Purpose of this guide
This guide will help veterans and active military to understand the benefits of, types of, and eligibility requirements for VA Loans.
After evaluating this guide, readers will have a better understanding of:
- What a VA loan is.
- Why so few people take advantage of VA Loans.
- Uses for VA Loans.
- VA Cash-out Refinance.
- VA Interest Rate Reduction Loan (i.e. VA Streamline Refinance).
- The benefits of VA Loans.
- Eligibility requirements for a VA Loan.
- How to use your certificate of eligibility to get a VA Loan.
- The process of getting a VA Loan.
- The VA Loan appraisal process.
- Finding a VA Loan Expert.
- Using your VA Loan eligibility more than once.
- Special protections against foreclosure.
The VA Loan program has allowed more than 20 million veterans to become homeowners since it was created in 1944. It was designed to provide home financing for eligible active duty and veteran personnel and their spouses.
“It’s such an incredible program," says Chris Birk, the Director of Education for Veterans United Home Loans. “It's not just our studies that show this, but the single greatest benefit of the program is that you can purchase a house with no money down and essentially with no out-of-pocket costs.”
The loans, which are made by private lenders and guaranteed by the Veteran’s Administration, provide an easy way for military borrowers to get financing of up to $417,000 of their total loan. While some fees and closing costs do apply, the borrower can get a competitive loan without any money down and avoid paying the private mortgage insurance that other loans require if the borrower is putting down less than 20%.
“The average military borrower does not have a ton of liquidity,” says Birk. “A lot of these people are not flush with cash. They’ve been serving our country abroad, they’re relatively young, so they’re not coming to the table with huge cash reserves or the ability to put 20% down.”
What’s surprising is that very few of our nations’ 24 million veterans have taken advantage of the benefits of the VA Loan program. 20% of veterans don’t even know that the program exists.
This guide is meant to give past and present military personnel an overview of their options within the VA Loan program. Hopefully it will help to close the gap so that more qualified people can take advantage of their hard earned benefits and move into a home—without having to save up for a down payment.
“It’s an incredibly important program,” says Birk, “and it’s only becoming more important as the whole lending landscape of the country changes given the fallout from the subprime mortgage crisis.”
Though we have done our best to make this guide as comprehensive as possible, you should do your own research and talk to a trusted financial advisor or real estate professional who understands your specific situation. While there are few downsides to a VA Loan, a mortgage is one of the biggest financial commitments you will make in your life. A trusted advisor can help you to make the best decision for you and your family before making any binding commitments.
Also, while this guide covers many aspects of the VA Loan process, it does not cover every aspect of the general mortgage process. Save yourself some cash and some headaches by educating yourself on the general mortgage process as well.
Part 1: Examples of typical uses for VA Loans
Situation: Jason is just returning from active duty overseas and would like to settle down and purchase a house, but he doesn’t have the savings and missed some credit card and other payments while he was away—so his credit has a few dings on it.
Strategy: After talking to military family and friends, he finds a mortgage lender that specializes in VA Loans. He works with a loan officer to work on restoring his credit. After six months of looking and saving, he finds a home in his price range and utilizes a VA Mortgage to purchase it without a down payment and uses his savings for closing costs.
Situation: Sarah is ready to move off base to purchase a home in the nearby town. Unfortunately, she doesn’t have enough money saved up for a 20% down payment.
Strategy: After getting her certificate of eligibility, she starts looking for a house in town. While she doesn’t have enough for a 20% down payment, she does have enough for a 10% down payment. Her loan officer suggests that she put this down and because of that is able to help Sarah get a better rate on her VA Mortgage than if she didn’t put anything down.
Situation: Craig is stationed overseas for the next two years, but Sarah, his wife, is still back in the states. They have a toddler and she could really benefit from the assistance and support of living near friends and family back near her hometown— at least until Craig is discharged.
Strategy: Craig is able to use his entitlement to purchase a home with Sarah back in her hometown using a VA Loan without any money down even though he will not be living there. She is able to get help with the baby from her friends and family while Craig is overseas.
Situation: Dave has a VA Loan for a house that he purchased 3 years ago. Now, interest rates are much better and he would love to benefit from lower monthly payments, especially since he plans to stay in the house for at least 10 more years.
