The VA Loan program, created in 1944, helps veterans become homeowners. The government backs portions of loans through approved lenders, allowing veterans to get mortgages with favorable terms.
Here are the details you need to know about VA Loans:
Veterans and active duty servicemembers alike are eligible for VA loans on homes for their own personal occupancy. Members must have a good credit rating, sufficient income, a valid COE (certificate of eligibility) and meet specific service requirements.
All veterans or active duty members must have served a minimum of 90 consecutive days during wartime or 181 continuous days in peacetime. Reserve or National Guard members who served at least six years are also eligible, and the spouse of a veteran who died in the line of duty may also apply under certain conditions. Dishonorably discharged servicemembers are not eligible.
The biggest benefit of a VA Loan is the down payment—there is none required. Qualified borrowers can get 100% of the cost of a home financed if they haven’t been able to set aside a large sum of money for a down payment.
Another significant benefit is not having to pay private mortgage insurance (PMI), a payment typically required to protect lenders against default when a buyer doesn’t put down 20%. The lender doesn’t require PMI or a down payment for VA loans because the portion backed by the government assumes the risk on behalf of the servicemember.
Since the lender carries less risk, they can often offer a better interest rate on the mortgage. However, interest rates are going to depend on the housing market, the cost of the house and other factors.
Additional benefits include limited closing costs, no pre-payment penalty if the loan is paid off early and potential assistance if a servicemember runs into trouble making payments.
Process and Advice
Upon leaving the U.S. Navy as a Lieutenant in 1994, one of the first things Patrick Kujawa, regional director for Halbert Hargrove, did was get his DD-214 Form (sometimes referred to as DD Form 214).
The DD-214 is a form for veterans that lists specifics about their active duty, including dates, assignment and rank, separation information (terms under which you were discharged/reason for separation) and any decorations, awards or medals received during service. It contains information needed to verify military service for benefits, retirement, employment and membership in veterans’ organizations, according to National Archives.
The form is needed to acquire a Certificate of Eligibility (COE), which verifies to lenders that you are eligible for a VA loan. You can apply for a COE online at www.ebenefits.va.gov or using VA Form 26-1880. Active duty servicemembers submit a current statement of service signed by the commander of their unit or personnel office in lieu of a DD-214.
Servicemembers obtain VA Loans through typical lending institutions like banks and mortgage brokers who participate in the VA Home Loan Program. A list of regional loan centers, which can help with every step of the process, is available through the U.S. Department of Veteran Affairs.
It’s a good idea to try to get pre-approved for a loan after gathering your COE. It lets buyers know you are serious, and will give you a realistic idea of how much you’ll be able to spend. If you do not go the pre-approval route, the VA Department recommends making sure the sales agreement you sign with the seller or agent contains a “VA Option Clause,” which lets them know you’ll be using a VA loan, as well as an escape clause, if you’ll want to get out of the contract should your loan be denied.
Be sure to shop around for a lender and compare rates. Kujawa advises that you “sit down with a qualified mortgage broker or banker and really go through the numbers and ultimately whatever [you] decide to do…don’t just blindly assume the VA’s rates are better.”
Location of the home and the current rates in the mortgage market are among the factors that can cause variance in such loans. The most important thing to look at, according to Kujawa, is the total payment over the course of the loan. Run the numbers and compare the cost of your net payment over the life of the mortgage.
One thing to be aware of is the VA Funding Fee, which, if you are approved for and use a VA loan, is paid directly to the VA Department and helps keep the whole loan program afloat.
According to www.vafundingfee.com, which has a calculator that lets you figure out how much the charge will be, the fee is dependent on the loan amount, type, type of service, down payment, and if you’ve used the VA loan program before. Luckily, this fee can be included in the loan, so you don’t have to pay it upfront; you pay it as you pay back the mortgage.
“If you have any inclination you’d ever want to use your VA loan, get the DD-214 form sooner rather than later. Make sure that you run the numbers and don’t automatically assume that the VA loan rates are going to be your best options—again taking into account the long term total payment figure on the loan. And make sure whoever you are working with as a mortgage lender has experience dealing with VA loans,” said Kujawa.