A VA loan is one of the best deals going in home mortgages. Not only is it one of the last places you can still get a home loan with no money down, the interest rates are competitive as well and you won't have to pay for private mortgage insurance.
However, basic information on VA loans can be surprisingly hard to come by. Official government sites can be incredibly obtuse and clear, simple guides to the most important facts are few and far between. To help you decide if a VA loan might be right for you, here are some of the most pertinent details.
Eligibility - To be eligible for a VA loan, you have to be a veteran, of course. That can mean either someone who's served in the armed forces or is currently doing so. Generally, you qualify if you served the full length of time you were called to active duty, at least 90 days in wartime and 181 days during peacetime. You can also qualify if you were discharged for a service-related disability after less than 90 days or for other involuntary reasons not related to a dishonorable discharge.
You also qualify if you served six years in the National Guard or Reserves. Spouses of service members who died in service, are missing in action or a prisoner of war are eligible as well, provided they have not remarried.
Terms - The interest rates tend to be very competitive, about what you'd pay on a conventional loan. The big perk of a VA home mortgage is that you can still get one for no money down, something that's almost unheard of these days. Plus, there's no need to pay private mortgage insurance (PMI), which can effectively boost your interest rate by half a percent. The VA already insures the loan for you, so there's no need for PMI.
On the other hand, increasing the size of your down payment can reduce the fee you have to pay to obtain a VA mortgage. This fee, which is in addition to your closing costs, varies according to type of service, size of down payment and type of loan. For a first-time home purchaser with no money down, the fee is 2.2 percent on loans with a down payment of less than 5 percent; 1.5 percent for loans with a down payment of 5 percent to just under 10 percent; and 1.25 percent for loans with a down payment of 10 percent or above. Reserve/National Guard members and veterans pay about a quarter of a percent more.
Types of loans - The figures above are for a first-time home purchase. You can also obtain a VA loan for a repeat home purchase (provided the terms of the original home loan have been satisfied), a streamline refinance to reduce the rate on an existing VA mortgage or a cash-out refinance to free up funds for other purposes, or to purchase a mobile home. Repeat home purchases carry a 3.3 percent rate for down
payments under 5 percent but are otherwise the same. Streamline refinances carry a fee of 0.5 percent, but cash-out refinances carry a 3.3 percent fee. The fee for mobile home purchases is 1.0 percent.
Limits - Technically, VA mortgages do not have limits, but as a practical matter, they are the same as those set by Fannie Mae and Freddie Mac - $417,000 in most parts of the country, but up to $625,500 and above in high-priced areas. However, if you want to do a cash-out refinance, you'll find you're limited to 90 percent of your home equity and a maximum of $144,000 taken out, regardless of how much equity you have in the property.
These are based on what is called the loan entitlement - essentially, how much the VA will guarantee for each service member. The VA loan entitlement generally insures one-quarter of the mortgage amount - for a maximum of $36,000 for the basic entitlement (hence the limit on refinances) and $68,250 as a 'bonus entitlement' (i.e., one-quarter of $417,000). However, the one-quarter rule is often stretched for loans in higher-priced areas.
Qualifying - You still need to demonstrate that you have adequate income and good credit to obtain a VA loan, the same as with any other mortgage. However, the guidelines on credit scores are somewhat more lax that other lenders currently are, allowing scores as low as 600, though you will pay a significantly higher interest rate with that score.
Where to apply - As with other government-backed loans, the VA doesn't actually lend money or offer mortgages itself, but instead guarantees mortgages made by private lenders that meet its criteria. Most mortgage lenders offer VA loans as part of their portfolio and can provide more information on this type of loan.