Strategy: Dave utilizes the IRRRL to refinance his loan and take advantage of the current lower rates. His monthly costs go way down immediately and within a year and a half he is able to break even with the closing costs and fees on the refinance. But since he plans to live in the house for ten years, he will enjoy at least 8.5 years of savings.
Situation: Allison served in the military in her early twenties and used a VA Loan to purchase a home as soon as she was discharged. That was about 15 years ago and since then her home has suffered some wear and tear. She would like to either move or fix up her home, but isn’t sure if she has the cash to do either.
Strategy: Instead of moving, Allison decides to do a VA Loan cash-out refinance of her home. She refinances for $30,000 more than her home is worth and uses that $30,000 to renovate her kitchen and bathroom and give the house a new paint job inside and out.
Situation: The house that Peter would like to purchase with his VA Loan is structurally fine and passes the VA’s inspection process. However, he wishes that it had some energy efficient improvements like better windows and insulation that could make the house more comfortable and save on energy costs. Unfortunately, there isn’t any extra money in his budget for these improvements.
Strategy: Peter applies for a VA Energy Efficient Mortgage, which allows him to qualify for $6,000 more on his loan that he is able to use to better insulate his home and buy new windows. The savings in energy costs in heating and cooling are more than the added monthly payments, so he comes out ahead.
Situation: Ryan was discharged 20 years ago and has always moved around. He’s finally getting remarried and settling into one town and a steady job. Unfortunately, a spotty credit record and very little saved money are making this transition to a more stable life difficult.
Strategy: Even though he has been out of the service for nearly two decades, Ryan still qualifies for a VA Loan. With a current steady job and efforts to repair his credit, a loan officer helps him to get a loan for a new home with no money down so that he can finally get his life started on the right track!
Part 2: What is a VA Loan?
Despite the name, a VA Loan is not a loan made directly by the federal government or the Veteran’s Administration. It is actually a loan made by a conventional mortgage lender that is guaranteed by the federal government. After a qualified applicant finds a house and makes arrangements for the loan through their lender, the property is appraised by the Veterans Administration to ensure that it is safe and a good value. If the house passes the inspection, the VA agrees to guarantee the lender against loss of principal should the buyer default.
The maximum VA Loan amount varies depending on the county. However, in 2015, the max loan without down payment is generally $417,000, though it can reach as high as $625,500 in some “high cost” counties to account for the higher cost of real estate in some parts of the country.
The real benefit of a VA Loan is that the borrower is not required to make a down payment and does not have to pay the private mortgage insurance that is generally required on a conventional mortgage when the down payment is less than 20%.
The borrower must pay a VA funding fee that amounts to 0-3.15% of the loan. However, veterans can get a loan for up to 103.5% financing, which takes care of the funding fee. This fee does not include any closing costs or fees from the lender.
Part 3: Why do so few take advantage of VA Loans?
One of the more puzzling facts is that many people who are qualified to take advantage of the VA Loan program either don’t know that they are qualified or that there is a program at all. “There’s a lot of people who were in the military who don’t’ even know that they qualify for the program,” says Dean Ellison, a Mortgage Planner for Frost Mortgage Banking Group in New Mexico. “The number one question that I always ask everybody is “were you in the military?” because that’s the first route that I want to go with anyone. If you can get someone in with no down payment, that’s huge.”
The reasons that people don’t know about the program are many. “The first is that service men and women are so focused on the job at hand,” says Chris Birk. “I think that it’s easy for a lot of the education and information that service members get at the beginning of their service to be lost. They’re bombarded with so much and we ask so much of them that just finding a way to make sure that we’re doing a better job of instilling education is key.”
The government has taken a step in the right direction with the Office of Service Member Affairs which was rolled out by the Consumer Protection Bureau. One of the OSA’s focuses is going to be to make sure that education and awareness is front and center for military homebuyers.
Part 4: What can you do with a VA Loan?
While a VA Loan can obviously help a person to purchase a home, that’s not all that it can do. Here are some examples of what it can be used for:
- To buy a home or a residential condominium.
- To build a new home.
- To renovate an existing home using a cash-out refinance.
- To refinance an existing home loan to take advantage of a better rate.
