What Is A VA Loan, And Do You Qualify?

If you’re a veteran or active-duty service member looking to buy a home, did you know there are special loans available to you? Rather than financing a house with a “normal” conforming loan, you might consider getting a Department of Veterans Affairs (VA) loan instead. These loans are made specifically for veterans as a thank you for their service and can provide borrowers with better loan terms than they could get otherwise.

Interested in pursuing this option? Let’s talk about what a VA loan is, how it works and how you may be able to utilize one to purchase a home.

How A VA Loan Works

Unlike a conventional loan, VA loans are considered non-conforming government loans and are backed by the VA. The VA doesn’t issue these loans, it simply guarantees a portion of them. This government backing makes this type of loan less risky to lenders who offer these mortgages.

Since these loans are backed by the government rather than purchased by Fannie Mae or Freddie Mac, they have a little more flexibility with borrower requirements. You may be able to qualify for a VA loan with a credit score as low as 580. It’s also possible to get a VA loan with a down payment as low as 0%, something not typically offered by other loan types.

These loans don’t come without a catch, however. Even if you’re a qualifying veteran or service member, you’ll have to meet a few more requirements. For example, if you’re financing a house with a VA loan, it’s required that you purchase that home as your primary residence – meaning you must live on the property and not use it as a rental space or investment property.

How To Qualify For A VA Loan

VA loans are offered exclusively to members of the U.S. Military who meet the following requirements:

·       Must have served 90 consecutive days of active service during wartime

·       OR served 181 days of active service during peacetime

·       OR have 6 years of service in the National Guard or Reserves, or served 90 days (at least 30 of them consecutively) under Title 32 orders

·       OR you are the spouse of a service member who died while serving or due to a service-related disability

If you meet one of these requirements, you are eligible for a VA loan. To prove to lenders that you meet these requirements, you’ll need to show them a Certificate of Eligibility, or COE. A COE is a document that can typically be pulled by your lender by using your social security number and date of birth. You can also request a COE through the VA either online or by mail.

Additional VA Loan Requirements

Beyond being a qualifying active-duty service member or veteran, to get a VA loan, you’ll also have to meet a few other requirements, including the following:

·       The VA has no minimum credit requirement, but most lenders will require a credit score of at least 580

·       The property you purchase must be a primary residence

·       You’ll have to pay what’s called a “VA funding fee”

·       You must have full “VA entitlement” to avoid making a down payment

If you’re uncertain whether you meet all of these requirements, don’t worry – let’s explain exactly what they mean.

You likely already have an idea of what your credit score is. If not, you can easily monitor your score and view your full credit report inside the Rocket Money^SM app. The VA funding fee, however, may be a new term. The VA funding fee is similar to the mortgage insurance that’s included with other mortgage loans. Rather than a monthly charge, however, the funding fee is one lump sum that’s paid upfront when you close on your loan.

The fee is generally between 1.25% – 2.15% of your total loan amount if it’s your first time using a VA loan and 1.25% – 3.3% of your loan if it’s your second time using one of these loans. This charge helps make up for the fact that VA loans don’t require a down payment or mortgage insurance.

As for VA entitlement, this refers to the total amount of money that the VA will guarantee on your loan. In other words, how much they’ll repay your lender if you default on the loan and how much you can get a loan for without making a down payment. If you’re getting your very first VA loan, you should have full entitlement. If you have a VA loan you’re currently repaying or you’ve defaulted on a past VA loan, you’d typically have reduced entitlement.

Applying For A VA Loan

To get a VA loan, you follow roughly the same process as anyone else getting a mortgage, with a few extra steps. First, it’s important to find a VA approved lender. Not all lenders can or will underwrite VA loans, so it’s important to find a lender that can originate VA mortgages. Rocket Mortgage® is a certified VA-approved lender.

Once you’ve found a lender, you’ll need to get your Certificate of Entitlement, either from your lender or the VA itself. After that’s in order, you’ll be able to get preapproved for a loan amount that’s in line with your VA entitlement and start house hunting.

If you find a home you love and make an offer, you’ll then go through the same steps as other home buyers – plus a few additional steps to satisfy VA requirements. For example, you’ll need a VA appraisal, rather than a normal one. That means a VA-approved appraiser will have to inspect the home you’re interested in to make sure it fits the VA’s guidelines. You may also be required to have additional inspections performed such as a pest inspection.

Assuming everything goes well, you can then go through the process of underwriting and, finally, pay closing costs and get the keys to your home.

Types Of VA Loans

The VA offers to back a number of loan types for veterans, including the following:

·       VA purchase loan: This is a VA loan that you would use to purchase a home to be your primary residence.

·       VA interest rate reduction refinance loan (VA IRRRL): This loan can help VA borrowers refinance an existing loan to lower their interest rate or make payments more manageable.

·       VA cash-out refinance loan: A cash-out refinance can help VA borrowers cash out some of the equity in their home to use for other purposes like paying off debt or making home renovations.

·       VA Native American direct loan (VA NADL): This loan helps Native American Veterans build, buy or improve homes on federal trust land.

VA Loan Pros And Cons

Like any loan type, VA loans have their pros and cons. Let’s break down some of the benefits and downsides to this type of mortgage.

Pros

·       You don’t have to make a down payment. Not many loans out there allow you to put 0% down, which is a huge perk, though it will increase your monthly payment compared to putting more money down.

·       You don’t have to pay mortgage insurance. There is no private mortgage insurance or mortgage insurance premium to pay besides the one-time funding fee.

·       Interest rates tend to be lower. Rates for VA loans tend to be a fraction of a percentage point lower than conventional (.3% – .4%).

·       There are more lenient credit requirements. Unlike conventional loan types which can have strict debt and credit requirements for borrowers, VA loans can be easier to qualify for financially.

Cons

·       The VA funding fee. Though you won’t have to pay for mortgage insurance, you will be responsible for paying the VA funding fee, which can be a few thousand dollars, on average.

·       You can only finance a primary residence. You cannot use a VA loan to finance a secondary residence or investment property, at least initially.

·       Not all lenders can originate VA loans. Only VA-approved lenders can originate these mortgages, which narrows your options a bit.

FAQs About VA Loans

Below are some other frequently asked questions about VA loans.

What is the interest rate on a VA loan?

VA loan interest rates tend to be on the lower end when compared to other loan types. To see today’s VA loan interest rates, check out our up-to-date Rates page.

What is the minimum credit score for a VA loan?

The VA itself does not enforce a minimum credit score, but most lenders will require borrowers to have a credit score of at least 580. Rocket Mortgage® requires a score of 580 as well.

What is the difference between an FHA and VA loan?

A Federal Housing Administration (FHA) loan is another type of government loan similar to a VA loan. These loans are offered to low- to median-income borrowers at favorable rates to help them achieve home ownership. There are many differences between the two, one of the chief ones being that anyone can get an FHA loan if they meet the income requirements, but only veterans can qualify for VA loans.

The Bottom Line

If you are a current or former member of the U.S. Military, a VA loan is a great option to help you get a house at a favorable rate. This benefit is one you should definitely consider if you qualify, as it could help you save a lot of money in the long run.

Ready to explore your mortgage options? Get started online today with Rocket Mortgage.