Overview of VA Loans & How to Get One
- Examine what it takes to be eligible for a VA loan.
- Understand the benefits of VA loans.
- Review various VA loan mortgage programs.
Review various VA loan programs and the process to get a VA loan
Lenders have tightened their income and credit requirements for mortgage loan approval. They have also increased down payment requirements for most conventional loans. These changes in the marketplace have made government backed loans more attractive. One type of government guaranteed loan is available only to eligible veterans of the armed forces or reserves and to certain surviving spouses. These loans are called VA loans.
A VA mortgage loan is a mortgage loan that is guaranteed by the U.S. Department of Veterans Affairs. The VA loan is not offered directly by the VA; Only VA-approved lenders issue a VA loan. VA loans can be accessed by eligible veterans through banks, savings and loans, mortgage companies, and private lenders. The VA guarantees the loan, but that does not mean that a veteran is guaranteed approval by the lender. He or she must meet the lender’s credit and income requirements.
Benefits of VA Loans
The VA loan program was established to assist American veterans or their surviving spouses in obtaining mortgage financing. VA loans offer the eligible veterans some distinct advantages over conventional loans:
- Lower Interest Rates- VA loan terms can be more liberal than standard financing, often .5%-1.0% lower than a conventional loan. A lower rate means that a borrower will qualify for a larger loan.
- No Mortgage Insurance- VA loans don’t require private mortgage insurance (PMI). This means more of the monthly payment is going towards the principal balance. It also means that a borrower may be able to qualify for a larger loan than if he or she had to pay for PMI.
- No Money Down- 100% financing is available. For purchase loans, VA loans are available with low or even no down payment. This kind of loan has disappeared from the conventional loan market. In fact, it is possible to finance 102.5% on a VA purchase loan.
- More Cash Out- Cash-out refinance loans are available to 90% of the property’s appraised value. An eligible veteran or surviving spouse can use the cash to consolidate debt, make home improvements, or use for some personal need.
- Reasonable Fees- Closing costs are comparable with other loans and often lower. VA loans do come with a funding fee. As the VA makes clear, it only requires a funding fee of one-half of one percent of the loan amount. This cost can be paid by the borrower or in cash or included in the loan. Because fees can vary from lender to lender, make sure that you shop around.
- Looser Credit Standards- Credit requirements for a VA loan are more lenient than on conventional loans. Generally, credit history is examined only for the past 12 months, a shorter window than in a conventional loan, although bankruptcy, foreclosure, tax liens, judgments, and collection accounts can be considered even if older than 12 months.
- Assumable Loans- VA loans are assumable. An assumable loan is one that can be transferred to another person. The new borrower still needs to meet the mortgage holder’s income and credit requirements. An assumable loan can be an attractive feature, if you are trying to sell your home.
Not every veteran is eligible for a VA loan. To obtain a VA loan, the borrower needs to receive a Certificate of Eligibility (COE) from the VA. To be eligible for a COE, a veteran must have not received a dishonorable discharge. The length of time served is also an issue. Requirements vary depending on such factors as whether a veteran had active duty during wartime or peacetime and whether she or he was an officer or an enlisted soldier. Length of service requirements also vary for members who served with National Guard units. The VA Web site has a description of eligibility requirements.
Certificate of Eligibility
To obtain a VA-backed loan, the borrower must provide the lender a COE. There are a three ways to get a COE:
- Apply Online: Veterans, active duty, and reservists/National Guard members who have served on active duty, as well as reservists/National Guard members who have never served on active duty are eligible to apply online. Instructions on how to apply for a COE online are available at the VA Web site.
- Apply through a Lender: A lender can submit a request for a COE on the borrower’s behalf. A borrower is required to provide the lender specific evidence, in order for the lender to apply for the COE. Veterans, active duty, and reservists/National Guard members who have served on active duty must provide certain evidence while reservists/National Guard members who have never served on active duty must provide different evidence.
- Apply through the Mail: Veterans, active duty, and reservists/National Guard members who have served on active duty, as well as reservists/National Guard members who have never served on active duty use VA Form 26-1880 (PDF). Surviving spouses can only apply for a COE through the mail using VA Form 26-1817 (PDF) and must provide a separate type of evidence.
