To help offset personal sacrifices, Armed Forces personnel enjoy many direct and indirect financial benefits.

If you’re a current or former member of the Military and considering buying a home, there’s one benefit you need to know more about the VA loan. Read on to learn how you can save thousands of dollars as a homeowner.

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What is a VA loan?

According to the US Department of Veterans Affairs, a VA loan is “a home loan collateral benefit…to help you buy, build, repair, preserve, or adapt a home for your personal occupancy.” It is one of the best economic benefits that members of the armed forces can receive.

VA Loan Basics

Like conventional mortgages, most VA loans are issued by private lenders. However, they are backed (in most cases up to $417,000 in loan value) by the full faith and credit of the US Federal Government.

That guarantee reduces the risk for lenders and allows them to offer more favorable terms, which may include lower interest rates and a private mortgage insurance (PMI) waiver on loans with loan-to-value (LTV) ratios above 80%.

It also allows lenders to originate VA purchase loans with no down payment required, putting homeownership within the reach of servicemembers with limited personal savings. Conventional loans require down payments, typically up to 20% of the property’s value. Other types of homeowner-friendly loans, like FHA loans, also require a down payment.

History of the VA Loan Program

The Federal Government has guaranteed home loans to veterans since 1944 when Congress passed the Servicemen’s Readjustment Act (SRA). The SRA authorized the VA to guarantee mortgage loans made by qualified lenders.

Initially, this authorization only covered loans made to veterans who purchased non-modular homes. In 1970, Congress amended the SRA to cover loans made on mobile homes. In 1992, the law was further expanded to virtually all active duty and honorably discharged veterans of the Armed Forces, as well as members of the Army Reserves and National Guard who served honorably for at least six years. In some cases, former spouses of military service members are also eligible for VA loan guarantees.

The SRA provides other financial benefits and protections for certain classes of servicemembers, including a hard 6% cap on mortgage interest rates during active duty.

 

Types of VA Loans and Grants

VA loans and financial grants come in several types:

  • Purchase Loan – A purchase loan is designed to help a qualified service person finance the purchase of an owner-occupied home with no down payment. Purchase loans can do any of the following: buy an existing single-family home; purchase a condominium unit in a VA-approved project; build a new construction house; simultaneously buy and renovate a home (similar to an FHA 203k rehab loan); or buy a manufactured home or lot for a manufactured home you already own.
  • Cash-out Refinance Loan: A cash-out refinance loan cash is designed to replace an existing mortgage on a home the borrower already owns while providing the borrower with a one-time, unrestricted cash payment. The existing mortgage does not have to be a VA loan. Cash-out refinance loans are similar to home equity loans, which also allow you to borrow against the equity in your home, but they differ in a few important ways: They replace existing mortgages (home equity loans do not ), usually (but not always) have lower interest rates than home equity loans, and have closing costs (home equity loans don’t). Many lenders allow loan-to-value ratios of up to 100% on VA-backed cash-out refinance loans, as opposed to 80% on most home equity loans and lines of credit. So, if you still owe $100,000 on a $150,000 mortgage and your home is worth $200,000, your cash-out refinance loan can be as large as $200,000, $100,000 of which is available to withdraw and do what you think is convenient.
  • Interest Rate Reduction Refinance Loan (IRRRL) – Also known as the VA Streamline Refinance Loan, this product allows you to refinance an existing VA loan and secure a lower interest rate without going through the loan application process GO for the second time. Unlike cash-out refinance loans, IRRRLs cannot be used to tap your home’s equity for cash, except for a $6,000 allowance for energy-efficient home improvement projects. Although you do not need to go through a credit check or other aspects of the typical mortgage underwriting process, you do need to show that you live in the home against which the loan is secured.
  • Native American Direct Loan (NADL) Program: This is a newer and less common type of VA loan designed specifically for service members and veterans of Native American origin. Unlike purchase and refinance loans, it is a direct loan, which means that the VA acts as the lender and servicer. It is always structured as a 30-year, fixed-rate loan, and must be used to “finance the purchase, construction, or improvement of homes on Federal Trust Land (reserve land), or to refinance a prior NADL to reduce the interest rate. ”
  • Adaptive Housing Grants – These two non-loan products (Specially Adapted Housing Grants and Specially Adaptive Housing Grants) are for veterans with “service-connected permanent and total disabilities” or disabilities who qualify for disability compensation from the 100% according to the VA Qualification Program Disabilities and are not expected to improve over time. Eligible disabilities include loss of use of both legs or arms, loss of use of one leg and one arm, severe burns and blindness in both eyes, and severe respiratory injuries. Veterans can use both grants to fund or offset the cost of building ADA-friendly homes from scratch, purchasing already-adapted homes, purchasing and retrofitting currently non-adaptable homes, or retrofitting already-occupied homes.
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VA Funding Fee

VA home loans have a special fee that does not apply to other home loans: the VA financing fee. This fee varies depending on the applicant’s branch of service and down payment but generally ranges from 0.5% to 3.3% of the purchase price.

