The VA Loan program was established in 1944 by the US government. The program aimed to help World War II servicemen and women purchase homes. Thanks to the program, massive hurdles were removed, including the need for a down payment or qualifying credit. The program still runs today and has enabled millions of active duty military members, veterans, reservists, and their families, to either purchase a home or refinance an existing mortgage.
Military families face some particularly challenging issues when it comes to managing their finances. They often find themselves moving location. Not only does this create additional expenses, but it makes it difficult for spouses to find good jobs and keep them. Selling their homes on short notice often means paying two mortgages, thereby, significantly increasing the financial burden.
For millions of military families, the VA Loan Program has been a blessing. You can obtain VA loans from a range of different financial institutions, including banks and credit unions.
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What is a VA Loan?
Citizens who have served in the past or are still serving in the US military often face trouble securing financing when they want to purchase a home. There is, however, a solution that not everyone knows about. A VA loan is a mortgage loan backed by the Department of Veterans Affairs (VA).
The VA is not able to lend money itself. It can, however, guarantee loans made to military personnel and spouses by banks, mortgage companies, savings, and loan companies. A credit union is another financial institution that can offer VA loans.
Several types of loans are available:
- Home purchase loans
- VA Interest Rate Reduction Refinance Loans (VA IRRRL or a VA streamline refinance loan), also known as IRRRL refinance loans
- Cash-out refinance loans
- Native American Direct Loan Program (NADL)
- Adapted Housing Grants
To be eligible for a conventional loan, you will be required to submit a down payment. With a VA loan, this is not a requirement, which makes homeownership a reality, not a dream for active military and veterans.
What are the Eligibility Requirements?
To qualify for a VA loan, you have to be a currently serving member of the military or veteran. Members of a military family are also eligible. The following groups fall into the bracket:
- National Guard members
- Reserve members
- Active-duty personnel
- Some surviving spouses
Other requirements include suitable credit history, enough income to cover the repayments, and a valid Certificate of Eligibility (COE). A COE is a confirmation that you’ve met the Department of Veterans Affairs’ military service requirement. It is applied for when you approach a VA-approved lender, or you can apply online using the Department of Veterans Affairs eBenefits portal. If you’ve got plenty of time, the application can also be made using the postal system. One further requirement is that you have to be planning to live in the house you are about to purchase yourself. VA loans are not available if you plan to rent out the property to a third party or use it as a vacation home.
How is a VA Loan Different to a Traditional Mortgage?
On the surface, a VA loan looks very much like a traditional mortgage. There are, however, some significant differences. The first of which is who provides the financing. With a conventional mortgage, the Federal National Mortgage Association, also known as “Fannie Mae” provides it. The Federal Home Loan Mortgage Corporation, or “Freddie Mac” can also provide it. However, the Government National Mortgage Association, also known as “Ginnie Mae” funds VA loans. They are insured or guaranteed by the Department of Veterans Affairs.
These organizations determine the rules for mortgage financing, as well as private mortgage insurance companies, credit unions, and private lenders. Which means they’re all very different.
The most crucial difference between both is that one is only available to eligible veterans and active-duty military personnel. Conventional mortgage financing is available for everyone, as long as they meet specific criteria.
Another critical difference is that a VA loan can only be used to purchase an owner-occupied property. In other words, it has to be lived in by the person applying for the loan or their spouse.
One last difference worth mentioning is that no down payment is required when you apply for a VA loan.
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The Advantages of a VA Loan
There are some very significant benefits to taking out a VA loan. They include:
- No down payment is required
- Private mortgage insurance (PMI) is also not a requirement
- Interest rates are negotiable and very competitive
- Funding fees can be included in the loan, or even reduced if you make a down payment
- The VA loan limits the closing costs, even sometimes sharing them with the seller
- You do not have to pay private mortgage insurance
- You can prepay the loan without having to pay a penalty
- Assistance is available in times of financial difficulty
- It’s an assumable mortgage which means it can be taken over by a buyer
The benefits of this type of loan are significant; however, there are also a few downsides.
