Home ownership is often considered to be part of the American Dream. Thankfully, achieving this dream can be easier for many veterans if they use a VA loan to buy their house.
The VA Home Loan Guaranty Program was created shortly after World War II to help returning veterans buy a home. In short, the program makes it easier for qualifying veterans to buy a home by guaranteeing a portion of the loan value. This reduces the lender’s risk and makes them more willing to extend loans.
VA home loans have other benefits. In general, it can be easier to qualify for a VA loan than a similar traditional mortgage. The VA does not have a minimum credit score requirement, though most lenders do require a credit score of 620 or higher. VA loans also allow homebuyers to finance 100% of the mortgage, including closing costs, origination fees, and funding fees. VA loans do not require buyers to purchase Private Mortgage Insurance, a costly insurance program most lenders require when buyers put down less than 20% of the sale price.
Most conventional mortgages, however, require buyers to put down at least 5% – 10% of the purchase price, along with buying the aforementioned PMI policy, which can cost several hundred dollars per month.
Lastly, VA loans often have slightly lower interest rates than a comparable conventional mortgage — assuming similar loan terms, credit scores, and other factors — making the loans more affordable.
There aren’t many disadvantages to using a VA loan either. However, one notable downside is the VA Loan Funding Fee, which can add several percentage points to the cost of your loan. The VA waives this fee if you have a service-connected disability rating.
VA home loan eligibility
In general, you may be eligible to use the VA loan program if:
- You served at least 90 consecutive days on active duty during wartime.
- You served at least 181 consecutive days on active duty during peacetime.
- You have completed six years or more “Good Years” in the Guard or reserves
- You are the un-remarried surviving spouse of a service member who died on active duty or from injuries sustained in the line of duty.
Being “eligible” for a VA loan is not the same as “qualifying” for the loan. The first simply means you are eligible to use the benefit. However, you must still meet the lender’s financial qualifications before loan approval.
This means the authorized VA lender will review your credit score, income, debt to income ratio, and other factors to ensure you can qualify for the mortgage.
How to use your VA home loan
Buying a house with a VA loan is similar to buying a house with a conventional mortgage. However, there may be a little more paperwork and there are some restrictions on the types of properties you can purchase.
To begin with, you will need to obtain a Certificate of Eligibility (COE). You can apply online through the VA’s eBenefits portal, by mail through the VA, or have your lender request it on your behalf.
I have used the VA loan to purchase two homes. In both cases, I had my lender request the certificate, but if you choose a lender that doesn’t process many VA loans, you may consider doing this yourself.
The VA also limits which types of homes you can purchase. A home purchased with a VA loan must be used as your primary residence, leaving vacation homes, investment properties, and undeveloped land out. You can, however, buy a multi-family property of up to four units if you intend to live in one of the units. You can also buy an undeveloped lot if it is part of a VA Construction Home Loan and the land will be developed as part of the home purchase.
There are some additional limitations regarding manufactured homes, condos, mobile homes and some other types of homes. I recommend visiting the VA website for more information if you are interested in buying those types of properties.
Where to get a VA loan
Most lenders can process a VA loan, but some have more experience than others. I recommend getting at least five rate quotes when buying a home. You can do this by visiting the bank’s website or by calling their home loan unit.
Keep in mind interest rates will vary based on many factors, including market conditions, home price, location, your credit score, your income, your debt to income ratio, cost of origination fees, points on the loan, and other factors. So, it’s a good idea to compare quotes from several lenders.
I’m a bit of a money nerd, so for my last loan, I created a spreadsheet to track the interest rates, closing costs, cost of points, and other factors when I was comparing lenders. The setup process took about 10 minutes. Then I spent the next hour making phone calls. Two lenders tied for the lowest interest rate and loan origination fees. I chose the one that had a great reputation in the military community.
It’s also a good idea to compare the cost of a VA loan to a traditional mortgage. For many veterans, the VA loan will be the better option, but in some cases, a conventional mortgage may cost less. It pays to compare!