The fee structure is as follows:

  • First Time Purchase Refinance Borrowers (Veterans) and Cash Out: 2.15% for down payments less than 5% (including no down payment); 1.50% for advances between 5% and 10%; 1.25% for down payments of 10% or more
  • First-Time Purchase and Cash Out Refinance Borrowers (Reservists and National Guard): 2.40% for down payments less than 5% (not including down payment); 1.75% for advances between 5% and 10%; 1.50% for down payments of 10% or more
  • Refinance Borrowers (Veterans) of Subsequent Purchases and Cash Out: 3.30% for down payments less than 5% (including no down payments); 1.50% for advances between 5% and 10%; 1.25% for down payments of 10% or more
  • Subsequent Purchase and Cash Out Refinance Borrowers (Reservists and National Guard): 3.30% for down payments less than 5% (including no down payment); 1.75% for advances between 5% and 10%; 1.50% for down payments of 10% or more
  • IRRRL (all classes of service members): 0.50%
  • NADL Program Loans (all classes of servicemembers): 1.25% for a purchase loan; 0.50% for a refinance loan
  • Manufactured Home Loans, Non-Permanently Attached (All Types and Classes): 1.00%
  • Veterans with service-connected disabilities (all types): 0.00%

You can pay the financing fee at closing or include it in the value of your loan, although bundling results in a higher monthly payment. For a complete overview of VA Funding Fees, see the VA Funding Fee Table.

 

VA Loan Benefits and Limitations

VA loans have some useful (and potentially lucrative) benefits not available to other classes of borrowers:

  • No Down Payment Required – For cash-strapped borrowers, this is the biggest advantage of a VA-backed loan. Most other types of home loans require at least 3%, and many lenders prefer 10% or more. Keep in mind that some lenders still require a down payment on VA loans, but the industry is competitive and you may be able to shop around to avoid this requirement.
  • No PMI Required – VA-backed loans do not require private mortgage insurance. By contrast, conventional loans issued at an LTV greater than 80% require PMI until the borrower’s LTV falls below 78% (or 80% if the borrower requests early removal of PMI). Depending on the principal of the loan and the value of the down payment, this can save anywhere from a few dollars to several hundred dollars per month compared to a conventional loan with PMI.
  • Relatively lenient underwriting: Lenders require VA loan applicants to meet lower credit standards than conventional home loan applicants. Even if you have fair or average credit, you may still qualify for a VA-backed loan.
  • Limits on Required Closing Costs: Borrowers eligible for VA loans do not have to pay certain closing costs, including underwriting fees, escrow fees, attorney fees, and document processing fees. The lender can partially offset its losses on these disallowed items by charging the borrower an origination fee of up to 1% of the loan principal. Otherwise, the seller may agree to pay them (since it’s quite common for sellers to pay closing costs), the buyer’s agent may issue an agent credit at closing and take a hit in commission, or the lender may simply consume the cost through a loan from the lender at closing.
  • VA Inspection for New Construction Homes – When a VA loan is used to finance a new construction home, the VA sends licensed inspectors to assess construction progress and confirm that the home meets VA specifications. At a minimum, the builder must provide a one-year warranty on the new home. Some builders offer warranties of up to 10 years, providing crucial peace of mind for new homeowners.
  • No Prepayment Penalties – VA loans do not carry prepayment penalties. If you want to avoid interest charges by expediting your loan payoff or making additional payments toward your principal, you can do so without penalty. Some lenders charge substantial prepayment penalties, often up to 80% of six months’ interest, which can be more than $10,000 on a large loan.
  • Assumability – VA loans are assumable, which means they can be transferred from seller to buyer with little (or no) change in rates and terms. This is extremely useful in a rising interest rate environment. However, the buyer still has to cover the difference between the remaining loan balance and the home’s appraised value, either by putting up cash or by taking out a second mortgage.
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VA Loan Limitations

VA loans come with some important limitations and restrictions:

  • Loan Principal – While there is no upper limit to the value of the property your loan is attached to, the VA guarantees loan principal only up to $417,000, the limit between conventional mortgages and jumbo mortgages. This upper limit can be lifted in certain regions with high housing costs, primarily in Alaska, Hawaii, and major coastal metropolitan areas, such as San Francisco.
  • Cash-out Refinance Appraisal and LTV – Lenders generally cap cash-out refinance LTVs at 100%, which means you can’t borrow more than the appraised value of your home. An appraisal is required during the underwriting process.
  • IRRRL Interest Rate – Unless you are refinancing an adjustable-rate mortgage (ARM) into a fixed-rate product, your IRRRL interest rate should be lower than the rate on your original loan.
  • IRRRL Income Restrictions – You must use your IRRRL income to pay off your existing VA loan or invest in qualified energy efficiency improvements.