There is no maximum VA loan amount. However, lenders will generally limit VA loans to $417,000, the current cap for conventional loans. This is because lenders sell VA loans in the secondary market and the secondary market will not purchase a loan for a single-family residence that is above $417,000.
VA loan program rules state, "a veteran’s basic entitlement is $36,000 (or up to $104,250 for certain loans over $144,000). Lenders will generally loan up to four times a veteran’s available entitlement without a down payment, provided the veteran is income and credit qualified and the property appraises for the proper value. For properties in Hawaii, Guam, Alaska and the U.S. Virgin Islands loan limits can be up to $625,000."
Types of VA Loans
VA Purchase Loan
One type of common VA loan is a VA purchase loan. As mentioned above, the ability to buy a home with NO down payment is a very attractive feature of a VA purchase loan.
Once a borrower has a COE, here are the steps to take to get a VA loan, when looking to purchase a home:
- Shop for and find a home within your budget. Negotiate a purchase price with the seller or the seller’s agent. Sign a purchase contract that is only in effect if your VA loan is approved.
- Shop for and select a lender. Interest rates and closing costs will vary from lender to lender, it pays to so some comparison shopping.
- Present your lender the COE. As mentioned above, lenders can assist with obtaining the COE.
- Provide the lender with all the required income and other documents. Stay in touch with the lender, to make sure that they have all they need to efficiently process the file.
- The lender will request that the VA assign a licensed appraiser to determine the fair-market value for the property. A Certificate of Reasonable Value will be issued. Borrowers may be required to pay for the credit report and appraisal, unless the seller agrees to pay.
- The lender will let you know decide whether to approve or turn down your loan application. Borrowers should be approved if they meet the lenders income and credit requirements and the property is appraised at a sufficient value.
- The borrower attends the loan closing. The lender or closing attorney explains the loan terms and requirements, as well as where and how to make the monthly payments. Sign the note, mortgage, and other related papers. Don’t hesitate to have your own lawyer review the paperwork before you sign it. Legal documents are confusing and no borrower wants to bind him or herself to a contract without knowing its terms.
VA Streamlined Refinance (IRRRL)
In addition to purchase loans, VA loans can be used to refinance a mortgage. If a borrower already has a VA loan, it makes sense to look into a VA Streamline refinance, also called an IRRRL (Interest Rate Reduction Refinancing Loan). IRRRLs have specific requirements. Only the original VA loan can be paid off in an IRRRL; no second mortgage that has been taken on the property can be included in the loan.
The great thing about IRRRLs is that they require very little paperwork, so the loan can be closed quickly. The VA does not require any appraisal of the property or any analysis of the borrower's credit worthiness. It can be the case that the lender itself will want an appraisal or to review the credit.
Getting a COE is not required for IRRRLs, as they re-use the Certificate of Eligibility that you obtained to get your first VA loan. While a borrower needed to be an occupant of the property when he or she originally took out the VA loan and obtained the VA Certificate of Eligibility, a VA Streamlined refi can be obtained when the borrower is no longer living in the home.
The new loan cannot be more than the payoff balance on the current VA loan plus the closing costs. Closing costs may include fees the lender charges to fund the loan and up to two discount points.
VA Refinance: Cash-out and Rate & Term
Refinance loans that are guaranteed by the VA are also available. Interested and eligible borrowers can apply for a VA refinance that only adjusts the interest rate and/or term of the loan, called a "rate and term" refinance. Borrowers can also apply for a cash-out VA loan. A VA cash-out loan that allows the borrower to access equity in the property, whether to consolidate debt, pay for home improvements, or use money for some personal needs.
In a cash-out loan, the borrower must be a resident of the property and the property must be the principal residence. The loan has to use the same borrower(s) as the original loan.
VA cash-out loans allow for refinancing up to 90% of the appraised market value of the home, unless a state's restrictions allow only a lower limit, plus the closing costs for the loan.