- To purchase a manufactured home that may or may not have a lot included in the sale.
- To use the Energy Efficient Mortgage option to install energy efficient improvements on a new home purchase or to a currently owned home during a refinance.
- It can be used to refinance a current VA loan in order to get a better rate.
Part 5: What types of refinance loans are available?
In addition to the basic VA Loan, which allows you to purchase a home, there are two refinance variations available:
Interest Rate Reduction Refinancing Loan or IRRRL: This refinance variation on the VA Loan is also called a “streamline” or “VA to VA” loan. The purpose of this type of refinance is to take advantage of a lower interest rate or change the terms of your loan. An IRRRL can only be used if you have already used your certificate of eligibility on a VA Loan on the property that you are refinancing. With the IRRRL, there is a .5% funding fee and the veteran is eligible to borrow up to 100.5% in order to do a no-money-out-of-pocket loan. As with a regular VA Loan, while no underwriting or credit report is required by the VA, the lender may require both. One plus of the IRRRL is that you don’t have to certify that you intend to occupy the home as you did with the original loan. This time around, you only have to certify that you have previously occupied the home.
As part of a refinance, a veteran can utilize an Energy Efficient Mortgage, which is an extra sum rolled into the refinance, up to $6,000 that can be used for energy efficient improvements to a home. A VA EEM can also be used when purchasing a new home to make improvements before moving in.
Cash-Out Refinancing: Another option for refinancing is a cash-out refinance that allows you to take out cash against the equity of your home—to refinance for more than your existing loan is worth and use the difference to pay for large ticket expenses like college tuition, home renovations, and health care expenses. This “cash-out” option has a maximum of $144,000.
Part 6: What are the benefits of a VA Loan?
There are many obvious and not so obvious benefits to the VA Loan. Here are a few of them:
- You do not have to put down a down payment for the property.
- You are eligible for 103.5% financing if your loan falls within the maximum loan limits of your area (and that includes the fee).
- Mortgage insurance is not necessary even though you may not be putting down a 20% down payment.
- The interest rates are competitive with other loans.
- No funding fee needs to be paid out by a disabled veteran.
- Some of the lenders fees are limited, for example a bank can only charge a 1% origination fee.
- For cash-out refinance, you are allowed to refinance for up to 100%.
- For new manufactured homes, the builder must give the purchasing veteran a 1-year guarantee that the home has been constructed to VA-approved plans and specifications.
- The borrower is allowed to prepay part of or the entire loan without a prepayment penalty.
- If a veteran homeowner is having issues paying his or her mortgage due to temporary financial difficulties, the VA will assist with personal loan servicing and financial counseling.
Part 7: The basic financial requirements for a VA Loan.
“Credit and underwriting has gotten more restrictive for VA Loans since the subprime fallout,” says Chris Birk. “At this point—and it’s going to depend on the lender—but if you don’t have a credit score of at least 620, you are going to struggle to secure a VA loan. And we’ve seen lenders across the board tighten their credit and underwriting.”
If you’ve been researching VA Loans online, these credit scores might sound confusing. Many mortgage banks and institutions highlight the fact that there are no credit requirements for a VA loan. “It is most certainly true. There is no minimum credit score and no minimum income requirement,” says Chris Birk, “but I think that that gives some veterans and military members a false sense of security because you’re sort of serving two masters here: the VA and the lender.” While the VA has a broad designation of what a “satisfactory” credit risk is, lenders need to see hard numbers.
Despite the need for hard numbers, don’t be surprised if you go to a company’s website and can’t find and of these hard and fast numbers. Most institutions don’t put that information on their websites because it is likely to change.
“Not having the numbers on a site is not necessarily a red flag and not something to worry about,” says Birk. “What’s more important is for military personnel to walk in with a good idea of where they stand with credit and their own debt and income level—sitting down and having some sense of what they can afford and how much they are spending each month and where that might position them in terms of home ownership.” Basically, if you take the basic steps to check your credit ahead of time and rebuild it where necessary, chances are good that there will be no surprises when it comes time to get your mortgage. Knowing exactly where your finances are at is half the battle.
Part 8: Who is eligible for a VA Loan?
