The Veteran Affairs (VA) loan program was created in 1944 by Congress and is designed to assist and support military service members and their families by providing 100% home financing guaranteed by the US Department of Veteran Affairs. As the US Federal Government does not directly fund loans, VA loans can only be issued by lenders or banks that have been approved by the US Department of Veteran Affairs.
There is no limit on the amount you can borrow for a VA loan. However, only 25% (up to the value of $113,275) of a VA home loan is guaranteed, meaning the maximum insured sum you can borrow is $453,100. If you are approved for a VA loan in a high-cost county, the maximum loan amount can increase up to $721,050.
In order to help fund the VA loan program, the Department of Veteran Affairs requires veterans to pay a variable fee called the VA Funding Fee. The rates of the VA funding fee differ depending on whether you are an active military service member, reservist, or National Guard member.
Who’s eligible for a VA loan?
In order to qualify for a VA loan, you must meet a minimum period of active service and either be a currently serving member or veteran of the US military. Spouses of deceased veterans can also access VA loan financing if they have chosen not to remarry. Just remember that you need to secure a Certificate of Eligibility from the Department of Veteran Affairs before reaching out to VA lenders.
What does a VA loan include?
Before purchasing a home with a VA loan, you need to understand the key features and underwriting standards of VA financing. We’ve listed two of the most important components of the VA loan program here:
- VA loans can only be used to finance approved primary property and development purchases – these include new or manufactured construction, single-family homes, one-unit properties, and condominiums.
- The VA loan program allows approved applicants to refinance existing mortgage loans in order to reduce interest repayments. Unless there is a conflict with state regulations, most VA loan refinancing agreements allow veterans to borrow up to 100% of the value of the refinanced property.
Why choose a VA loan?
Because of how simple it is to secure a VA loan, you might be tempted to rush straight into the application process. Before you do, take the time to understand the five most advantageous features of VA loans:
- You can secure VA financing with a 0% down payment. In fact, 80% of homes bought through a VA loan are via zero-down payment.
- Private lending institutions view VA loans as less risky than conventional loans. This assessment often translates to more competitive interest rates.
- VA loans are free from prepayment penalties, allowing you to pay off your house ahead of schedule.
- If you secure a VA loan, you can say goodbye to the prospect ofPrivate Mortgage Insurance (PMI).
- Due to more favorable underwriting conditions, you can secure a VA loan even if you have a higher than average debt-to-income (DTI) ratio.
Final Considerations When Choosing a VA loan
While VA loans have exceptionally attractive terms, it’s important to factor the impact of long-term interest repayments into your personal financial situation. If you are on top of your personal finances, there are a few other caveats we think it’s worth noting:
- VA loan conditions do not require a minimum credit score. However, VA approved lenders will still set a credit score benchmark on VA loans – aiming for a credit score above 620 is a good starting point.
- While the VA loan program eliminates or caps almost all upfront expenses in a home purchase, you still have to pay for out-of-pocket expenses like appraisal or realtor fees, especially closing costs.
- If you find yourself facing short sale, foreclosure or a payment default on a VA loan, contact the Department of Veterans Affairs or visit a VA Regional Loan Center. Depending on your personal circumstances, you may be eligible for the Service members Civil Relief Act (SCRA). If you qualify for the SCRA, it can help you negotiate forbearance and modification of your loan.
To learn more about VA loans and other good options for first-time and/or low-income home buyers, check out some of the resources below: