September 17, 2021

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VA home loans: What they are and who’s eligible

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A VA-backed loan means you don’t have to pay a down payment.

Angela Lang / CNET

Come with the Down payment for a house can be an insurmountable hurdle, especially when you factor in all of the other up-front costs. For this reason, a VA backed home loan – that doesn’t require a down payment – could be your ticket to owning a home.

You or your spouse must be a current or former member of the U.S. military. And not all properties are eligible.

Read on to learn more about how to get a VA loan and if it is right for you.

What is a VA Loan?

VA home loans are not offered by the Department of Veterans Affairs – they are only supported by the agency. By guaranteeing VA home loans, the government gives lenders and financial institutions confidence that the loans are low risk. That’s why you don’t have to pay a down payment – as long as the sale price is not higher than the estimated value of the house.

And because the government shares the risk, you should also get better terms and interest rates on a VA-backed loan than other loans, even if your loan takes a little work.

How does a VA loan work?

You are still going to seek out a private lender to get a VA loan. However, if you stop making payments on your VA home loan, the government will be held responsible for the loan. You can have access to this service for your entire life – it’s not limited to one home. However, the loan can only be used for your primary residence, not vacation property.

Who is Eligible for a VA Loan?

Veterans or service members who are or have been on active duty must meet one of the following requirements to qualify:

  • Served for at least 90 consecutive days during wartime
  • Served at least 181 consecutive days in peacetime
  • Discharged from service due to a service-related disability
  • Are currently on active duty

Members of the National Guard or the Reserve must meet the following requirements to be considered eligible:

  • Served in the Selected Reserve or National Guard for at least six years
  • Served in active service for at least 90 days.

For more information on VA loan eligibility, see VA’s website.

What are the Different Types of VA Loans?

Buy loan: If you are planning to buy a home, a simple VA purchase loan will help you get decent interest rates with private mortgage lenders.

Native American direct loans: This loan is available to Native American or Native American veterans to buy, build, or improve a state home.

Refinancing loan to cut interest rates: If you are having financial trouble keeping up with your VA loan, a lower interest refinance loan can help reduce your monthly payments.

Withdrawal Refinancing Loans: If you want to improve your home, pay off debts, or make progress towards your retirement fund, the VA can help Withdrawal Refinancing Loans.

How to Apply for a VA Loan

If you think you are eligible, the first thing to do is to apply Certificate of attendance, either through your private lender or the VAs eBenefits online portal. Veterans and current or former National Guard or Reserve members who have been activated are required to provide discharge or separation papers (DD form 214). Current members of the service, as well as members of the National Guard or the Reserve, must provide a statement of service signed by their commanding officer, adjutant, or personnel officer.

The following information must be included in your service description:

  • Full name
  • Social security number
  • Date of birth
  • Date you entered the service
  • Any lost time
  • Command to provide the information

What are the pros and cons of a VA loan?

As in all types of loansThere are advantages and disadvantages to consider.

advantages

No down payments: You can skip the puzzle to get cash upfront as the government will secure your loan.

Reduced closing costs: Yes, you still have to pay closing costs even if you qualify for a VA loan. However, you will not incur some closing costs and the origination fees are capped at 1% of the total loan amount.

Bad reviews: Compared to traditional mortgage rates and the Federal Housing Administration mortgage rates, VA loan rates are significantly lower. For example, on May 11, the average 30-year VA loan rate was 2.66% with an annual interest rate of 2.84%. Meanwhile, the average 30-year FHA purchase rate was 2.85% with an annual rate of 3.7% and the traditional 30-year mortgage rate was 3.06%. A VA loan mortgage calculator helps you estimate your prices.

No mortgage insurance: With a VA loan, in addition to refusing a down payment, you can skip paying for mortgage insurance as your loan is guaranteed by the government.

COVID-19 Forbearance: Like other government sponsored mortgages, the CARES law enables those struggling with the pandemic to keep up with their mortgages I beg your forbearance until June 30th. It will take up to six months and borrowers can get an additional six months if needed.

disadvantage

Primary homes only: Let go of your dreams of financing a vacation home with a VA loan. VA loans can only be used on the borrower’s primary residence and must reside there.

Ownership: Not all properties are eligible for VA home loans. A VA approved appraiser must evaluate your potential new home to ensure that it meets the VA property requirements. Unfortunately, it means you may not be able to get a VA loan if you were hoping to buy a Fixer upper.

VA funding fees: One of the advantages of a VA loan is that you don’t have to pay for mortgage insurance. However, you will have to pay financing fees once you stop making payments on the loan. Once the government takes responsibility for the loan, it charges fees, typically between 1.4% and 3.6% of the loan, which can be paid in advance or over time.