There are a number of things that a person needs to do to show their eligibility for a VA Loan. Most importantly, they need to obtain a formal government document called a Certificate of Eligibility that details the borrower’s entitlement to a VA loan. People who may qualify for a certificate include veterans, active duty, guard or reserve, and military spouses. And while the certificate allows a person to apply for a loan, it doesn’t guarantee that they will actually get the loan.
Part of this eligibility is based on a person’s military service and there are strict guidelines established by congress regarding when you served, how you served, and how you were discharged.
You may also be eligible if you are the unremarried spouse of a veteran who died in service or from a disability related to service or is missing or a prisoner of war.
For a detailed list of these eligibility requirements, visit the VA’s page on eligibility:
To obtain your Certificate of Eligibility, you will need to apply using VA Form 26-1880, which will require a copy of your DD-214, which is your Certificate of Release or Discharge from Active Duty.
Here is a rundown of a few other legal requirements to be eligible for a VA Loan:
- The loan must be for an eligible home purchase.
- The homeowner must intend to occupy the home as a home within a reasonable period of time after closing the loan.
- The applicant must be a satisfactory credit risk.
- The income of the applicant and his or her spouse (if there is one), must be sufficient to cover payments, maintenance costs, and take care of family obligations.
- No one but the veteran and their spouse can be on the loan.
- In addition to the certificate, a loan applicant will also need to do the usual documenting of their credit, savings, and employment information that comes with most any loan. This generally includes:
- At least a 620 credit score.
- No foreclosures within the last 3 years.
- No bankruptcy within the past 2 years.
Part 9: Funding Fees
The one catch to a VA Loan is that a mandatory funding fee must be paid to the VA for 0-3.5% of the loan. A veteran can be exempt from the fee if he or she is receiving VA based disability compensation. This fee can be paid in cash or it can be financed into the loan amount (hence the ability to get a 103.5% loan). This fee goes directly back to the VA and essentially funds the VA guarantee program.
It is important to note that the closing costs on the loan cannot be included in the loan. The seller can pay these fees for the borrower; otherwise the borrower is responsible for things like the VA appraisal, credit report, survey charges, and other common closing fees.
Part 10: What is the process of getting a VA Loan?
After getting over the big hump of determining your financial eligibility and acquiring your Certificate of Eligibility, you are ready to begin the process of applying for a VA Loan. Except for the VA property appraisal, this process is similar to any other home buying process. It will save you time and money and headaches to read up on basics ahead of time.
There are a number of approaches to the order in which you do things when looking for a house. Many real estate professionals suggest that before you do anything, you get preapproved for a loan. This means, figuring out how much you will be able to borrow and then finding a lender who will go through your credit and officially approve you for that amount. This is different from prequalifying, which just gives an estimate of what you can borrow based on what information you provide and isn’t a promise from a specific lender for the amount.
While prequalifying will give you a ballpark idea of what you can afford to pay, a preapproval will give you an actual number, which should come in handy when you are looking at houses. And because you are already approved for the loan, It makes it easier to jump on the perfect house when you find it.
Aside from finding the perfect house, the real trick of the home buying process if finding a lender who fully understands the VA Loan program.
Part 11: How to find a VA Loan expert
While it is not necessary to find a lender who specializes in VA Loans, it helps to find a lender with extensive experience in the field. “What we end up seeing a lot of times is that military veterans really want to use their benefits and end up getting pushed into different lending mechanisms because they are dealing with people who are not aware of the power of the program,” says Chris Birk. Most homeowners are only going to go through the loan process once or twice in their lives, so they really need somebody who understands the intricacies of the program.
“It’s about finding a lender who has the fluency in the program and requirements,” says Birk, “and knows what veterans need in a property so that they aren’t wasting hundreds of dollars on needless appraisals to find out that the home that they are looking for meets the VA’s minimum property requirements or other requirements that are unique to this program that are really geared towards making sure that veterans and their families have a safe, sanitary living environment.”
With minimal effort, homebuyers can find companies who are solely dedicated to ensuring that military members can take advantage of the benefits earned by their service.
“I urge borrowers to do their homework and really look at the core focus and backbone of these companies,” says Birk. “How many people have they helped? Who are they working with? What sort of roots and ties and connections to the military community at large do they have?”