- VA loans can sometimes take a long time to process, which might put a seller off
- The property seller might be required to pay a part of the closing costs, making them less likely to negotiate on the price
- A veteran homeowner might be liable if a buyer defaults on an assumed VA loan made before March 1988
- The value of your property might be less because it could be 100% financed
- You cannot use VA loans for purchasing an investment property or vacation home
- VA loans are not available everywhere
The Different Types of VA Loan
There are several types of mortgage loans military personnel can take advantage of.
Home Purchase Loans
This loan is available for the purchase of a new home. For military personnel wanting to get their foot on the property ladder and become a first-time home buyer, it provides the means to do so. The loan can be used on finished properties or even those still in the process of construction. It’s a loan that can also be used to purchase land. Up to 100% finance is available with no down payment required. Generally, this type of loan is repayable over 30 years with a fixed rate of interest, often below that of a traditional loan.
There is also an adjustable-rate option that means the fixed-rate loan runs for a certain period and then reverts to a variable rate depending on the market.
VA Interest Rate Reduction Refinance Loans (VA IRRRL or a VA Streamline Refinance Loan)
If you already have a home and a VA mortgage, it is possible to reduce interest rates and amend the mortgage term with a VA cash-out refinance loan. Refinance rates can be very favorable. You can use the same documents you have submitted for the original loan, and there are no out-of-pocket expenses or fees. If VA mortgage rates have dropped and you want to take advantage of them or pay off your mortgage much quicker, this is the best way to do it. You are required to have enough equity in the house, and then you can refinance up to 90% of its appraised value.
Cash-Out VA Refinance Loans
You can use this type of loan if you want to liquidate some of your home’s equity in the form of cash. There might be a medical emergency that needs to be paid for, an old debt popping up, or refinancing an existing loan. You can also use it if there are home improvements you wish to make, or you need to pay for your kids’ college tuition. The same qualifications apply, and there’s a fixed 2.15% fee.
Native American Direct Loan Program (NADL)
Native Americans have their specific loan programs that can be utilized for purchasing, refinancing, building, or improving a home. The usual VA qualifications apply together with a few additional ones. The purchased property must be on Native American Trust land, and you must be planning to live on the property. Your tribal organization should be a member of the VA loan plan as well. It’s also a requirement that monthly payments can be met, together with any other associated costs.
Adapted Housing Grants
Grants are available for veterans injured during active service. Veterans with total or permanent disabilities can receive help when purchasing a new adapted home or making modifications to their current home because of their injuries. There are two grants currently available: The Specially Adapted Housing (SAH) grant or Special Housing Adaptation (SHA) grant.
VA Construction Loan
If you want to build your own home, you can apply for a VA construction loan. You must find a contractor to pay for all the costs until they finish building works for your home, though. It is an obstacle; however, there are a few builders who work entirely with VA loans. Some VA loan lenders do advance the funds during the process of construction, but not all of them. Another stipulation is the home must pass all required VA inspections and appraisals for the VA program to guarantee it.
VA Hybrid ARM Loan
With this type of loan, the interest is fixed for the first three to five years, depending on the VA approved lender. After that, there is a 5% interest rate cap throughout the loan. The interest rate on this ARM (Adjustable-Rate Mortgage) is not permitted to go up or down, more than 5%.
VA Renovation and Home Improvement Loan
In 2018, the rules relating to the VA loan program were changed slightly to allow military personnel to purchase a home that needed repairs. It’s now possible to finance any improvements or fixes, even if you’re already living in the property. Previously, you’d need at least 5% equity to take advantage of this type of loan. But now you can borrow up to 100% of the “after improved” value.
