VA Loan Programs
Home Ownership
Even though the VA does not offer loans themselves, they do make it possible for a veteran to get a loan through a lender, banks, mortgage companies or savings and loan institutions, with perks that are not offer to all individuals. These include competitive interest rates, no down payment and loans available to those with bad credit who normally would not be approved.
The reasoning behind these special deals it the fact that the Federal government, through VA, will guarantee the loan for approximately 25% which makes lenders more willing to offer better deals on their loans because if they do not get paid by the borrower they know they will be paid by the Federal government which takes out the risk of nonpayment. Currently the limit on the amount that can be borrowed for a VA loan is $417,000 except for some counties in areas where there is a high cost of living such as those in Hawaii or Colorado. They do put a maximum on the amount they guarantee which is 25% on the borrowed amount and varies by counties based on the median home values estimated by the FHA or Federal Housing Administration.
When considering which type of home loan is right for you, it is important to look at both the pros and cons of a VA loan before beginning the process.
Pros:
- No downpayment
- Easier credit qualifying than conventional mortgage
- Lower closing costs
- No monthly mortgage insurance
- Loan is assumable
Cons:
- VA loans include funding fees which are 2% of the loan amount, slightly higher for reservists, although these fees may be rolled into the loan and are waived for vets with service-related disabilities. If you make a downpayment, the funding fee is reduced.
- VA requires that the property meets certain minimum standards at appraisal. If the property does not meet those standards, and the owner refuses to make the required repairs, the buyer has three options. To either pay for the repairs himself, switch to another type of financing such as a conventional or FHA loan, or find another property.
When choosing which VA lender to go with, keep a few points in mind that might make the decision easier. Some VA lenders have the ability to approve the loan on an “automatic basis”. This gives the lender the right to approve the loan without the approval of VA. This saves time for the buyer because, even though a VA appraisal is still required, you are not waiting initially for the approval from VA. Not all VA lenders have the authority to make this automatic approval. Also, the VA appraisal process can often be expedited if the lender participates in the VA’s Lender Appraisal Processing Program.
Another thing to keep in mind is the closing cost and the lenders willingness to negotiate rates and discounts. Even though VA loans are not subject to commissions or brokerage fees, the following closing costs are still able to be collected on VA loans: VA appraisal, title search, survey, credit report, recording fees, 1% origination fee and discount points. These are all charges due at closing that cannot be rolled into the loan amount except in the case of VA refinancing loans. Rates and closing costs can be negotiated with the lender and discounts can be given. There are many VA approved lenders available to homebuyers so choose wisely.
VA Loan Eligibility
All veterans meeting the eligibility requirements in one of the following categories and discharged under other than dishonorable conditions are eligible to receive a VA loan:
- Wartime Service – those who served in wartime having at least 90 days on active duty and discharged under other than dishonorable conditions. If served less than 90 days but were discharged for a service-connected disability you may also be eligible. Wartime eligibility includes service during the following times of war:
- World War II - September 16, 1940 to July 25, 1947
- Korea - July 27, 1950 to January 31, 1955
- Vietnam - August 5, 1964 to May 7, 1975
Peacetime – those servicing in periods of peace must have served at least 181 days of continuous active duty and discharged under other than dishonorable conditions. If served less than 181 days but were discharged for a service-connected disability you may also be eligible.
Peacetime eligibility includes service during the following times of peace:
- July 26, 1947 to June 26, 1950
- February 1, 1955 to August 4, 1964
- May 8, 1975 to September 7, 1980 (enlisted)
- May 8, 1975 to October 16, 1981 (officer)
Enlisted Service After September 7, 1980; Officer Service After October 16, 1981 - those serving as enlisted or officers during the before mentioned dates and meeting the following criteria:
Must have completed 24 months of continuous active duty service or the full period, at least 181 days, for which you were ordered or called to active duty and received a discharge status of other than dishonorable conditions, OR
Must have completed at least 181 days of active duty service and been given a hardship discharge or Early Out or have been determined to have a compensable service-connected disability
You were discharged with less than 181 days of service due to a service-connected disability
It is possible that some veterans who were discharged because of involuntary reduction in force, certain medical conditions or for the convenience of the government may be eligible for VA loans. A Veterans Affair officer should be contacted to determine eligibility if any of these situations apply.
