Home loans from the Department of Veterans Affairs (VA) have increased exponentially in recent years due to the recession in the US economy. This economic downturn has resulted in banks tightening lending standards for conventional loans. The rise in VA loans is due in large part to the fact that they are easier to qualify for than conventional mortgages and are one of the few mortgage options available to qualified borrowers with no down payment.
VA loans often offer lower interest rates than other types of loans and are available for the “full fair value” of a given property. Consequently, there is no down payment required as with other government programs like FHA, which requires a minimum down payment of 3.5%.
So what is a VA loan? VA Loans are home mortgages guaranteed by the US Department of Veterans Affairs, however they are not a direct lender. The loan is made through a private lender (of your choice) and is VA guaranteed as long as guidelines are met. What are the guidelines and who really qualifies for a VA loan? Below are the seven basic steps you will need to take to successfully obtain a VA home loan.
Step One: Determine Eligibility
Most members of the armed forces (veterans, reservists, and members of the National Guard) are eligible to apply for a VA loan. Military spouses who died on active duty or as a result of a service-connected disability may also apply. Active duty members qualify after about six months of service.
Reservists and National Guard members must wait six years to apply, unless they are called to active duty, where they gain eligibility after 181 days of service. However, during periods of war, members are generally eligible after 90 days of service. In consideration of your service status, loan applications may differ. VA regional office staff can assist you with any additional eligibility questions.
After pre-determining your eligibility, the first step for potential borrowers is to obtain a Certificate of Eligibility (26-1880) before applying for a loan. At this time, you will need to select a VA Accredited Loan Specialist who will help you move through the loan process, including accessing and submitting this online eligibility form.
Step Two: The Pre-Approval Process
Before you begin step two of the VA loan process, it’s critical that you have obtained your credit report early with all three credit reporting agencies to see what your FICO credit score is. You should carefully examine the report for errors and/or identity theft, taking care of any such issues beforehand. Although Veterans Affairs does not require a minimum score for a VA loan, most lenders have internal requirements, asking for a credit score of 620 or higher.
Once you have completed this important task, you will provide this information to your VA loan specialist. They can answer any questions you have and help you determine the loan amount you’re eligible for through a pre-approval process. Most real estate agents require the pre-approval process before working with you to find a home. It serves to give you peace of mind and a price range you can afford based on a pre-approved amount.
To get a VA loan, the law requires that you:
• Applicant must be an eligible veteran with available entitlement.
• The loan must be for an eligible purpose.
• The veteran must occupy or intend to occupy the property as a home within a reasonable period of time after closing on the loan.
• The veteran must be a satisfactory credit risk.
• The income of the veteran and spouse, if applicable, must be shown to be stable and sufficient to meet mortgage payments, cover home ownership costs, take care of other obligations and expenses, and have enough left over for family support. .
Your experienced VA loan specialist will be able to further discuss specific income and other qualification requirements. According to the VA Loan Quick Guide, VA loan limits generally do not exceed $417,000 (exception in maximum limits with Jumbo VA loans in designated high-cost counties; calculations may vary).
Step Three: Decide on a House and Make an Offer
Select a real estate agent to work diligently with you to find the home you want. After finding the home based on your personal and economic criteria, you will make your offer. The offer should be neither too low nor too high, as you want to stay ahead of the offer but not risk overpaying for the property. After making the offer, you will be required to make an initial deposit ($500.00 is typical) on the property.
When making your offer, be aware that there are certain fees, such as brokerage and lender fees, commissions, or buyer’s brokerage fees that the seller may have to absorb, as the VA does not allow them to be charged to the veteran buyer . This amount may need to be factored into the bid/buy price to be acceptable to the seller.
Step Four: Signing of the Purchase Agreement
It is recommended that two contingency provisions: 1) on financing and 2) on inspection, be included or modified in the purchase contract. Fact: A “pre-qualification” letter doesn’t necessarily guarantee funding, so you should be covered in case it doesn’t go through. However, if you’ve proceeded as outlined in Step Two and are “pre-approved”, you should be fine. The pre-approval process is a more extensive check by your VA loan specialist of your financial history and credit score. After completion, your lender will provide you with a conditional commitment on your loan amount.
