United States has a special home loan for its military service members called Veterans Affairs (VA) home loan. VA home loan or VA loan was designed to help U.S veterans, service members as well as widowed military spouses to buy a home. Traditionally, the loan isn’t issued by the Veterans Affairs but by private lenders and backed by the Department of Veterans Affairs. To qualify for a VA loan, one must have served in the United States Armed Forces or is a surviving spouse of a Veteran. However, based on the latest update from va.gov, it seems VA administration is also playing a role as the lender.
Eligibility
Only service members, veterans or surviving spouses are eligible for VA home loan programs. To apply for a VA loan, you must first obtain a Certificate of Eligibility (CoE) which shows your qualification based on service history and status. If you or your former spouse received an honorable, you should have no problem getting the CoE. If you or your former spouse receive a bad conduct or dishonorable discharge, you may not be eligible for VA benefits. However, you can apply for an upgrade or review via this process.
How to apply
This used to be done by filing a request via the phone or VA’s website. You will need to reach out to them and submit your DD-214. Once they have verified your service status, the CoE is mailed to you. You would then submit the CoE to your lender. This process can take a few weeks; however, these days, this can be done electronically by your lender. The last time I used VA loan in 2016, I just provided some information to my lender and they were able to get my CoE electronically. Although I had my paper CoE, I didn’t have to send that to my lender. Check with your lender first to see if they can get the CoE electronically as it can save you a lot of time. If not, head over to the VA’s website and apply for eBenefits to start the process.
How does a VA Loan work?
In most situations, the VA loan is just a federally backed loan. The private financial institutions are the entities that actually provide the loan. And the loan itself is backed by the Department of Veterans Affairs up to 25% of the loan’s amount (see loan limits here). That reduces the risks for the lender on a VA loan in the event that you can’t meet the loan obligations. You are not required to put any money down on a VA loan. That’s why you often hear about zero down VA loan. However, that comes at a cost as VA loan borrowers are required to provide a one time VA funding fee. Funding fee can range anywhere from 1.4% to 3.6% of the loan amount depending on usage and down payment amount.
Why use VA Loan?
There are many benefits that comes with a VA Loan. One of those is that you can have zero down with no Private Mortgage Insurance (PMI). And VA loan usually have lower interest rate compare to conventional loans. This makes home buying much more affordable for service members. The program also requires lenders to limit the fees buyers must pay. It also comes with more stringent requirements on the property such as inspection and appraisal requirements. Those are put in place to protect the buyers and save them from a bad deal.
Is a VA Loan worth it?
This depends on a number of things and most of that depend on your financial situations. If you don’t have a lot of money to put down for your future home, VA loan could be a great option as you aren’t required to put any money down. You can also avoid PMI if you are putting less than 20% down and the interest rate for VA loan is lower than conforming loan. Lender is restricted from adding too much miscellaneous fee onto your loan application.
Despite all these great benefits, VA loan also comes with some drawbacks. The biggest of all is the VA funding fee which currently could be as high as 3.6% of the loan value. In order to minimize the funding fee, you should put at least 10% down on your home or property as this will lower the funding fee to 1.4%. Also, once you go with a VA loan, you will have to stay with a VA loan for your refinance or cash out refinance. All of which will require funding fee if you want to take advantage of it. So be sure to take all of that into your financial calculations.
An investment property loan is a mortgage taken out on an investment property, which is a property that is not your primary residence. The loan is used to purchase the property and can be used for repairs and renovations as well.