Gulf War Service – those serving on active duty from August 2, 1990 through the present who meet the following criteria:
Completed 24 months of continuous active duty service or the full period, at least 90 days, for which you were called or ordered to active duty and received a discharge status of other than dishonorable conditions, OR
Completed at least 90 days of active duty service and been given a hardship discharge or Early Out or have been determined to have a compensable service-connected disability, OR
You were discharged with less than 90 days of service due to a service-connected disability.
It is possible that some veterans who were discharged because of involuntary reduction in force, certain medical conditions or for the convenience of the government may be eligible for VA loans. A Veterans Affair officer should be contacted to determine eligibility if any of these situations apply.
Selected Reserves or the National Guard – those who have completed a total of six years in the Selected Reserves or National Guard, you must be a member of an active unit, attended required weekend drills and two-week active duty for training AND
Were discharged with an honorable discharge
Were placed on the retired list, OR
Were transferred to the Standby Reserves or an element of the Ready Reserves other than the Selected Reserve after service characterized as honorable, OR
Continue to serve in the Selected Reserves
It is possible that some veterans who completed less than six years but were discharged for a service-connected disability may still be eligible.
The following individuals may be eligible for obtaining a VA loan. Contact a local Veterans Affair office to see if you qualify:
- Those United States citizens who served in the armed forces of a government allied with the US during World War II
- Those with service as members in certain organizations such as cadets at the United States Military, Air Force, or Coast Guard Academy, midshipmen at the United States Naval Academy, merchant seamen with World War II service and Public Health Service officers.
- Unmarried surviving spouse of a veteran who died on active duty or as a result of a service-connected disability
Those not eligible for a VA-guaranteed home loan are as follows:
- Those serving in World War I
- Those serving on active duty only for training in the Reserves and active duty only for training in the National Guard (unless activated under the authority of Title 10, U.S. Code, which is the United States Code for the Armed Forces, the governing military laws and powers)
- The above mentioned veterans, however, may be eligible for a HUD/FHA veterans’ loan.
- Those veterans receiving a general discharge or one under other than honorable conditions may be eligible to receive a VA loan, however, it is much more difficult to attain this eligibility.
A Step-by-Step Guide to Obtaining a VA Loan
Although not necessary, setting up financing before choosing the home you want to buy can significantly speed up the buying process and reduce the stress purchasing. The VA loan application process can, however, be initiated after a home is chosen and price is negotiated. VA loans can only be used for homes serving as a primary residence. The following steps will guide you through the VA loan process.
- Obtain a Certificate of Eligibility.
You must first secure a certificate of eligibility. To do this you must submit an application, VA Form 26-1880, along with proof of your military service. Most VA lenders will supply you with the form and assist you with filling out this form. It is possible, if you are already in the VA system for other reasons such as you are currently receiving VA health care or educational benefits or vocational rehab, the lender may be able to receive a certificate of eligibility for you on the Internet through the Automated Certificate of Eligibility system which can establish and issue an online Certificate of Eligibility. If this is not the case, the application and proof of military service must be mailed to:
VA Loan Eligibility Center
PO Box 20729
Winston-Salem, NC 27120
1(888)244-6711
Proof of military service – if discharged after January 1, 1950 but before October 1, 1979 a photo copy of DD Form 214 should be included in the application. If discharged after October 1, 1979 a photo copy of DD Form 214 copy 4 should be included in the application.
For Selected Reserve or National Guard members documentation needs to be provided confirming at least six years of honorable service. Servicemembers discharged from the Army or Air Force National Guard should submit NGB Form 22, Report of Separation and Record of Service, or NGB Form 23, Retirement Points Accounting. Servicemembers discharged from the Selected Reserve should submit a copy of your latest annual points statement.
- Apply for the Loan
There is a great deal of documentation that is required to get approval for the VA loan. First you will need to sign a release allowing the lender to pull your credit report. Also bank account amounts and verification and employment verification must be supplied. The lender will inform you of any other necessary paperwork that needs to be submitted. If you are applying for pre-approval, your lender can take the approval information and advise you by recommending a price range that would best suit your current financial situation when choosing a home for purchase. The application for loan can, however, be submitted after a home has been chosen. VA loans can be used for several types of properties including single-family homes, townhouses, condominiums or new home construction.
