A VA purchase loan is a home loan issued by a private lender with assurance that the government will cover a portion of the loan if there is a foreclosure. This pledge, called a guarantee, allows veterans to qualify for better terms on their loans.
If you are eligible, you can get a VA loan for a home you will occupy yourself or that a spouse and/or dependent will occupy if you’re still an active-duty service member. You may also be able to use a VA purchase loan to build or manufacture a home.
“You can’t use this type of loan to purchase an investment property or a secondary residence like a cottage,” says Gates Little, president and CEO of altLine at The Southern Bank Co.
An IRRRL can help you obtain a lower interest rate on a property that already has a VA-guaranteed loan. “This is a program that is very streamlined and geared towards refinancing existing VA home loans into lower rates with little costs involved,” says Brad Baker, vice president of underwriting and capital markets at Equity Now, a mortgage lender based in New York. “If you obtain a VA loan now, it is a good idea to keep this program in mind if (or) when rates start to drop again in the future.”
It may be possible to add an energy-efficient mortgage from the VA to a purchase loan or IRRRL. The VA also backs loans for home improvements and repairs, which borrowers may be able to add to a purchase loan or cash-out refinance.
The VA also issues home loans through the Native American Direct Loan program. The NADL program is for eligible Native American veterans, eligible spouses or veterans whose spouses are Native American. Loans can finance the purchase, construction or improvement of homes on federal trust land, or lower the interest rate on an existing VA loan through refinancing.
To qualify for a VA home loan, you’ll need to meet certain service requirements and obtain a Certificate of Eligibility. You can request a COE online, through your lender or via mail, and you can review the eligibility requirements on the VA’s website.
Since VA loans are backed by the U.S. government, lenders are able to offer competitive interest rates that can be lower than rates on conventional loans.
But while VA loan interest rates can be lower than conventional mortgage rates, borrowers need to be aware of the VA funding fee. “This is a fee designed to compensate for the down payment and mortgage insurance that aren’t part of the VA home loans,” Little says. This fee is a percentage of your total loan amount. You can pay the full fee when you close on your loan or roll it into your mortgage, and it is in addition to the interest and closing costs collected by your lender.
You can think of the VA funding fee as similar to the upfront mortgage insurance premium on Federal Housing Administration loans, Baker says. Not all borrowers have to pay the funding fee, however.
“Veterans with a VA-rated service-connected disability, or service members who are on active duty and who have received a Purple Heart are exempt from paying the VA funding fee,” Frueh says.
Your funding fee may vary based on the type of loan you get. You may also qualify for a lower funding fee on a purchase loan if you provide a bigger down payment or if it is your first time using a VA loan.
You can view the VA funding fee rate charts on the VA’s website.
In addition to potentially lower interest rates, VA loans offer a host of other benefits. One of the biggest benefits is that borrowers generally don’t need to make a down payment. “Making a larger down payment may lower the interest rate, but a VA loan allows you to consider purchasing a home even if you don’t have available funds for a large lump-sum payment,” says Wayne Brown, financial consultant at Dugan Brown and an Air Force veteran.
Be aware that while the VA does not require down payments, some lenders may require them.
“VA also provides veterans valuable oversight for VA-guaranteed mortgages,” Frueh says. “For instance, VA can intervene on the veteran’s behalf with the loan servicer if the veteran experiences a temporary financial difficulty that results in the veteran falling behind on mortgage payments. VA can help the veteran work with the loan servicer on home retention options to bring the loan current.”
Two other benefits that people often overlook, Brown says, are that there is no time limit on when you must use your VA loan and that there’s no limit on how many times you can use a VA loan. “After leaving service, eligibility will be redetermined based on the length of service and the type of discharge you received, but upon receiving eligibility, there is no statute of limitations on your VA loan,” he says.
If you have already used one VA loan, you will have to complete a form to request that the VA restore your eligibility, however.
To recap, the benefits of a VA loan include:
- No down payment required.
- No PMI.
- Potentially lower interest rates.
- Foreclosure avoidance assistance.
- No time limit, and it’s possible to use a VA loan more than once.
Yes, VA loans are assumable. This means you can sell your home to a qualified individual and have the buyer take over your existing loan. “To be assumed, federal law mandates that the loan be current and that the prospective purchaser meets VA’s credit underwriting requirements,” Frueh says.
Keep in mind that loan assumption can affect your ability to get a new VA loan. Eligible borrowers have a certain amount of money available through the VA home loan benefit, called their entitlement. If you let a nonveteran or a veteran without sufficient home loan entitlement assume your VA loan, you will only be released from liability for the mortgage, Frueh says.
You will not have your full entitlement restored unless the borrower assuming the loan is an eligible veteran who is willing and able to use his or her own VA home loan entitlement in place of yours, or until the loan assumer pays off the loan.
“Finally, the substituting veteran would have to prove occupancy of the home as their residence to use their VA home loan entitlement,” Frueh says.
While the VA limits the fees lenders can charge you at closing, you or the home seller will still have to pay certain closing costs, such as a loan origination fee, VA appraisal fee, title insurance and the funding fee.
The VA does not have a minimum credit score requirement to qualify for a VA loan. However, private lenders may have their own credit score requirements. Little says “the gold standard” is 620, but you may be able to get a loan with a lower score if you’re able to make a down payment.
In addition to your credit score, you should also expect lenders to evaluate your employment history.
“The biggest thing VA loan lenders will look at, other than your credit score, is your employment history, and it is not as straightforward as some people may think,” Brown says.
An applicant who is self-employed or works a commission job will need to show two years of income in that job. Borrowers with full-time jobs also need to provide two years of employment income, but that income does not have to come from the same job, Brown says. “For people who work part-time jobs, lenders will often review income over the last couple years specifically looking for increases and decreases in income with an emphasis on the most recent months.”
“VA requires lenders to assess a borrower’s ability to repay the loan based on a spectrum of criteria, to include the borrower’s income and credit history, and conduct a holistic review of their loan,” Frueh says. He encourages veterans to shop around before choosing a lender.
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