What Is A VA Loan, How Does It Work, And What Are The Qualifications?
If you’re a veteran who’s thinking about buying a home or refinancing, you should definitely consider a VA loan. A VA loan has a couple of huge advantages, including the ability to buy without a down payment and a one-time funding fee in place of a mortgage insurance requirement.
Many veterans aren’t sure if it’s the best option and think that the process is more complex than it actually is. Let’s take an in-depth look at what a VA loan is, how it works and if you might qualify.
What Is A VA Loan?
A VA loan is a special mortgage option open to qualifying, active-duty service members and reservists, veterans, eligible members of the National Guard and surviving spouses of those who have passed in the line of duty or as a result of a service-connected disability.
Introduced in 1944 as part of the G.I. Bill, a VA loan is backed by the U.S. Department of Veterans Affairs. Private mortgage lenders, including Quicken Loans®, issue these loans, which are then insured by the VA. This means that the VA agrees to pay the lender for a portion of the loan if you default on your payments or face foreclosure of your home. The VA will currently pay lenders up to $36,000 if you can no longer make your payments and default on your loan.
VA loans have seen an uptick in popularity in recent years. Last year, there were a total of 383,115 VA loans originated for a purchase with a total loan volume of more than $103 billion.
VA Loan Benefits
The VA loan has various advantages. The following are the major ones:
- No down payment is required. This removes one of the significant obstacles to homeownership for those that qualify because you don’t have to have tens of thousands in savings available up front.
- Utilize your full home value. In a cash-out refinance, you can convert up to the full amount of your home equity into cash, subject to lender guidelines. The VA has the only loan option from the major mortgage investors that allows this.
- There are no set loan limits.The VA doesn’t enforce a set loan limit, although there is a limit to the amount the administration will payout in the event of default. Most lenders will approve you at least up to the conventional loan limit, which in most areas is $484,350 – this is higher in high-cost counties. Quicken Loans offers a special jumbo loan option for VA eligible clients that allows them to get a loan up to $1.5 million with no down payment.
- Credit requirements are looser. The VA has no standard minimum credit score they require, although lenders set their own policies. Quicken Loans requires that the lowest median FICO®Score of all borrowers on the loan be no lower than 620.
- Afford more home if you need it. While you should always consider your personal budget and never stretch beyond your means, you may be able to afford more home because you can often qualify with a slightly higher debt-to-income ratio (DTI) than you could on just about any other loan depending on the policies of the lender. For instance, Quicken Loans allows qualified applicants to have a DTI as high as 60% for a fixed-rate VA loan.
- Prepayment penalties aren’t allowed. Lenders aren’t permitted to charge you a fee if you pay off your loan early.
- There’s no mortgage insurance. Instead, there’s a VA funding fee. We’ll get to that in a minute.
- You don’t need to be a first-time home buyer and you can reuse it. While you can generally only have a VA loan for one property at a time, you can use your VA loan again if you sell the property and move on to another one.
- You can use a VA loan to build, buy or refinance a primary residence. Your primary residence is the one you live in the majority of the time.
- If you’re struggling with bankruptcy or possible foreclosure, the VA offers mortgage servicers several options to help you. Quicken Loans clients can call (800) 508-0944 to get help with their loan. Please call us when you feel you might have trouble making your payment so we can work to assist you.
- If you’ve been through a bankruptcy or foreclosure in the past, you may qualify for a VA loan sooner. As an example, if you’ve gone through Chapter 7 bankruptcy, you’ll have to wait 4 years after discharge or dismissal to get a conventional loan as opposed to 2 years for a VA loan. If you’ve been through foreclosure, the waiting period is 7 years for a conventional loan and 2 years through the VA.
- The VA Interest Rate Reduction Refinance Loan (IRRRL) allows you to refinance for the purpose of lowering your interest rate even if you owe more on your home than it’s worth. While the VA doesn’t put a cap on the existing balance, lenders may. Quicken Loans clients can refinance up to 120% of their property value. You may also see this referred to as a VA Streamline.
