitation assistance, payouts for military service-related impairments or deaths, pensions, funerals, and health care, including nursing homes, clinics, and hospital care.
Types Of VA Loans
Owning a home or property is a major achievement in anyone’s life. Therefore the department of veteran affairs has provided benefits for veterans, on-duty officers, and their family to fulfill their dreams of owning a home.
This loan is provided by the Department of VA, known as the VA direct loan. But in some cases, the loan is provided by a third party, private companies like banks, and mortgage loan lenders. This is known as the VA-backed loans, which make it convenient for private companies to trust these veterans and provide them with sufficient loans.
What Is The Difference Between VA Backed Loans And VA Direct Loans?
A veteran affair backed loan is one that the Department of VA does not issue and is given by private associations like banks, private companies, and mortgage lenders ( that often give out loans to people for real estate purposes).
The VA-backed loan is also referred to as VA guaranteed loan, as a small percentage is ‘backed up’ or ‘guaranteed’ by the veteran affair association. This small percentage is named VA entitlement and amounts to approximately $36000 (25% of the overall amount).
The advantage of VA-backed loans is that it assures the organization will give the loan, especially to those that may not qualify on some of the lender’s conditions. Approximately 90% of these loans don’t need any down payment, but sometimes, the lender may ask for other requirements. However, this requirement often varies from lender to lender.
On the contrary, the VA direct loan is issued directly by the Veterans affairs committee. This loan does not need any down payment, but other factors, like fees and upfront costs, might differ from those provided by a private organization like a bank.
The veterans can take private loans like an FHA or USDA. An FHA loan is supported by the US federal housing association, which backs a certain percentage of the loan given by the lender to the borrower. It is similar to the VA-backed loan, but the borrower is non-military personnel.
On the other hand, the USDA loan also caters to normal citizens and requires no initial down payment. But these types of loans have certain requirements, such as having a stable income and a great credit score, to name a few.
Although a veteran can opt for any of the above housing loans, a VA loan is still a better choice as it requires zero down payment and a low percentage of funding fee. The funding fee for a normal mortgage can range from 1% to 8%, while the loan provided by veteran affairs has a minimal funding fee of 1.4-3.6%.
The VA loan can be used to buy one home or even more than one. The same loan can also be used to model, repair, furnish, or change an existing home. So the added advantage of a VA home is that there is no restriction on purchasing a property.
However, it should be kept in mind that to qualify for a VA loan, one must pass the eligibility criteria, to which recent changes have been made. The most noticeable change is the provision of a direct VA loan limited to only certain veterans, specifically those who have sustained serious injuries or disabilities during their service.
What Are The Other Types of VA Loans?
NADL Or The Native American Direct Loan Program:
The Native American Direct Loan is available to Native Americans or veterans with native spouses (NADL). This home loan enables the borrowers to purchase, construct, remodel, or enlarge a residence on Native American trust land.
However, there is an eligibility criterion in which one must be eligible for the NADL (it also allows the native Americans to use this loan under certain conditions). The first and foremost is having a memorandum of understanding between the VA and your tribe. This memorandum will clarify how you will use the loan to make or purchase land on the tribal territories.
Secondly, a current certificate of eligibility or COE is required to prove your eligibility for the loan. Apart from that, it would be best if you showed that you could handle the housing expense like the monthly rent and establish that you will be the person living there.
Cash Out Refinance Loan:
With cash-out refinancing loans, you can take out a loan against the value of your house. Depending on your need, you can use the loan for refinancing your current loan or utilize the funds for home improvements, education costs, or other needs.
The cash-out refinance loan is an excellent way to clear off debts like education debt or even to lower the monthly payment. To qualify for a cash-out refinance loan, you need to have a valid and genuine COE (certificate of eligibility) and fulfill the lender’s requirements of having a certain credit score and monthly or yearly income.
Cash-out refinance loans are similar to a HELOC ( home equity line of credit) provided by banks. This gives the borrower a loan against their house equity as security insurance.
Interest Rate Reduction Refinance Loan Or IRRRL:
An interest rate reduction refinance loan is used for refinancing an existing property. You should reside in the property or have lived there for this loan.
The IRRRL, also known as a VA streamline refinancing, requires less paperwork, and its application process is simpler. To be eligible for an IRRL, there are some criteria.
The first and foremost condition is the good character of the borrower, especially when it comes to timely payment. Furthermore, the IRRL is for house mortgages only and not to be utilized for cash-out refinance and cover costs like college debts.
VA-Backed Purchase Loan:
A third-party private institution can give VA-backed loans to purchase a house. The eligibility criteria for this kind of loan are that you should have a recent certificate of eligibility (COE), you plan to reside in the house you are interested in purchasing, and you fulfill the income and credit standards (this standard differs from organization to organization).
When compared to loans given to non-veterans, VA-backed purchase loans have no requirements for a down payment, fewer closing expenses, better terms, lower interest rates, and no early repayment fees. With the help of a purchase loan, the borrower can borrow up to the limits of Freddie Mac and Fannie Mae and even more if they decide to put down a down payment.
