Arranging a down payment for a home can be a difficult task for first-time home buyers. However, it is possible for veterans, military personnel, and their families to purchase a home without the need for a down payment, thanks to VA loans.
âMost lenders require insurance if you don’t invest 20%,â says Lacey Langford, a US Air Force veteran, blogger and host of the Military silver show. âWith a VA loan, you can’t save money and you don’t need to pay for this mortgage insurance, although there are other fees you should be aware of,â she adds. .
VA loans aren’t just for buying a new home. It is also possible to refinance or obtain a home improvement loan to pay for home renovations.
Here is what you need to know about the different types of VA loans available and what to consider before getting one.
What is a VA loan?
A VA loan is a mortgage guaranteed by the United States Department of Veterans Affairs. VA loans are not actually issued by the federal government, according to Doug Nordman, a US Navy veteran and author of “The Military Guide to Financial Independence and Retirement”. Instead, VA guarantees that it will pay your lender up to 25% of the loan amount if you don’t repay the loan. It is a way to reduce the risk for approved lenders and encourage them to give loans to the military and veterans.
âOne of the biggest advantages of the VA loan is that borrowers can get a mortgage without a down payment,â Nordman said. âPlus, it’s possible to fund closing costs under this arrangement, all without needing to pay mortgage insurance,â he adds.
For those who cannot afford the down payment required by conventional mortgages or even FHA loans, a VA loan can be a good alternative. Plus, with a conventional mortgage, you usually have to pay for private mortgage insurance when you put less than 20%. A VA loan can get rid of this expense.
In contrast, Nordman points out that there are often more stringent requirements for VA loans. The home must meet certain inspection and appraisal criteria that might not be required with a conventional mortgage. Therefore, the closing time may be longer, which may be a problem for some sellers.
âWhile the VA loan is often a good deal for buyers, sellers can turn down an offer that is dependent on obtaining a VA loan,â he says. “In a sellers market, buyers using a VA loan might not even get a counter offer.”
Who is eligible for a VA loan?
Since VA loans come from private lenders and not from the federal government, lenders can set their own requirements in addition to those set by VA. For example, even though VA loans do not require a down payment and there are no minimum credit requirements, your individual lender may have additional criteria.
âNot all lenders will approve you for a zero down payment or if your credit is poor,â Langford says. âYou should also be aware that if you don’t have a down payment you will have to pay a higher finance charge,â she adds.
Apart from this, however, the main requirement is to obtain a Certificate of Eligibility (COE) from the Department of Veterans Affairs. To obtain a COE, you generally must have been on active duty for at least 90 days at some point in your military career or have served at least six years in the Selected Reserve or National Guard. Eligible surviving military spouses may also be eligible to receive a COE.
You can use your COE more than once, according to Langford. However, you must have paid off your first loan, or you can only borrow up to the amount you have repaid.
What Types of VA Loans Are Available?
There are different types of VA loans, and which one you should get depends on where you are on your homeownership journey. With a VA loan, all you need is a current COE that you can show your approved lender.
All VA loans have finance charges, which are set based on the type of loan you get as well as the amount you put in. Another factor that influences your fundraising costs is the number of times you’ve used your COE. Some borrowers, such as people with disabilities or Purple Heart recipients, may be exempt from financing fees.
Here is what you need to know about the different types of VA loans.
VA purchase loan
The VA purchase loan is designed to purchase an existing home. In general, these loans are intended for the purchase of a primary residence. It is possible to buy a property with up to four units, for example, if you want to rent the other units. You only need to live in one of the apartments for it to be considered your main residence.
âVA purchase loans are great for first-time home buyers,â says Nordman. âThe VA’s guarantee to the lender means that buyers could still qualify for a larger mortgage, even if they have lower credit scores,â he says.
Refinancing of VA collection
If you have built up equity in your home and want immediate cash flow, refinancing with withdrawal may be one way to go. Nordman suggests using a VA withdrawal refinance to refinance a loan that might have a higher interest rate, or using it to withdraw 100% of the equity you have accumulated.
Whether you can use your COE for a withdrawal refinance depends on whether you have used it in the past. If you refinance a VA loan, you may only be able to cash out an amount equal to what you have already paid off. However, if you have secured a conventional mortgage or other loan on your home and want to use VA cash refinance, you should be able to take full advantage of your COE.
VA IRRRL (Refinancing loan with reduced interest rates)
The IRRRL offers a streamlined process for refinancing your existing VA loan. If you’re hoping for a lower interest rate or monthly payment, an IRRRL may be a good choice. Plus, Nordman points out, if you qualify for a finance fee waiver, you can essentially refinance your VA loan at no cost.
On top of that, explains Nordman, if you can certify that the residence in question was your primary residence, you may be eligible for IRRRL even if you do not currently live in the property.
“This is particularly useful for active-duty military families who have transferred to a new duty station but still own the property and wish to take advantage of lower interest rates,” he said.
VA home renovation and improvement loan
A VA home improvement loan can provide you with a way to secure a home that may not meet the strict standards required for a VA home loan.
âPart of the loan is used to bring the home to these standards after purchase, but it also requires the homeowner to use VA-approved contractors and additional VA appraisals for post-renovation value,â Nordman said. âThe loan can only be used to bring the existing house up to standard, not for luxury or adding a new structure,â he adds.
For home improvements on an existing home, Nordman recommends looking at other loan products offered by your lender. Instead of using a VA loan to make the improvements, it is possible to use a more conventional home improvement loan, then, once the improvements are completed and the house has a higher value, use a VA withdrawal refi for pay everything back.
What type of loan is right for you
When deciding which type of VA loan is right for you, it is important to understand how each one works and to determine how it fits your situation. Nordman recommends sitting down with a mortgage broker who is familiar with the VA lender’s manual to help you determine what is best for your situation.
If you have access to a military base, talk to someone at the Family Support Center for an objective overview of VA loans and information on how to qualify.
Plus, Langford points out, a VA loan might not be the right choice for you. Depending on where you live and your income level, you may be able to get a USDA loan with no down payment and avoid some of the requirements of a VA loan. An FHA loan can also be a good alternative to a VA loan, Langford says, because it is often easier to obtain. However, it can be more expensive because you need at least 3.5% down payment and you will need to pay for mortgage insurance. It is worth considering all of your options carefully and researching the best rate before committing to any loan product or lender.
âCompare other mortgage options,â Langford says. “Sometimes the VA loan can be the best deal, but it’s not always the cheapest.”