Another place that people can look for recommendations for lenders is within their own communities. “It’s such a large, tight knit community across the country,” says Birk, “So, turn to the people at a local VFW hall or within their own family readiness group and use some of those connections and ties. Who they have turned to and who they trust breeds a lot of confidence.”
Part 12: The appraisal process
A unique aspect of the VA Loan program is that in order to finalize the loan, you need to request an appraisal by the Veteran’s Administration.
Your loan officer generally orders the appraisal after submitting an appraisal request to the Department of Veteran’s Affairs. The fee for the appraisal is set by each state, but is generally in the $300-$400 range.
A VA appraiser is trained by the VA to determine the true value of the house based on comparable listings in the area and to protect the buyer by identifying any significant problems. Oftentimes, the appraiser will require that the seller resolve these issues before the sale can go through. “If there’s some work that needs to be done to the house and if the VA appraiser makes a comment,” says Dean Ellison,” the seller has to get someone to fix it or fix it themselves. But it has to be fixed before the loan can be closed.”
The appraisal process can be slightly different in each state. “In New Mexico,” says Dean Ellison, “the VA requires termite treatment no matter what, while in other states they may not.”
The upside to this unique inspection process is that the homebuyer usually gets a home that they can afford that will not cause them as many problems down the road. The downside is that the requirements on the seller could very well sour the deal and motivate them to choose a buyer who has a conventional loan.
Part 13: Using your eligibility more than once
Your certificate of entitlement can only be “in play” for one house at a time. For example, if you have used your certificate to purchase a house with a VA loan, you must sell that house and pay off the loan before your certificate is “restored” and you can use it again for a new home purchase. As long as you keep paying off your loans and no longer own the previous house, you can keep using your certificate for every house you purchase.
However, there are some workarounds to this situation. “If you have a husband and wife who both have certificates of eligibility and the husband has his certificate of eligibility tied up in a house and they want to rent that house out,” says Dean Ellison, “the wife can use her certificate of eligibility and it’s a first time use, so they can get the first time rate of 2.15%.”
Another situation that many active duty service people face is if they have purchased a home that they want to keep for retirement or investment purposes but get transferred to a new station where they also want to buy a home. In this situation, as long as they have paid off the first property, they can get a “one time only” restoration to use to purchase a second property.
Part 14: Protection from foreclosure.
One of the amazing things about the VA Loan program is that it has the lowest foreclosure rate of any of the four major streams of lending programs, which is amazing when you consider the mortgage environment as a whole.
This can be somewhat credited to the inspections process. “I think that there are some institutional concerns about the appraisal being too stringent,” says Chris Birk, “but I do think that it’s one of the benefits in that it directly ties into the low rate of foreclosure.”
“The VA takes a more holistic approach. It’s not just looking at hard and fast credit numbers—it’s really trying to step back and see if a veteran can truly afford the home loan and the obligation and the responsibility,” says Birk, “and they’re getting a broad view of overarching issues that could present health and safety issues for the veteran.”
Also, the Service member’s Relief Act protects active service VA Loan borrowers from financial problems that may occur as a result of their active duty commitments.
Part 15: Conclusion
VA Loans are an amazing opportunity for qualifying past and present members of the armed forces who are looking to purchase a home. With 35% of the current loans going to the people in the 26-35 year old age bracket, it’s a solid chance for younger people to lay down some roots in an economy that where they might otherwise have trouble getting their foot in the door.
“The reality is that the cost of home ownership will go up and if you want the best rates, you are going to have to put down at least 20%, which is going to put home ownership out of reach for a lot of borrowers,” says Chris Birk. “For military members, what I think that’s going to mean is that the VA program is only going to be more important, especially when in 2010, 89% of the loans that the VA guaranteed came with no money down.”
Part 16: Additional Resources
The website for the US Department of Veterans Affairs with news and information on all of the programs available to veterans.
This website is a general clearinghouse of information about the VA loan from the Department of Veteran’s Affairs.
Intrepid Fallen Heroes Fund, private charity funding construction of medical care and research facilities to help injured veterans, particularly those suffering from Traumatic Brain Injuries (TBI) and castastrophic disabilities suffered in military service. Rate "A" by the American Institute of Philanthropy.