Borrowers with a VA-backed purchase loan are not obliged to acquire a PMI (private mortgage insurance), which lowers the monthly payment amount even if there is no down payment required for the loan. These loans may be utilized to purchase, construct, or remodel a home.
Benefits Of VA Loans
VA loans are a great initiative that has helped numerous military members, veterans, and their families get their dream homes. Compared with normal portage loans, VA loans have many advantages, including zero down payment and low rates.
As a result of these added advantages, the volume of people taking advantage of VA loans has increased since the great recession. However, there are many more benefits of VA loan programs, such as:
No Down Payment:
When purchasing a house, you must put a percentage of the total payment as the down payment. This can be from 5% to 20% of the total amount. Home buyers have to save up for years to afford this down payment.
Service members who are always moving can find it hard to save money and build credit. With a VA loan, qualified buyers can finance the home’s full value without adding extra capital. Military homebuyers don’t have to save for years and years to get enough money for a down payment because they can buy a home without one.
In Veteran Affairs home loans, the greatest advantage is no down payments, which makes it unchallenging to select and buy a house with no limits on size or location. With increasing size and better locations, the overall price of the house and, therefore, the down payment increases.
Compared to VA loans, in conventional loans and FHA loans, buyers usually have to make at least a 5% and a 3.5% down payment, respectively. On a $200,000 mortgage, there would be a conventional down payment of $10,000 and an FHA down payment of $7,000.
Better Credit Requirements:
When getting a loan, especially a home loan, the lender usually has a credit score requirement to determine if you are eligible for a loan. While in VA home loans, there is a need to have a good credit score, it is still less compared to conventional home loans.
Both conventional and FHA lenders have credit standards that can be hard to meet. Most VA lenders want you to have at least a 620 credit score. For conventional mortgages, borrowers usually have to meet a much higher standard.
The FICO “Fair” score range starts at 620, which is one tier below “Good” and two tiers below “Excellent”. It is set by the private organization that gives out VA loans, as the VA unit does not give out the loans itself.
Ease During Difficult Financial Times:
Financial problems can often lead to foreclosure (in which the lender tries to seize the property as the borrower cannot meet the mortgage requirements), bankruptcy, or short sale. These situations can affect a person’s chances of getting a loan.
But in the case of VA loans, you can still get a VA loan after 2 years of the passing of short sale, foreclosure, or bankruptcy. People who have filed for bankruptcy can even be eligible for a VA loan after one year.
The waiting time can be much longer when a buyer opts for conventional or FHA financing. Even if a VA-backed loan goes into foreclosure, a veteran can still get another one.
Competitive DTI Ratios:
A DTI ratio is a percentage of the total monthly income you can spend on other debts like student loans. This percentage is often lower when qualifying for home loans (41% or lower).
But it is still possible to get a VA home loan with a higher DTI ratio. Some lenders may go up to 55 percent or more, depending on your credit score and ability to meet other income benchmarks. This extra flexibility can make it easier for buyers to make the most of what they can buy.
Eligibility Requirements For VA Loans In 2022
There are many benefits for Veteran affairs home loans, but to use those benefits, you need to be eligible for the VA loan requirements. There are certain requirements and ways to apply for the loan, which are discussed in detail below.
If you meet one or more of the following requirements, you may be eligible for a VA loan:
- During the war, you were actively on duty for 90 days.
- You were on active duty for 181 days during times of peace.
- You have served your duty in the National Guard or Reserves for 6 years or 90 days as per the order of Title 32, with at least 30 days in a row.
- You identify as a veteran’s spouse who passed away while serving in the military or from a disability connected to service, and you have not remarried since your spouse passed away. Alternatively, you remarried after age 57 or after December 16, 2003. It is also eligible for the spouses of service soldiers who are either lost in action or are prisoners of war.
There is a possibility that you may not fall in the above category but still be eligible for a VA home loan. This eligibility will depend on the type of discharge. If you were discharged with a status that was “other than honorable,” “for bad conduct,” or “dishonorable,” you may not be eligible for this benefit. However, you may still be an eligible candidate for a VA loan if:
- You were removed from the military due to the government’s convenience, a reduction in force, or hardship discharge.
- The military discharged you due to a health condition or a handicap associated with your service.
- You were given an early-out discharge after serving a minimum of 21 months in a two-year enlistment before receiving the discharge.
What Is Certificate of Eligibility (COE) And How To Get COE?
You can apply for a VA loan at a bank, mortgage lending company, or credit union that gives them out. The process is the same as when you apply for other types of mortgages; you give information about your job, income, and other finances, and the lender decides if you qualify. But to successfully get the loan, you will require a few things, such as a certificate of eligibility (COE).
A VA certificate of eligibility is a special thing you’ll need. It is an official document from the Department of Veterans Affairs showing you have met the service requirements for a VA loan. You can get the certificate of eligibility from the VA or ask a VA mortgage lender to do it for you.
Lenders need this Certificate of Eligibility to confirm if the applying veteran has the minimum amount of service needed for the loan’s eligibility.
