How Do VA Home Loans Work?
VA home loans are flexible, cheap and accessible to people in Service!
Everyone wants to live in a great house, claim ownership of the property and raise their families. Where most people can do that after taking out a mortgage loan because they have good credit, such a service is usually rejected to veterans and retired military personnel. Why? Because during the time they were away, they didn’t have a strong credit backing or savings for down payment, thus they’re rejected loans.
In 1944, the United States government introduced VA loans especially for veterans, military personnel and their families to purchase or refinance their homes, without having an excellent credit. Let’s get into more details.
How does a VA Loan work?
Ever since 1944, 24 million veterans have had the chance to become homeowners due to the accessibility of the VA loan. This works differently than how a traditional loan works; which requires a downpayment, a good credit score and a steady income. VA loans on the other hand have 0% down payment and don’t even require an excellent credit score.
VA loans are handed out by private lenders, but a portion of it is guaranteed by The Department of Veteran Affairs, which gives a little confidence to private lenders against default. So because of this, they agree to a $0 downpayment.
How much does a VA Loan Cover?
VA will guarantee up to 50% of a home loan up to $45,000. For loans between $45,000 and $144,000, the minimum guarantee amount is $22,500, with a maximum guarantee of up to 40 percent of the loan up to $36,000, subject to the amount of entitlement a veteran has available.
VA Home Loan Benefits
There are several benefits that are availed by veterans, active duty members and their select spouses when it comes to the process of becoming homeowners.
Zero Downpayment: Having to pay NOTHING from your pocket to secure the loan looks like the biggest advantage for borrowers. A VA loan finances 100% of your home without having to pay a single dollar as down payment.
No limit on how much you can borrow: You can borrow however much depending on the cost of the house, there is no limit on borrowing. However, there is a limit on how much liability the VA loan can take. For 2019, the VA will guarantee a maximum of 25% (up to $121,087) of a home loan amount, which corresponds to a maximum loan of $484,350.6 Anything beyond that won’t be guaranteed by the VA.
Lowest mortgage rates: Veterans get a low rate of interest through VA loans as compared to conventional loans. Here’s a breakdown:
|Loan Type||Current Mortgage Rate|
|VA 30-year FRM||2.25% (2.421% APR)|
|Conventional 30-year FRM||2.875% (2.875% APR)|
|VA 15-year FRM||2.25% (2.571% APR)|
|Conventional 15-year FRM||2.625% (2.625% APR)|
No mortgage insurance: In a conventional or FHA loan, if you’re making a downpayment of less than 20%, you have to pay the cost of mortgage insurance, PMI, or private mortgage insurance. Since VA loans are backed by the government, veterans don’t have to pay any mortgage insurance.
No repayment penalty: There is no time frame which decides for how long you’re supposed to keep the house. You’re allowed to sell it whenever you feel like because there is no penalty or early-exit fee you need to be careful of.
Less credit score: Unlike other mortgage loans where you need to have a reasonable score to get a loan, it is relatively easier to qualify for a VA loan. You only need to prove a source of sufficient income to pay back the loan and you’re set! They also have a smooth criteria for other requirements so you don’t have a hard time getting approved for the loan.
VA Home Loan Certificate of Eligibility
The certificate of eligibility is a first step to gaining a VA home loan. This is basically proof that the borrower has completed his duty in service. To get this certificate, the borrower must have:
- 181 days of service during peacetime
- 90 days of service during war time
- 6 years of service in the Reserves or National Guard
- Some surviving spouses of service members who have died in the line of duty are also eligible
Once all of these are checked, the borrower receives the certificate and proceeds with the application.
VA Home Loan Requirements
Like it has been discussed earlier too, VA home loans are relatively easier to qualify because their requirements aren’t too strict. The eligibility criteria is as follows:
- COE (Certificate of Eligibility)- This is basically proof of your service and duty that you show to the lender which supports that you’re qualified for applying for the VA home loan.
If you were discharged for one of these reasons, you’re eligible to apply:
- The convenience of the government (you must have served at least 20 months of a 2-year enlistment)
- Early out (you must have served 21 months of a 2-year enlistment)
- Reduction in force
- Certain medical conditions
- A service-connected disability (a disability related to your military service)
But if you were discharged on the basis of misconduct, you WILL NOT be eligible for a VA home loan.
VA Home Loan Rates 2020
The current VA rates for the purchase of a home are:
|30-Year Fixed Rate||3.050%||3.360%|
|30-Year Fixed-Rate VA||2.920%||3.080%|
|20-Year Fixed Rate||3.020%||3.290%|
|15-Year Fixed Rate||2.560%||2.870%|
Note: Sample rates have been extracted online, courtesy of BankRate.
VA Home Loan Calculator
You must be wondering about the math, how much loan can i borrow against my income, how much monthly payments will i have to make after the interest is piled up and for how long! Trust me, we know how overwhelming these questions can be.
To make your life a little easier, there are tons of online VA home loan calculators available that tell you approximately how much you’re expected to pay. They ask for basic input such as the value of the house, interest, duration of the loan, credit score etc. and then give you an amount
VA home loans are specifically reserved for veterans and are backed by the Department of Veteran Affairs. Because of this guarantee, there is $0 downpayment and the interest rates are also very less. This is the government’s way of accommodating potential homeowners for their years of service.
Every lender will have a different rate of VA home loans according to their personal fees and cost, so it is best to shop around for economical options. Make sure you submit a proof of your income through which you’re planning on paying the loan, and be efficient in paying the dues promptly.