VA home loans can help veterans, service members, or their surviving families to buy, build, improve, or refinance a home. You’ll still need the required credit and income for the loan amount you want to borrow. But VA home loans may offer better terms than a traditional loan from a private bank, mortgage company, or credit union.
Private lenders, such as banks and mortgage companies, provide VA home loans. VA guarantees a portion of the loan, enabling the lender to provide more favorable terms. VA home loans do not require a down payment or a privately insured mortgage.
In contrast to conventional loans, VA loans offer highly competitive, low-interest rates and limited closing costs. The VA home loan is not a one-time benefit. Eligible applicants can use the VA home loan multiple times. Read on if you are looking for information on how you can apply for a veteran home loan.
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What is the Difference Between VA Direct Loans and VA-Backed Loans?
In VA direct loans, the VA issues and services the loan directly. There are no down payments required for VA loans, but the fees may be higher than for bank loans. The upfront fees are low, as they can be transferred to the remaining unpaid balance.
Buying a home, refinancing, or remodeling an existing property can all be done with a VA loan. However, VA direct loans are only available to service members with specific disabilities because of recent changes to the eligibility requirements.
VA-backed loans, on the other hand, are loans offered and serviced by financial institutions outside of the VA. Lenders are more likely to extend a loan to borrowers who might not otherwise qualify because the VA guarantees or backs a portion of the loan, referred to as VA entitlement.
Most VA loans at the conforming limit, $548,250 for most counties across the country, are entitled to approximately $36,000, or 25% of the loan amount. VA-backed loans require no down payment, unlike the VA direct loan. A borrower might need to meet additional requirements from the lender.
VA-backed loans protect and insure the lending institution to some extent if a borrower defaults on the loan. Borrowers do, however, need to have a good credit score and prove that they earn a substantial income.
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Types Of Veteran Home Loans From The VA
VA loans come in a variety of types. To choose the right veteran home loan, you must consider your general financial situation, credit score, and income. The type of loan you should consider will also depend on the policies of the available lenders.
Native American Direct Loan (NADL)
A Native American Direct Loan (NADL) is available to veterans who are Native Americans or have a Native American spouse. VA home loans are typically used by eligible borrowers looking to purchase, build, repair or extend their existing homes on federal trust land, usually on Native American reservation lands governed by Native American tribal nations.
Refinancing a property with a NADL is also possible for Native Americans. Qualifying for the NADL involves additional requirements. Detailed instructions on how the VA loan program can be used on tribal lands must be included in your tribe’s Memorandum of Understanding with the VA.
A Certificate of Eligibility must be obtained before applying for a VA loan on tribal lands. Your financial stability must cover the monthly payments and other associated housing costs. The home must be intended for occupancy by the applicant.
VA-Backed Purchase Loan
Financial institutions provide VA purchase loans to borrowers who qualify for VA loans backed by the VA. This type of loan is available to anyone with a valid Certificate of Eligibility who meets the lender’s income and credit requirements and will live in the home.
Buying a home with a VA-backed loan tends to be simpler and cheaper than buying a home using a non-veteran loan, with lower rates, fewer closing costs, and no penalties associated with paying it off early. In a purchase loan, the borrower can take up to the limits established by Freddie Mac and Fannie Mae, and if a down payment is made, the borrower can take even more than those limits.
Although VA-backed purchase loans don’t require down payments, borrowers are not required to obtain private mortgage insurance (PMI), resulting in lower monthly payments. The loans can be used for buying, building, or renovating a house, even one with up to four separate units.
Cash-Out Refinance Loan
The equity in your home can be used as collateral for a cash-out refinance loan. This money can be used for renovations, college tuition, or other pressing needs. Also, you can refinance your current loan with it.
In addition to paying off other debts or refinancing your current mortgage to reduce your interest rate and monthly payment, a cash-out can be a great option. Refinancing a VA loan is an option for anyone currently on a conventional loan or who previously had a VA loan.
Consumers can take out what is essentially a personal loan by using their equity in the house as collateral, similar to a home equity line of credit (HELOC) offered by banks.
Interest Rate Reduction Refinance Loan (IRRRL)
If you own or previously owned a property to be refinanced and reside in the property, you can refinance the VA-backed loan. An interest rate reduction refinancing loan (IRRRL) with a fixed rate can provide great savings for homeowners who originally had a variable rate mortgage, which fluctuates based on the prime rate.
You will need the lender’s consent to convert the IRRRL into your first mortgage if you already have a second mortgage on the property. The VA streamline refinance, also called an IRRRL, is a simplified, less cumbersome application than a traditional refinance.
To qualify for the VA IRRRL, borrowers must meet several specific eligibility requirements, most of which require good behavior on the borrower’s part – for example, they can’t have been 30 days past due in their payments for the past 12 months. Additionally, a VA IRRRL cannot be used to defray large expenses like college tuition because it is designed to refinance a primary residence.
Eligibility Requirements
Depending on when you served, you may qualify for a Certificate of Eligibility if you weren’t dishonorably discharged and met the minimum active-duty service requirements. These active duty requirements vary for veterans, service members, national guard personnel, and reserve members based on their served period.
You can request a Certificate of Eligibility at any time through eBenefits. Your Premium DS Logon account will need to sign onto the eBenefits website. A Premium account can be obtained if you already have one.
Applying For A VA Home Loan
You can apply for a VA loan by talking to a trusted lender that knows VA loans. Pre-approval is usually the first step in the process, and it can usually be completed within minutes on any internet-connected device.
An offer on your dream home isn’t complete without a loan pre-approval. Your pre-approval letter indicates your intention to purchase a home, and sellers and listing agents know you are serious about closing your home purchase.
After obtaining a pre-approval letter, you need to decide the type of loan you wish to take out. If you are seeking a Native American Direct Loan, your lender will be the VA itself. However, the VA is not the lending authority for the other types of VA loans.
Instead, a private mortgage company or a bank may serve as the lender. Irrespective of the loan type you choose, your lender will require an appraisal of the house by the VA. When the house is appraised, the VA will estimate the house’s market value. Appraisals aren’t home inspections or value guarantees.
Lenders review mortgage applications, appraisals, income, and credit information and decide whether to approve them. If your application is approved, your lender will help you find a title company to transfer the ownership of the house in your name. Read this VA buyer’s guide for more details on the VA home loan.
The VA offers different home loan options for veterans, serving members of the armed forces, or their family members to assist them with purchasing their own homes. These loans are administered directly by the VA or a VA-approved lender (typically a bank or mortgage company). If you are eligible for a VA home loan, contact a VA-approved lender to get your application process started.
Visit the rest of Gov-Relations if you are interested in reading about more programs that can help with your financial issues and improve your life. If you or any family member is disabled, read our article on where you can find emergency housing for disabled individuals.
