What is a VA Home Loan?

By Realty Times Published Nov 25, 2020 09:27 am Updated Dec 2, 2020 09:42 am

If you’re a service member or veteran in the United States, you might be eligible for a Department of Veterans Affairs (VA) home loan. The spouse of a service member or veteran may also be eligible for a VA home loan. The entire objective of this program is to help veterans and service members obtain a mortgage with little-to-no money down.

The Basics

The Department of Veterans Affairs guarantees a VA loan. The government doesn’t make the loan. Instead, since the federal government is backing it, lenders feel more comfortable offering the loans even to higher-risk borrowers. The backing of the federal government mitigates the risk for the lender.

Along with being able to get a loan without a down payment, sometimes the program has less stringent credit requirements too. You still have to meet some requirements, and you have to be approved by the lender, but it facilitates an easier path to homeownership.

Eligibility Requirements

There are requirements as far as your military service that you have to meet for VA loan eligibility. The requirements include that you are currently a veteran who was honorably discharged or that you’re active duty military.

You must have at least 90 days of consecutive active service during wartime or at least 181 consecutive service days during peacetime. You may also be eligible with more than six years of service in the National Guard or Select Reserve.

If you’re the spouse of someone who died in the active line of duty, you could qualify for a VA loan.

To go through this home loan process, you need a VA Certificate of Eligibility called COE.

To get a VA COE, you can go online to the VA and fill out an application through their eBenefits portal, or you might be able to apply through your lender if you’ve selected one.

How Does It Work?

First, as was mentioned, you need to fill out VA paperwork to verify your program eligibility. You’ll receive an entitlement, which is an amount guaranteed on each loan. Lenders may be willing to give you a loan that’s up to four times more than the entitlement.

Then, you can get a VA loan without a down payment. Instead of paying mortgage insurance, you pay a VA funding fee.

The entitlement is an important part of a VA loan, and there are two types. The first is a basic entitlement which is the lesser of either 25% of your total mortgage or $36,000. The second is called a bonus entitlement, which is up to 25% of the FHA loan limit, minus the basic entitlement.

Underwriting Requirements

A lender is going to have their own criteria for who they’ll lend to, but typically you need to be able to show you have adequate income to cover your mortgage payments. You’re not likely to be approved if you have a lot of existing debt. Also, there isn’t a minimum credit score requirement, but you have a relatively low chance of approval if you don’t have at least a FICO score of 620.

How Do You Apply?

You’ll need first to get all of the necessary documents and paperwork completed through the VA. Then, you’ll have to find a lender that does VA loans because not all do. An experienced VA lender will be able to walk you through the process and answer your questions.

You’ll still need to compare their loan terms and rates and comparison shop for the best deal.

Finally, if you have a full loan entitlement, there aren’t any limits on how much you can finance. However, entitlements are based on conforming loan limits. Also, lenders will more than likely have criteria dictating how much you can borrow.