Bankruptcy’s effect on a VA loan – It is possible to receive a VA loan if you have had a previous bankruptcy under certain conditions. The loan will be denied if you are currently in proceedings for bankruptcy. If, however, it has been more than two years since the bankruptcy was discharged there is a good chance they will not consider this an issue when evaluating the loan. If it has been within the last two years it will be necessary for you, and spouse if applicable, have reestablished satisfactory credit AND that the bankruptcy was due to circumstance beyond your control such as illness, or unemployment. If it has been less than a year since the discharge of the bankruptcy, the likelihood being able to prove satisfactory credit are slim, without which you would not be approved for the VA loan.
- A VA Appraisal
Once a home has been chosen and an offer has been negotiated and accepted, you must now contact VA to get a loan number and appraiser. A VA appraiser will be sent out to evaluate the home and compare it to similar properties on the market to determine a fair market value for the home. A report is sent to the VA for review and if approved a Certificate of Reasonable Value will be issued. The certificate determines the maximum allowable loan amount for the property. Make note that this VA appraisal is not done to determine the condition of the property. For this a certified home inspector should be called in. The VA appraisal is done for the purpose of guaranteeing the loan, not the condition of the property.
- Sealing the Deal
The closing is the final step in the home buying process. This can occur after the VA has issued the Certificate of Reasonable Value and the lender has prepared the loan. The closing can take place in a variety of locations such as the title company’s office, the escrow office or a lawyer’s office. It is at this time that the remaining funds due, deed of title, title insurance policy and financing papers are distributed to the proper individuals. After closing is complete, you can take possession of your new home.
Death of the borrower does not result in the payoff of the VA loan. If this happens the estate becomes responsible for the loan. The co-borrower, or in some cases spouse, will still be required to make payments until the loan is paid in full or the property is sold and the loan is repaid at closing. Mortgage life insurance can be obtained through private insurance companies if this is a service in which you are interested.
Downpayments
VA home loans do not require downpayments, however, there are some exceptions to this rule:
It is the policy of some lenders to require a downpayment from their clients. If this is the case with the lender you have chosen but you do not want to put a downpayment toward the home, you must go with another VA approved lender.
If the agreed upon price for the home you have chosen exceeds the reasonable value determined by the VA appraisal, it would be necessary to make up the difference between that price and the maximum loan amount the VA is willing to pay. Be extremely cautious when considering purchasing a home at higher than appraised value. If there are not extenuating circumstances that would cause the value of the home to increase and meet the purchase price, odds are you will take a loss on the home in the future.
VA Refinancing
Refinancing a conventional mortgage with a VA loan can be done for a variety of reasons.
To secure a lower interest rate
To take out some of the equity built up in the home
To pay off other debts
The following is a closer look at these situations.
VA Interest Rate Reduction Loan – This is for individuals already holding a VA loan who want an interest rate reduction. With this loan there are no out-of-pocket costs, no maximum loan amounts, no monthly mortgage insurance, no appraisal required and no income or credit check required. A small funding fee, which can be rolled into the loan itself, is the only cost required. The following forms need to be submitted when applying for this type of loan:
- VA Form 26-0285
- VA Form 26-0286
- VA Form 26-8320
- VA Form 26-8998
- VA Form 26-8923
- VA Form 26-1820
- VA Form 26-8937
- HUD-1 Settlement Statement
- VA Form 26-0503
- VA Cash-Out or Debt Consolidation Refinance
This loan is done when you would like to use the equity in your home for things such as home improvements or debt repayment. When refinancing your VA loan you can cash out up to 90% of the value of the home.
Conventional Loan to VA Loan
Switching from a conventional loan to a VA loan can be done with only paying a funding fee which can be rolled over into the loan amount and will provide the following benefits:
No out-of-pocket closing costs
No monthly mortgage insurance
Better interest rates usually available to those with poor credit than the conventional loan.