VA Loan Eligibility Requirements

VA loan eligibility requirements vary based on the applicant’s branch of service, length, and dates of service, and discharge status. (Service members dishonorably discharged are not eligible for VA loans under any circumstances.)

Eligibility Requirements for Non-Dishonorable Servicemembers

As of September 8, 1980, Armed Forces personnel who have provided at least 24 consecutive months of service in active or non-active duty are eligible for VA loans. Those called to active duty at any time during their careers are eligible after serving at least 90 to 181 days on active duty, depending on when the service occurred. Those currently on active duty are eligible after serving at least 90 consecutive days on active duty.

As of August 2, 1990, National Guard and Reservist personnel who gave at least 90 consecutive days on active duty are eligible for VA loans. National Guard and Reservist personnel who did not give at least 90 consecutive days on active duty are eligible once they enter at least six years in their respective branch of service and meet any of the following criteria:

  • Retired (included in the retired list)
  • Transferred to a Reserve status other than Reserve Selected (including Reserve On Hold or Reserve Ready)
  • Stay in Selected Reservation status
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For more information, see the VA Eligibility Chart.

 

Other eligible classes

Others are also eligible for VA loans:

  • Surviving Spouses – Several types of surviving service member spouses are eligible for VA loans. These include unmarried spouses of service members who died in service; unmarried spouses of service members who died from a service-connected disability; surviving spouses who remarried after December 16, 2003, and after their 57th birthday; and surviving spouses of totally disabled veterans whose death cannot be conclusively attributed to disability.
  • Naturalized United States Citizens – This class includes individuals who served in certain foreign armies allied with the United States during World War II and subsequently became naturalized United States citizens.
  • Members of Certain Service Organizations Aligned with the Armed Forces: This class includes individuals who served as cadets in the US Military Academy, Air Force Academy, or Coast Guard Academy as officers of the military service. public health; as midshipmen at the United States Naval Academy; and officials from the National Oceanic and Atmospheric Administration.

Obtain a certificate of eligibility

Once you have determined that you are eligible for a VA loan, you may need to obtain a Certificate of Eligibility (CoE) to present to your lender. Although you do not need a CoE to obtain an IRRRL, your lender will not originate a VA purchase or cash-out refinance loan without a valid CoE.

The evidence required to obtain a CoE varies by service member category. The general requirements are the following:

  • Veterans of the Armed Forces: Department of Defense Form 214 (DD214), which includes a full explanation of the nature of the separation and character of service.
  • Active duty service members – A signed statement of service describing the service member’s date of entry into service, personal information (including date of birth and social security number), and lost service time (if applicable).
  • Current or former Reservists and National Guardsmen with active duty experience: Department of Defense Form 214 describing the nature of the separation and the character of the service.
  • Current Reservists and National Guardsmen with no active duty experience: A signed statement of duty outlining the total length of service and time lost.
  • Discharged Reservists with no active duty experience: Evidence of honorable service (may vary on a case-by-case basis) and a copy of the most recent retirement points statement.
  • Discharged National Guardsmen with no active duty experience – Service records and separation reports for each leg of National Guard service or a retirement point ledger statement with accompanying evidence of honorable service.
  • Surviving Spouse Receiving Dependency and Indemnity Compensation (DIC) Benefits: Veteran’s Form DD214 (if available) and  VA Form 26-1817.
  • Surviving spouse not receiving DIC benefits: Veteran’s DD214 (if available), VA Form 21-534, Death Certificate or Department of Defense Claim Report (DD1300), and marriage license. These documents should be sent to the spouse’s local VA Compensation and Pension office for processing.

How to Apply for Your CoE
The easiest way to apply for a CoE is online at the VA eBenefits portal. You can also apply with your lender during the underwriting process, although not all lenders have this ability.

If you prefer to apply offline, you can complete and mail VA Form 26-1880 (Application for Certificate of Eligibility)  with the appropriate CoE evidence for your class of service. If you are a surviving spouse, you must complete a paper copy of VA Form 26-1817 and give it to your lender to send to the VA or mail it directly to the VA.

Once you have your CoE in hand, you can use the VA website to find a qualified VA loan originator and begin the underwriting process. Learn more about applying for a CoE on the VA Certificate of Eligibility page.

 

Conclusions

Serving in the Armed Forces is a chore, just like choosing to spend your life with a career service member. The least the Federal Government can do to honor and reward the sacrifices made by service members and their loved ones is to make it easier for them to buy their own homes. No wonder private lenders have issued nearly 20 million VA-backed loans since the program’s inception.

In an increasingly tumultuous and uncertain world, peacekeepers deserve safe spaces of their own.

Have you taken advantage of benefits like VA loans? What other services should be offered to current and former military members?