VA Loan Regulations and Fees
As you might expect, you have to pay various fees when taking out a VA loan. VA regulations, however, do place limitations on what they can be and how much they are. One expense that everyone has to pay is the VA funding fee. The actual amount changes from time to time because it reflects administration costs in running the program. Other charges you might have to pay to include:
- Appraisal and compliance inspections
- Recording fees
- Credit report
- Prepaid items, for example, taxes, assessments, and other similar items
- Hazard insurance
- Flood zone determination
- Title examination and title insurance
- Individual mailing fees for refinancing loans
- VA funding fee
- Mortgage electronic registration system fee
The lender is also authorized to charge a 1% flat fee based on the total amount of the loan. This fee is to cover any costs incurred by the lender and for services that are not reimbursable.
VA Loan Rates
The VA is not the one responsible for setting interest rates. However, because the government backs this type of loan, VA loan lenders can charge very competitive rates. In general, a VA loan will have a lower interest rate than a conventional loan. The rate you can expect to pay depends on several different things based on your financial situation.
VA loan interest rates can be affected by your credit score, current market conditions, the duration of the loan, and your debt to income ratio. Most of these things you have little influence over yourself, apart from your credit score. You’ll be able to secure a more favorable interest rate if your credit report is healthy. If it’s not looking too good, don’t be overly worried though, because there are things you can do to improve it.
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Tips for Finding the Best VA Lenders
You’re already on to a winner if you’re eligible for a VA loan. Finding the best VA lender is going to ensure you get the best deal possible. With so many VA mortgage lenders offering VA loans, it can be challenging to know where to start. Here are some tips to help you in your quest.
Know and Understand Your Credit Score
Your credit score is of great importance, regardless of what type of mortgage you’re applying for. In the case of a VA home loan, your ability to make the monthly mortgage payments also has a bearing on whether the lender will approve your application. Whether you qualify for a VA loan depends on your total debt-to-income ratio. Ideally, it has to be more than 41%. If it isn’t, you’ll need to provide proof of your ability to repay the loan. Before you start approaching VA mortgage lenders, spend some time looking closely at your monthly income and expenditure. Make a list of all your monthly living expenses and compare the total figure with your monthly income. Hopefully, there’ll be enough residual to cover your estimated mortgage payment.
Shop Around for the Best VA Lender
Choosing a VA lender is an important decision to make. Don’t make the mistake of going with the first thing you find, or just randomly picking a name out of a hat. As with all relevant financial decisions, it does pay to shop around. No two lenders for VA loans are created equal. There will be different requirements, factors taken into account, fees, loan limits, and interest, as well as mortgage rates. Take a look at some of the reviews we’ll be writing a little further down the page, and you’ll see some of the best currently available.
Understand the Fees You Have to Pay
There is one fee you have to pay regardless of the lender. This is the VA funding fee. There are a variety of other costs you have to pay, charged by the individual lender. What they are and how much they cost, all depends on the lender. Notification of any charges included when you receive an official loan estimate from the lender.
Pay Close Attention to the APR
Along with details of the charges you’ll have to pay, you’ll also receive notification of the interest rate the official loan estimate offers. The interest rate will be on the front page, but more important is the APR which appears a few pages in. The Annual Percentage Rate is the interest rate after any additional fees are taken into consideration.
Choose a Lender That Suits Your Situation
Mortgage lenders come in all shapes and sizes, and there will be some that specialize in a particular target market. For example, if your credit history is a little weak, there are still going to be lenders you can approach.
If you are a first-time homebuyer; it is recommended to check a couple of different options before you choose the right lender for your needs. Some offer automated online platforms; while others are known for their excellent customer service. Go with your gut feeling but read the fine print as well. If you feel lost, there is always an option to speak with a professional who will walk you through the process.
Now that you have an idea of what to look for, here are our top five recommendations for anyone out there looking for a VA loan.
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Top 5 Best VA Loans
Finding the right VA home loan can be challenging. For this reason, we’ve decided to help you out as best we can. The following five VA lenders are offering some of the best deals for April 2021. When you’re doing your research, these are excellent places to start.