A home inspection can be a critical contingency provision, giving you the option to back out if repairs are costly and substantially reduce the property’s fair market value. Fact: VA Fee Appraisers are not required to go up on the roof for the inspection nor do they have the specialized knowledge that a certified home inspection can provide.
The VA appraiser’s job is to make sure the home meets the minimum property requirements. He/she establishes the fair market value for the home and a Certificate of Fair Value is issued. However, this VA assessment is not a substitute for a detailed inspection of the property. Although optional, it is strongly recommended that your offer be contingent on a detailed home inspection.
Step Five: Offer Accepted
Contact your lender immediately and let them know your offer has been accepted. Congratulations! He’s on his way to homeownership! If you haven’t already done so, you’ll need to provide the last two to three years of tax returns, pay stubs, and bank statements. He/she will help you complete your application and submit it for processing and approval.
The lender will then order a VA appraisal and certified home inspection. Your VA loan specialist will complete the appraisal and perform a complete review and verification of your credit, income and assets to give you a “clear to close.” This will initiate the date, time and place where you will close to sign all the necessary paperwork for the title to be transferred to you.
Step Six: VA Funding Fees
The VA Funding Fee is an essential component of the VA Home Loan Program. All exempt veterans, except certain exempts, must pay this one-time basic funding fee to VA. First-time users of the VA No Down Payment Loan Benefit Program require a 2.15% fee. A down payment of at least 5 percent but less than 10 percent requires a 1.5% fee, and a down payment of 10% or more requires a 1.25% fee.
For subsequent users of the VA loan benefit, no down payment requires a 3.3% fee and a down payment of at least 5 percent but less than 10 percent requires a 1.5% fee. And a down payment of 10% or more asks for a fee of 1.25%.
The Reserve/National Guard first time user category with no down payment requires a 2.4% fee. A down payment of at least 5 percent but less than 10 percent requires a 1.75% fee, and a down payment of 10% or more requires a 1.5% fee. For subsequent users for the Reserves/National Guard category, no down payment requires a 3.3% fee. A down payment of at least 5 percent but less than 10 percent requires a 1.75% fee, and a down payment of 10% or more requires a 1.5% fee. The financing fee may be paid in cash or may be included in the loan.
The following people are exempt from paying the financing fee:
• Veterans who would be entitled to receive compensation for service-connected disabilities if they did not receive retirement pay.
• Veterans who would be entitled to receive compensation for service-connected disabilities if they did not receive retirement pay.
• Surviving spouses of veterans who died in service or from service-connected disabilities (whether or not such surviving spouses are self-rights veterans and are using their own rights on the loan).
More good news! Unlike conventional and FHA loans (less than 20% down), VA loans do not require mortgage insurance.
Step Seven: Approval and Closing
If your lender is authorized for automatic processing under VA’s Lender Appraisal Processing Program (LAPP), upon receipt of the VA’s assessed value determination, the loan may be approved and closed without waiting for VA review. For loans that require further VA review, the lender will submit the application to the local VA office, which will notify the lender of its decision.
After receiving VA approval, you (and your spouse) will attend the loan closing. Your lender or closing attorney will go over the loan terms and requirements, and where and how to make the monthly payments. You will sign all the necessary paperwork and ownership will be transferred to you. You’ve completed the seven steps to getting a VA loan and are now a homeowner!
VA Loan Program Benefits: Now and in the Future
The VA loan program is effectively the US governments and American people’s way of saying “thank you” to those who are actively serving or have served in the military. The benefits of the VA loan program extend beyond obtaining a home loan, as it can also be used to refinance and repair an existing home.
Another advantage of a VA loan is the assistance offered to borrowers who might be having difficulties. If a VA loan borrower is unable to make their mortgage payment, VA will negotiate on the borrower’s behalf. They have a nationally dedicated staff committed to helping veterans who are experiencing financial hardship. These financial counselors can help borrowers negotiate payment plans, loan modifications, and other alternatives to foreclosure.
We are very aware that many of our troops will be returning from overseas in the near future and that there are veterans who served our country in the past who are now looking for a home. Rest assured, VA-accredited lenders are honored to work on your behalf to finance your home and the bright future you and your family deserve.