VA Loans
What is a VA Loan?
VA loans are backed by the Department of Veteran’s Affairs. These loans come with several benefits that are exclusive to veterans, active duty service members, as well as certain military spouses.
Keep in mind that VA loans charge funding fees. These fees can change depending on the down payment amount. The more money you put down, the lower the funding fee.
As an example, a first-time VA loan borrower who pays 0% down must pay a 2.15% funding fee based on the loan amount. For a borrower who puts down 10% or greater, the funding fee is 1.25%. These funding fees can also change based on the military category.
VA loan borrowers can choose to pay this funding fee over time through financing. Also, some VA home-buyers qualify for reduced or even waived funding fees.
VA loans are issued by private lenders (banks and mortgage companies). In the event that a borrower is unable to pay the loan, VA loans are guaranteed against default. Generally, this guarantee is up to one-fourth of the total loan amount.
The benefits provided by VA Loans are:
- Lower interest rates compared to other loan types
- No down payment required
- No monthly mortgage insurance fees
- No penalties for prepayment
- Option to finance the VA funding fee
- Opportunity to qualify for reduced or waived funding fees (for vets receiving service-related disability compensation)
- Ability to qualify despite less-than-perfect credit
Borrowers have the option to either a Fixed Rate VA Loan or an Adjustable Rate Mortgage (ARM) VA Loan.
The Fixed Rate option has the same interest rate throughout the life of the loan. The ARM helps you save more money upfront with a lower initial interest rate, then the interest rate goes up after a certain period of time. (As an example: For a 7-year ARM loan, the interest rate will go up after 7 years.)
VA mortgage holders can also refinance with the Interest Rate Reduction Refinance Loan. The IRRRL is also known as the Streamline refinance. This option speeds up the refinance process, helping you to lower your interest rates and reduce your monthly mortgage payments.
Another refinance option for VA loan holders is the VA Cash Out refinance, which allows you to take cash out of your home’s equity. Speak to a mortgage professional about refinancing options down the road.
To be eligible for a VA loan, the borrower must meet one of the following criteria:
- At least 6 years of service in the National Guard or Reserves
- 90 days of service during wartime
- 181 continuous days of active service during peacetime
- Being the (un-remarried) spouse of a service member who passed away either in the line of duty, or as a result of a service-related disability
In addition to these eligibility requirements, borrowers typically must move into the new home within 60 days after purchase. This home must also be the primary residence (some exceptions apply). The VA loan may not be used for investment properties or second homes.
Certificate of Eligibility (COE)
You will need a Certificate of Eligibility to qualify for a VA loan. To apply for a COE, you can talk to a loan officer who can obtain a COE on your behalf. You can also contact the Veterans Administration directly to receive a COE.
The Veterans Administration determines if you’re eligible. The COE shows proof that you’re eligible, and the COE also calculates the funding fee.
Once you receive your COE, you can start looking for a VA home loan. Keep in mind, you will need to meet other requirements such as credit score, income verification, and debt-to-income ratio. Talking to a mortgage loan officer can help you learn more about what you need to get approved for a VA loan.
Basic Allowance for Housing (BAH)
The Basic Allowance for Housing provides money to cover housing and other related costs for active duty members and their families. The allowance amount is calculated based on dependency status, pay grade, and the location of your duty station. It can be used toward rent or mortgage payments.
The BAH changes each year (based on the previous year’s average housing costs). Fortunately, individual rate protection prevents your BAH from decreasing (as long as your situation stays the same).
VA Loan Overview
A VA Loan is a great option for veterans, active duty service members, and certain military spouses who want to purchase their dream home. Not only is it relatively easy to get approved for this type of mortgage, but the lack of insurance fees and the low interest rates can help borrowers save a lot of money.
If you’re interested in getting a VA loan, speak to a mortgage professional to get started. There are many loan officers who specialize in VA loans, and they can help you find the best course of action for you.
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