What are VA Loans? The federal government has special programs set aside for veterans, active service members, and spouses of those in military service. VA loans are issued by private lenders and guaranteed by the federal government’s U.S Department of Veteran’s Affairs. These loans are notable because they require no down payment.
VA Loans were created towards the end of World War II with service members in mind who would be returning from the battlefield with few options towards purchasing a home. This goal of helping service members is still in place. This makes a VA Loan as appealing as ever.
VA Loans for military borrowers offer many advantages over traditional mortgages. The most important advantage is the zero percent down option. Traditional mortgages require up to 20 percent down for the purchase of the home. With a VA Loan, qualified borrowers pay nothing down.
Although the federal government is responsible for the creation of the program, they seldom offer the loans. Instead, they leave the financing to private institutions.
Subsequently, these lenders have much more leeway and security in the issuance of the loans. This means if a borrower cannot repay the loan for whatever reason, the government then steps in to cover the lender. However, while the VA does not set limits on the amount that can be borrowed, it does set limits on the amount of liability it will cover. However, having the backing of the federal government means the lender can offer more favorable terms.
Conventional loans also require Private Mortgage Insurance (PMI) for any loan that is financed for more than 80% of the home’s value. Since the VA Loans have that federal protection, PMI is not required. Lenders can also afford to loosen qualification standards.
VA Loans also allow home loans to be paid off early without pre-payment penalties and can even offer relief should a borrower run into any trouble paying back the loan.
To be approved for a VA Loan, borrowers must be able to prove service eligibility put forth by the Department of Veteran’s Affairs. This can vary from person to person. The main factors are length of service, service commitment, and character of service. Veterans who have been dishonorably discharged would not receive VA consideration.
While there are no income requirements, borrowers must be able to provide evidence of stable income in order to meet monthly requirements. They must also have enough residual income left over each month after making the new mortgage payments. However, service members can count their Basic Allowance for Housing (BAH) towards effective monthly income.
Private lenders may also issue additional eligibility requirements beyond what the federal government requires. Just like in a conventional loan, lenders will require both a positive credit score and debt-to-income ratio. The home must also be lived in by the recipient of the loan.
Once the service borrower can prove eligibility, they must then obtain a Certificate of Eligibility (COE). This can be done online, through a lender, or through the mail. Once completed, this lets any potential lender know a VA-backed loan is permissible.
Like any other mortgage, service borrowers may have many questions concerning a VA-backed loan. Those looking to secure a loan should find a trusted lender with VA experience to walk them through the potentially-complex process.