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Jun 2016

12 Things You Need to Know About a VA Loan

Are you thinking of buying a home? If you’re a military service member or Veteran, you may be eligible for a VA loan. And the great news is that many of the perks of this loan are unmatched by any other home loan option.

What is a VA loan?

A VA loan is a mortgage loan for service members that’s guaranteed by the U.S. Department of Veterans Affairs (VA). Its main purpose is to help Veterans finance a home purchase with favorable loan terms.

Who is eligible for a VA loan?

To qualify for a VA loan, you must meet certain income and credit requirements (similar to other loan programs) and have a valid Certificate of Eligibility (COE). While length of service, duty status, and conduct can also affect your eligibility for a VA loan, you may be able to obtain a COE if you belong to any of the categories below.

  • Veteran

  • Active duty service member

  • National Guard member

  • Reserve member

  • Surviving spouse

What do I need to know about a VA loan?

My husband and I recently purchased a house using a VA Loan, so I’m speaking from personal experience here, folks. I’m going to share with you 12 things that I think are the most important takeaways from my home buying experience with a VA loan.

1. VA loan are government-insured.

Like I mentioned before, the VA guarantees a portion of the loan will be paid back to the lender, in case the homeowner defaults. Government backing gives lenders the confidence to extend financing with great rates and terms. While the VA insures the loan, the government itself does not lend money for the loan, which I’ve learned is a common misconception. You actually get financing from a private mortgage lender, like Atlantic Bay, just like you would with a conventional loan.

2. No down payment is required.

Probably the biggest advantage of a VA loan is that qualified buyers can usually finance 100% of their primary home’s sale value. Almost all other loan options require at least some down payment.

3. There's no private mortgage insurance (PMI).

With most conventional loans, you’re required to pay mortgage insurance if you don’t put down at least 20%. But that’s not the case with a VA loan. With a VA loan, there’s no PMI, potentially saving you hundreds each month when compared to a conventional loan.

4. It comes with a mandatory fee.

One unique cost to this loan program is the VA Funding Fee, something I was previously unaware of. The Funding Fee is a mandatory fee applied to every VA purchase loan or refinance. It’s required by the VA, who uses it to cover losses on loans that may go into default. The fee is a percentage of the loan amount, and it’s based on whether this is your first-time using a VA loan, if you’re making a down payment, and if you’re purchasing or refinancing. The fee is listed as a closing cost, but you can finance it in addition to your loan amount. For example, hypothetically if your loan amount was $200,000 and your funding fee was $4,300 (active duty homebuyer, 0 down payment, first-time user), you could then finance a total amount of $204,300.

5. A VA appraisal is required.

One contingency of a VA loan is that you must get a VA appraisal. The VA appraisal is an evaluation of your proposed property value. An independent VA-certified appraiser inspects the condition of the home, compares surrounding sales, and makes a value assessment. The appraisal can be anywhere from $300 to $500. But don’t mistake this for the home inspection; these are two different things. Mainly, the appraisal’s purpose is to determine if your home is fair market value. This helps you, the VA, and your lender ensure you’re not overpaying for your property.

The VA appraisal typically takes around 14 days, but don’t be surprised if it takes longer.

Also, timelines vary by state based on specific state guidelines.

6. A VA loan is more forgiving with credit scores.

Since the VA backing reduces lenders’ risk, they can be more flexible with their terms, such as credit score minimums and ranges. The minimum will vary vary from lender to lender, but most are looking for a credit score of 620 or above. However, Atlantic Bay can potentially qualify down to a 580 credit score, with additional requirements. Credit ranges are much more broad as well, and interest rates are not based heavily on credit scores. For example, if you have an average credit score, you may get the same interest rate as someone with an excellent score. In addition, the VA program is more lenient with things like previous bankruptcy, short sales, and foreclosures than a conventional loan program.

7. Your closing costs could be covered by the seller.

With a VA loan, the seller can pay an unlimited amount of your closing costs and prepaids (settlement costs associated with the loan), including up to two discount points to buy down your interest rate. And they could also pay up to 4% towards your discretion, such as paying off your debts, appliances, etc. All of these terms, however, must be negotiated in your contract with the seller. Some loan options won’t allow closing cost assistance, meaning the buyer would be responsible for these up-front expenses. And no other program will allow the seller to pay discretionary costs, which makes VA loans very unique.

8. VA loans must be used for your primary residence.

Another thing you may want to know about a VA loan is that it can only be used for your primary residence, where you plan to spend the majority of your time. All that means is that you can’t use your VA eligibility to buy a temporary residence, like a vacation home. With that said, you should also be aware of the following.

9. You can own two homes at once with a second VA loan.

Let’s suggest you’re locating to a new duty station, but you want to keep and rent out your primary residence. Having a renter locked into a lease who will cover those old monthly payments can go a long way toward making this scenario work.

Veterans with enough remaining entitlement may be able to secure a second VA loan with little to no money down to purchase a home in their new area.

10. There's no prepayment penalty.

While you might not be planning to pay more than your required monthly mortgage payment, it’s nice to know that if you chose to do so, you won’t be penalized. I was so surprised to learn that some loan options actually charge you extra if you pay off your mortgage early – known as a prepayment penalty. But don’t worry, a VA loan doesn’t have one.

11. A VA loan is reusable.

Once you completely pay off a VA loan, you regain your full VA eligibility and can reuse it for another VA loan.

You can reuse a VA loan as many times as you want, as long as the previous loan is paid off.

And like I mentioned before, you can also have two VA loans at a time, if you have enough entitlement available.

12. A VA loan is assumable.

Your VA loan can also be assumed by someone else. That means that another buyer could take over your existing mortgage (as long as the lender and VA approves), basically a transfer of loan terms from current owner to a new buyer. The only contingency is that the new buyer must also be VA loan eligible. If the new buyer doesn’t have VA entitlement, your entitlement will remain attached to the loan even after assumption. However, this means that the current owner is basically putting their entitlement on the line, so beware and make sure your entitlement will be fully restored after assumption. Overall, a VA loan is an amazing option for service men and women to achieve homeownership. If you’d like to know if you’re eligible for this program, an Atlantic Bay Mortgage Group mortgage banker can help guide you through the process.