Veterans United is a financial institution that’s grown rapidly in just a few years. It started with only a handful of employees and has grown to be one of the leading providers. They’ve helped thousands of families purchase their dream home and in 2017 lent out more than $10 billion. They have 26 offices across the US and are licensed in all 50 states. The first product offered is VA loans, but FHA, USDA, and conventional loans are also available. The Lighthouse Program is for prospective veteran homeowners with poor credit ratings. An in-house credit expert is available to review their credit profile and after a consultation, work to develop a personalized plan to improve it. This service is possible even if you’re not taking out a VA home loan.
The current rates are as follows:
- 30-Year Fixed VA Loan – 3.250%, 3.498% APR
- 15-Year Fixed VA Loan – 3.250%, 3.701% APR
Closing more than $400 billion in mortgage loans between 2013 and 2017 makes Quicken Loans one of the biggest mortgage lenders in the US. Their headquarters are in Detroit, but they provide loans across the country and online. Quicken Loans boasts an impressive customer satisfaction record, a quick and convenient loan process, and a team of experts that work with the VA directly. A minimum down payment of 3% is required, together with a minimum credit score of 620. They offer a wide range of loans including a 30-year fixed mortgage, a 15-year fixed mortgage, adjustable-rate mortgage, and YOURgage ®. This is a custom loan with a fixed interest rate of over 8 to 29 years, depending on your requirements.
The current rates are as follows:
- 30-Year Fixed VA – 3.625%, 4.072% APR
- 15-Year Fixed – 3.375%, 3.853% APR
- 30-Year Fixed – 4.5%, 4.775% APR
- 5-Year ARM – 3.75%, 4.517% APR
- 30-Year Fixed FHA – 3.75%, 4.753% APR
JG Wentworth has a reputation for knowing all there is to know about VA loans. They’ve been operating for more than 20 years and has continually achieved an A+ rating with the Better Business Bureau. Their approach to the loan process is a very flexible one, thanks to its top of the range web and mobile tools. There are, however, individual states it’s not licensed to lend in. Its financial offerings include prepaid credit cards, home mortgages and refinancing, structured settlements, annuities, lottery payment purchasing, student loans, debt consolidation, and access to personal loan providers. The complete VA loan application process can be completed online, from getting an initial quote to the final signing off with an e-signature.
Current rates are available at the JG Wentworth website.
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Lending Tree boasts one of the largest networks of lenders in the US and can provide a way for people to connect with a variety of lenders, depending on their individual needs. You can fill all the forms online, allowing you to compare offers from a variety of different lenders and save on your loans. The LendingTree has received more than 65 million loan requests. Thanks to the wealth of online tools available; it’s possible to find the best loan for your needs. The qualification process is much easier when compared with conventional loans, and the application process is quick and easy. LendingTree doesn’t generate the loans, but it matches borrowers with suitable lenders.
Visit the LendingTree website, input your loan requirements, and you’ll be able to compare the best offers.
Veterans First Mortgage
Veterans First Mortgage is another financial institution with an excellent reputation. It focuses mainly on military families and as such, can provide support and understanding. A 1% origination fee is charged, along with needing to make an application to find out the details of its variable and fixed-rate mortgage deals. You can count both of these factors as a downside, but on the upside, they score incredibly well on customer service and provides a valuable service for military families. The online application experience is a good one.
To find out more about this lender and its interest rates visit the Veterans First website.
With a few VA approved lenders introduced it’s time to look at how the VA loan application works.
7 Steps to Getting a VA Loan
The process for getting a conventional mortgage and a VA loan are very similar. There are, however, a few small differences. So to help you understand what these are and how the process works, here are the seven steps you’ll need to follow.
Find Out Whether You’re Eligible
The first step in the process is to check that you’re eligible to apply for a VA loan. There are specific VA service member requirements you have to meet. To prove you meet these requirements, you have to produce a Certificate of Eligibility to the lender. There are different types, with the one you’re issued depending on whether you’re an active duty service member, or a veteran, for example.