Specially Adapted Housing
Veterans or servicemembers with specific service-connected disabilities may be entitled to a grant from the Department of Veterans Affairs (VA) to construct an adapted home or modify an existing home to meet their special needs. As the VA states, "the goal of the Specially Adapted Housing (SAH) Grant Program is to provide a barrier-free living environment that affords the veterans or servicemembers a level of independent living he or she may not normally enjoy."
According to the VA, In order to apply for a SAH Grant, an eligible veteran or servicemember must:
- Download VA Form 26-4555 (PDF), Veteran’s Application in Acquiring Specially Adapted Housing or Special Home Adaptation Grant.
- Complete the form and submit it to your nearest VA Regional Loan Center. A list of all the regional centers can be found below or at the VA Web site.
- The VA also provides two separate fact sheets (Part 1 [PDF] and Part 2 [PDF]) about the SAH Grant program.
VA Reverse Mortgages
Although there have been attempts to legislate a VA reverse mortgage program, they have not been successful. As of December, 2012, there is no VA reverse mortgage program. Veterans can apply for any other reverse mortgage on the market, but will be treated the same as other borrowers.
VA loans may offer the best option for eligible and qualified borrowers. Borrowers that are eligible for a VA loan should still shop around for the best deal. Interest rates and closing costs will vary from lender to lender. A VA loan may be the best choice, but it is wise to compare the VA loan to a conventional loan. The funding fee that comes with the VA loan could make the VA loan more expensive than a conventional loan.
VA Regional Loan Centers
|Regional Loan Center||Jurisdiction||Street & Mailing Addresses||Telephone Number|
|Atlanta||Georgia North Carolina South Carolina Tennessee||Department of Veterans Affairs VA Regional Loan Center 1700 Clairmont Rd. Decatur, GA 30033-4032 (P.O. Box 100023, Decatur, GA 30031-7023)||888-768-2132|
|Cleveland||Delaware Indiana Michigan New Jersey Ohio Pennsylvania||Department of Veterans Affairs VA Regional Loan Center 1240 East Ninth Street Cleveland, OH 44199||800-729-5772|
|Denver||Alaska Colorado Idaho Montana Oregon Utah Washington Wyoming||Department of Veterans Affairs VA Regional Loan Center 155 Van Gordon Street Lakewood, CO 80228 (Mail: Box 25126, Denver, CO 80225)||888-349-7541|
|Honolulu||Hawaii Guam American Samoa Commonwealth of the Northern Marianas||Department of Veterans Affairs VA Regional Office * Loan Guaranty Division (26) 459 Patterson Rd. Honolulu, HI 96819|
|Houston||Arkansas Louisiana Oklahoma Texas||Department of Veterans Affairs VA Regional Loan Center 6900 Almeda Road Houston, TX 77030-4200||888-232-2571|
|Manchester||Connecticut Massachusetts Maine New Hampshire New York Rhode Island Vermont||As of April 2011 these states are serviced by the Cleveland office. Department of Veterans Affairs VA Regional Loan Center 1240 East Ninth Street Cleveland, OH 44199||800-729-5772|
|Phoenix||Arizona California New Mexico Nevada||Department of Veterans Affairs VA Regional Loan Center 3333 N. Central Avenue Phoenix, AZ 85012-2402||888-869-0194|
|Roanoke||District of Columbia Kentucky Maryland Virginia West Virginia||Department of Veterans Affairs VA Regional Loan Center 210 Franklin Road, SW Roanoke, VA 24011||800-933-5499|
|St. Paul||Illinois Iowa Kansas Minnesota Missouri Nebraska North Dakota South Dakota Wisconsin||Department of Veterans Affairs VA Regional Loan Center 1 Federal Drive, Ft. Snelling St. Paul, MN 55111-4050||800-827-0611|
|Winston/ Salem||Department of Veterans Affairs Winston-Salem Eligibility Center P.O. Box 20729 Winston-Salem, NC 27120||888-244-6711|
|*Although not an RLC, this office is a fully functioning Loan Guaranty operation for Hawaii.|
VA Loan Centers. Source: Veterans Administration