VA Loan Drawbacks
The benefits of a VA loan definitely outweigh the drawbacks, but there are a couple that are at least worth mentioning.
- There’s a funding fee between 1.25%–3% of the loan amount. Instead of the mortgage insurance or guarantee fees associated with many other loans, the VA has a one-time funding fee of anywhere between 1.25% – 3.3% of your loan amount that can either be paid up front or added to the loan balance. The fee varies based on the size of your down payment or equity amount as well as whether you were in the regular military or the National Guard or reserves. If you receive VA disability or are a surviving spouse, this funding fee may be waived.
- You can’t use your VA loan to get a vacation or rental property. A VA loan can only be used to buy a primary property. The good news is that the property can be up to four units, so you can rent out the other three units as long as you live in one of them.
- You can’t purchase or refinance certain pieces of property like a co-op or vacant land. All property must be owned in “fee simple,” meaning there are no conditions on the ownership of the land and it’s specified that way in the deed. Although this is the case for most housing, the requirement does preclude certain transactions like co-ops.
VA Loan Qualifications
You must prove you’re eligible before you can apply for a VA loan. The VA has specific service requirements and to qualify applicants must get a Certificate of Eligibility (COE), and either be currently serving in the United States military or be an honorably discharged veteran.
You may be eligible if you have served:
- 181 days during peacetime (active duty)
- 90 days during wartime (active duty)
- 6 years in the Reserves or National Guard
- Or, if you’re a surviving spouse of a service member who died in the line of duty
Service members discharged due to a service-connected disability don’t need to meet duty timeframes and their funding fee may also be waived.
As proof of your service, you’ll be required to present a COE.
How Do I Get My Certificate Of Eligibility?
A COE is your official proof of your service and qualification for a VA loan. To obtain your COE from the VA you must complete VA Form 26-1880. You can also do this online. Quicken Loans can also assist you in this process if you can give us your military discharge information.
VA Loan Approval Requirements
Like other mortgages, veterans have to meet financial requirements in order to be approved for a VA loan. There are credit and income requirements that need to be met.
What Does Your Credit Score Have To Be To Get A VA Loan?
Your credit history is taken into account any time you get a mortgage. Although the VA doesn’t specify a minimum credit score that you need, lenders set their own policies.
At Quicken Loans, the minimum median FICO® Score necessary for approval is 620. This may vary depending on the type of loan approval you’re trying to get.
Income And Debt Requirements
With a VA loan, one of the really cool features of this program is the ability to afford more house. Here at Quicken Loans, well-qualified buyers can get a VA loan with a DTI as high as 60%.
This ratio – a comparison of your monthly debt payments on things like housing, cars, personal loans and credit cards in relation to your monthly income – helps determine how much house you can afford.
Let’s say you make $3,600 per month. You have monthly student loan payments of $500, pay $800 per month for housing, $300 per month for a car payment and a $100 per month minimum payment on your combined credit card balances. Your total DTI would be about 47.2% ($1,700 ÷$3,600).
Another cool benefit is the ability to refinance and take out cash up to the full value of the property in most cases as long as you have a 680 median FICO® Score. This is applicable on loans up to $453,100 or the conforming limit in your area.
If you owe more on your home than it’s worth, you can refinance up to 120% of your property value with us in order to change your term or lower your rate. For existing Quicken Loans clients, the minimum FICO® Score is 620.
How Your VA Loan Works
You can only use a VA loan to get a primary property, although it may be a multiunit structure with up to four units. In addition, the veteran has to live in the home. It may be occupied by a spouse if the service member is actively deployed.
Typically, you can only use your VA loan to get one home at a time. Your entitlement is restored when the home is paid off or if the loan payments are assumed by another veteran. Other people can assume your loan, but the entitlement won’t be restored. There’s the ability to restore your entitlement on a one-time basis without selling your home in order to buy another property.
How To Apply For A VA Home Loan
Does a VA loan sound right for you? To apply for a VA home loan, you can check out your options online through Rocket Mortgage® by Quicken Loans. If you’d rather get started over the phone, you can call (800) 785-4788 and one of our Home Loan Experts will be happy to speak with you.
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