A COE can be obtained online by visiting the VA benefits portal, applying through the postal system or asking a lender to get it for you.
Shop Around for the Best Lender
You can’t go any further until you’ve got a COE and one of the quickest routes is to get a lender to do it for you. By using a lender-only portal, they can typically get one within a few minutes. Finding lenders who offer VA loans is easy. The difficulty is finding the right one.
You’ve already been given a few suggestions here, but there are lots more to choose from. Don’t merely select the first one you find. Instead, do some research and find one that offers the best rates which suit your requirements. Don’t forget to read customer reviews as these can be very informative. You can even ask your colleagues for recommendations as well.
Make Your Selection and Get Pre-Approved
When you’ve chosen a lender, the next step is to seek approval for your loan. This step is not a formal offer from the lender but a pre-approval.
Contact your chosen lender and make an application. Within three working days, you’ll receive a formal written rate and fee quote. This provides you with the details of the interest rate you can expect and what fees you’ll have to pay.
The lender will ask for specific documentation, including:
- Full credit history and your credit scores from Equifax, TransUnion, and Experian, the three major credit bureaus. You don’t have to request this information yourself. You give the lender authorization to obtain it.
- Residence history going back two years
- Employment history going back two years
- Two years of filed tax returns
- Two recent banks, investment or retirement account statements
- You also have to prove that your monthly expenses don’t exceed 41% of your income
- Active-duty personnel also have to provide a Leave and Earnings Statement with an Expiration of Term Service dated less than 12 months after the loan closes
Look for a Real Estate Agent
Once your loan has been pre-approved, the fun part starts. Now it’s time to start looking for your dream home. One final small step before you start looking at properties is to find a real estate agent to help you. You know the amount of the loan you’ve been approved for so you can ask for suitable homes within that range.
Choose Some Homes and Make Offers
An excellent real estate agent will be able to show you a wide range of suitable properties. All you need to do is take a look around until you find one you like and want to make an offer on it.
When you make an offer, you’re entering a purchase contract with the seller. This contract is presented to the seller’s agent by your agent. It details the price you’re willing to pay and whether any inspections or repairs are needed. It also outlines how fast they have to get completed, and when you want to close.
You’ll also need to produce your pre-approval letter so that the other party knows you’ll have money to complete the transaction.
Appraisal and Underwriting
When you’ve found your dream property, the lender will request a VA appraisal on the property. The VA appraiser works independently to the lender, and usually, a local VA center assigns it. There are several things the appraiser will check:
- The roof, heating, plumbing, and electrical systems are functional
- There are no issues with pests, particularly termites
- No lead-based paint used on the property
- There is no water intrusion
- There are no health or safety concerns
- The purchase contract and any special terms included in it
- The title report to check there are no liens
If you wish to raise any issues, then you have to address them before the process can go any further. If any repairs need to be done the buyer and seller must decide who is going to pay for them.
Your Loan is Ready to Close
The final step is the most exciting one, and this is the closing of the loan. As long as you have completed all the previous steps and your details haven’t changed since obtaining the pre-approval, it’s time for you to close the loan.
You need to send the lender’s documents to an attorney or an escrow company, and then to be available to sign them. Loan funds can be sent at the same time as the documentation. Otherwise, you’ll receive the funds once they return your signed documents.
With the funds available to be given to the seller, the property can officially change hands. You’ll be given the keys to your dream home. All you’ve got left to do is to move in with your family and all your possessions.
There’s nothing like the feeling you get when you move into your own home. With the help of the right VA lender, you’ll soon be able to realize that dream yourself!
We’d love to hear about your experiences and whether any of the information we’ve provided was helpful. Thousands of veterans and military personnel around the country are looking for their dream home every day. So, share your experiences and help them make their dreams come true too.