This is a simple step for veterans. Most of the time, your lender only needs your date of birth and SSN (social security number) to process your COE. In some situations, the process might be harder.
The way to get a COE is simple and uncomplicated, and you can do it by:
- Using a lender, the VA approves
- Using the available eBenefits portal to fill out an online application
- Using VA Form 26-1880 to apply by mail
As per the veteran affair unit, almost all Certificate Of Eligibility requests are given electronically, while some are given out immediately. If more paperwork is needed, a DD Form 214 may be required for the regular military, and an NGB Form 22 or Form 23 for the National Guard or Reserves.
However, in case of needing extra documentation, it might depend on the service type and sometimes the length of the service. Knowing this can help ensure that all the documents are ready for a smoother process.
- In the case of a Veteran and former or current activated national guard or reserves, a DD Form 214 (Report of Separation) may be asked.
- In the case of active duty, a statement of service can be required.
- In the case of the current national guard or reserved with the status of never activated, a statement of service and an allocated points statement might be essential.
- For a discharged national guard with the status of never activated, a report of separation and record of services (NGB form 22), retirement points, and a character of service proof (NGB form 23) might be required.
To qualify for a VA loan, you must be a veteran, currently on active duty, or a spouse/family member. For the first two cases, it is easy to apply for a COE, and the details are mentioned above. But, if you are a veteran’s spouse, you can apply for the VA loan, still needing a COE.
Surviving spouses are also required to have a Certificate of Eligibility to verify their VA loan eligibility and use the benefits to which they are entitled. You will be given a Certificate of Eligibility (COE) depending on your receiving a Dependency and Indemnity Compensation (DIC).
Spouses eligible for Dependency and Indemnity Compensation need to submit VA Form 26-1817 (Request for Determination of Loan Guaranty Eligibility – Unmarried Surviving Spouses) and the veteran’s separation paperwork ( like the DD Form 214).
Suppose you are not currently getting DIC benefits. In that case, you will need to submit an application using VA Form 21P-534EZ to the VA Pension Management Center where you reside.
In addition, you will be required to produce your marriage license copy, the veteran’s certificate of death (or a DD Form 1300 – Report of Casualty), and the papers regarding their separation from the military.
Apart from these, you can get a certificate of eligibility if you fulfill any of the below conditions:
- You are a citizen of the United States who served in the armed forces of a country that was allied with the United States during World War II,
- Or you are a citizen of the United States who served in specified organizations during that time.
These responsibilities in organizations can involve any or all of the following:
- A midshipman at the United States Naval Academy Officer of the National Oceanic and Atmospheric
- Administration Officer of the United States
- Public Health Service Cadet at the United States Military, Air Force, or Coast Guard Academy Merchant seaman during World War II
In addition to that, you may be able to use a COE you have used before, provided that you fulfill any one of the following requirements:
- You’ve paid completely off that loan.
- A certified Veteran-transferee has agreed to accept your VA loan and exchange their entitlement for the same amount initially used.
- You have completely paid off your previous loan but haven’t yet sold the property you purchased with the loan proceeds (you can only do this once).
What Are The Loan Requirements Set By Lenders?
The Department of Veterans Affairs is responsible for setting the basic requirements for VA loans. But many VA loans are provided by third-party private organizations like banks or mortgage lenders. These third-party lenders may have some of their requirements.
These requirements are basic and not very complicated, requiring a lender’s conditions’ complying credit score, a stable income sufficient to pay back the VA loan, and acceptable debt levels. Apart from that, there are other requirements that a lender may set according to their assurance.
The Department of VA doesn’t have a fixed requirement for a minimum credit score, but most lenders do. Hence, the VA loan credit score prerequisites may vary from lender to lender. Most lenders require a mortgage credit score of at least 620 to get a loan.
The VA also requires that qualified veterans have a specific amount of money each month (residual money) after clearing major bills to fulfill basic family needs like healthcare, transportation, and food.
Requiring borrowers to have a certain residual income ensures they will make enough money for their financial needs and gives them a safety net in an emergency.
Lenders also look at the debt-to-income ratio (DTI) along with the residual income, which provides them with a full picture of your ability to get a VA loan and buy things.
What Is The VA Loan Application Process?
Before applying for a VA loan, the first and foremost step is thoroughly checking the latest eligibility criteria. Acceptance of a VA loan application can take about 30-45 days. But every case is different, and the exact timeline will depend on the complexity of your process.
After checking the eligibility requirements, you must consult a VA lending firm and start your application process. The next step will be obtaining a certificate of eligibility. As mentioned above, you don’t need a COE for the application but to ensure the lender you are eligible for the loan.
After this, finish your application and give your lender all the documents they need, such as tax returns, W-2s, and other financial information.
Conclusion
The advantages of VA loans compared to traditional mortgage loans are endless, making it increasingly easy for eligible veterans and their families to own a home. VA loans have no PMI and zero down payments compared to a normal home loan.
Furthermore, it is not a one-time benefit and can be used more than once. The application process for a VA loan is also straightforward, provided there are no complications for your case.
