Many people struggle to purchase their dream home because they can't afford to make the 20% down payment. Of course, you can put down less than 20%, but you'll be saddled with private mortgage insurance (PMI), which can make it more challenging to pay off your mortgage. Fortunately for veterans and active military members, they can fulfill their dreams of homeownership through a VA loan. Our REALTORS® break down some of the important things you should know about VA loans and how they work.
A VA loan is a mortgage loan that is made by private lenders through a program established by the U.S. Department of Veteran Affairs. The program was designed to help veterans, active-duty military personnel, eligible surviving spouses of veterans, and other classes of military personnel to become homeowners at an affordable cost. The VA guarantees a part of the loan, sets eligibility requirements, and dictates the terms of the loan offered. The VA loan does not require down payments, mortgage insurance, or some closing costs.
A VA loan can only be used to finance the purchase of primary residences. It cannot be used for a vacation home, an investment property, or a home in a foreign country. Compared to conventional loans, the VA loan stands apart for its lenient underwriting, lower interest rates, and secondary benefits.
Most active-duty military members, veterans, and reservists are eligible to apply for a VA loan. National Guard members and reservists can also qualify. Spouses of military members who died in the line of duty or due to service-connected injuries can qualify as well.
Typically, active-duty military members are eligible after 6 months of service. Reservists and National Guard members have to wait 6 years, but if called up to active duty, they become eligible after 181 days of service. Once you qualify for a COE, you will have to shop for a mortgage from a private lender. This means that you'll have to meet mortgage requirements, which may cover debt-to-income ratio, income verification, and credit score.
While the VA doesn't set a limit on how much you can borrow, it sets a cap on the portion of your mortgage that it can guarantee. This can affect the amount of money that a lender will give you. The loan limits are generally the amount that an eligible veteran may be able to borrow without a down payment. The limits vary by county depending on the value of a house.
The VA will assume liability on a portion of your mortgage through the basic entitlement or bonus entitlement. The basic entitlement available to an eligible veteran is $36,000, or 25%, of the total mortgage. Generally, lenders will loan up to 4 times your basic entitlement if you're not making a down payment. But you're not tied to using the full entitlement.
While the cost of getting a VA loan are lower than other conventional mortgages, they still carry some up-front costs that vary, depending on the type of veteran and the amount of down payment. The one-time funding fee helps keep the VA loan system afloat because there's no down payment or PMI required.
A veteran getting his/her first VA loan with no down payment would pay a fee of 2.15% on the amount of loan. The fee is reduced to 1.25% if the borrower makes a down payment of 10% or more. Reservists and members of the National Guard usually pay more than about one-quarter of a percentage point in fees. Second-time borrowers who make no down payment would pay 3.3% of the total loan amount.