As the financial crisis gets further behind us, mortgage options get more flexible. One loan program that’s often overlooked is a VA loan. If you’ve served in the U.S. military, you can get a loan backed by the U.S. Department of Veterans Affairs (VA) with no down payment.
VA loan features
This may be a surprise: VA loans aren’t actually made by the VA. They are made by mortgage lenders, and the VA backs the loans, which enables lenders to be more flexible when making these loans.
Features of VA mortgages include:
- Financing for up to 100 percent of a home’s value. The national loan limit is $417,000, but can go up to $1,000,000 in high-cost areas. VA loan limits for your area are available on the VA site, and a VA lender can also give you local VA loan limits.
- The ability to finance most of your closing costs, including appraisal, credit report, title insurance, lender origination fee, recording fees, and survey fees. These represent the bulk of the closing costs in most home purchase transactions.
- The ability to finance the one-time VA funding fee that’s required on all VA loans, and the ability to have this fee waived for certain circumstances, such as injury and disability.
- No mortgage insurance. This is a material benefit that will save hundreds of dollars per month compared to other government-backed programs like FHA loans, which come with high mortgage insurance fees.
- No prepayment penalty if you pay off the loan early.
- Loans for a primary residence only.
- A wide variety of fixed- or adjustable-rate mortgage loan programs.
Who’s eligible for VA loans?
It’s important to work with a VA loan specialist so they are familiar with the criteria of who exactly qualifies for VA loans. To be eligible for a VA loan, you must be one of the following:
- Active duty service member.
- Current or former National Guard or Reserve member who has been activated for federal active service.
- Current National Guard or Reserve member who has never been activated for federal active service.
- Discharged member of the National Guard or Selected Reserve who has never been activated for federal active service.
- Surviving spouse receiving Dependency & Indemnity Compensation (DIC) benefits.
- Surviving spouse who isn’t receiving DIC benefits.
If you’re in any of these categories, you can search for VA lenders to help you find a loan.
You will, however, need to provide your lender with a Certificate of Eligibility (COE) to verify that you’re eligible for a VA loan. The COEs for each category of eligible VA borrower have different requirements.
An expert VA lender can also help you obtain the correct COE based on your circumstances. If you fall into one of the eligible categories but don’t know how to get your COE, ask a lender to help you.
The VA loan approval process
Getting your VA loan approved is mostly the same as getting a non-VA loan approved. A lender will calculate your total proposed monthly housing cost plus all other monthly debt - like payments on credit cards, cars, and student loans - and compare it to your income. They'll want to see that these total monthly costs don't exceed 43 percent of your monthly income - although in certain cases, the automated loan underwriting engines lenders are required to use for VA loans might allow monthly costs to go as high as 50 percent of income.
Lenders will also look at your credit scores. Each lender will vary in terms of the credit score they require, but generally a score of 620 or better is required to qualify for a VA loan.
If you’re buying a condo, the VA must approve the condo project. The agency maintains a database of pre-approved condos, and if the condo you want isn’t on this list, you’ll need to work with your lender to get the condo approved.
This can add considerable time to the transaction, so make sure you do this research before writing an offer. And make sure your real estate agent is aware you’re getting a VA loan.
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Originally published May 12, 2015.
Note: The views and opinions expressed in this article are those of the author and do not necessarily reflect the opinion or position of Zillow.