The VA Loan Masterclass: Everything You Need to Know about the VA Loan
Welcome to the VA Loan Masterclass, your comprehensive guide to understanding VA loans. We’ll delve into everything you need to know about VA loans, from their historical origins to key benefits, eligibility requirements, and how they compare to conventional loans. Let’s embark on this educational journey together.
History and Highlights of VA Loans
The story of VA loans begins with the Service Member Readjustment Act of 1944, a landmark piece of legislation aimed at aiding service members in transitioning back into civilian life after World War II. Within this act, you’ll find the GI Bill and the VA Home Loan Guarantee program, which we’ll focus on here. These initiatives were designed to provide veterans with affordable housing options and educational benefits.
Understanding the VA Loan
VA loans are administered by the Veterans Administration, and their primary function is to guarantee up to 25 percent of a veteran’s loan, provided that lenders adhere to certain requirements. It’s crucial to note that the VA itself does not directly provide the funds for these loans; instead, it acts as an insurance policy for lenders. This means that it’s up to individual lenders to decide on whether to approve a VA loan based on VA guidelines.
Benefits of VA Loans
One of the most appealing aspects of VA loans is the ability to secure 100 percent financing, meaning no down payment is required. Furthermore, VA loan borrowers are exempt from monthly insurance premiums like private mortgage insurance (PMI) or mortgage insurance premium (MIP). Additionally, veterans may qualify for more competitive interest rates compared to conventional loans.
Common Questions About VA Loans
We understand that you might have some burning questions about VA loans. Here are a few quick answers:
Can you use a VA loan multiple times, even simultaneously? Yes.
Is there an expiration date on VA loan benefits? No.
Are there size limits for VA loans? No, as of 2020.
Can service-connected disabilities affect VA home loan terms? Yes.
Can active-duty military personnel use VA loans? Absolutely.
Are National Guard and Reserve members eligible for VA loans? Yes, they are.
It’s important to stay informed about VA loan guidelines, as they can change over time. This is one of the reasons why working with a lender who gets VA loans is going to make all the difference in the world.
VA Loan 101: Understanding the Key Terms
- VA Mandatory Funding Fee:
The VA imposes a funding fee on every VA loan, with rates determined by your Certificate of Eligibility (COE). This fee can be paid in different ways: by the buyer at closing, by the seller at closing, or by rolling it into the loan. Notably, the funding fee is waived for veterans with a service-connected disability of 10 percent or greater. For first-time users without a disability, the fee is 2.15%, while subsequent use loans carry a 3.3% fee. A 5% down payment reduces the fee to 1.5%, and a 10% down payment further reduces it to 1.25%. Active-duty military can apply to have the funding fee waived before separation or retirement.
- Certificate of Eligibility (COE):
The COE is a critical document provided by the VA, outlining your eligibility for a VA loan. Lenders typically have direct access to obtain this document quickly. It’s imperative to ensure your COE is accurate, as it contains essential information regarding your eligibility, existing VA loans, and potential exemptions. Confirming your COE during the pre-approval process can prevent complications down the road.
Having a lender who knows these terms and can efficiently access your COE is vital for a seamless VA loan experience. Addressing these elements during the pre-approval stage can help you determine your eligibility and avoid problems later on.
- VA Home Inspections:
While the VA loan appraisal process includes a habitability check, it doesn’t replace a comprehensive home inspection. VA loans require an inspection for wood-destroying organisms (termite inspections). If your home is going to have a well as the primary source of water, that will also need to be inspected. The good news is that these inspections can now be paid for by either the buyer or seller, eliminating the previous requirement for sellers to cover the cost.
- Mandatory Occupancy Period:
VA loans are exclusively for primary residence purchases. The veteran or spouse must move into the home within 60 days of closing and reside there for at least one year before considering renting or selling it. However, valid changes in circumstances, such as deployments or job changes, can provide flexibility in meeting the one-year occupancy requirement.
- VA Loan Property Types:
VA loans can be used for various property types, including single-family homes, condos, townhomes, duplexes, triplexes, quads, mobile/manufactured homes (when owned with the land), and new construction. However, VA loans cannot be used for commercial property, raw land, undeveloped lots, or investment homes.
- VA Interest Rate Reduction Refinance Loan (IRRRL):
The VA IRRRL, pronounced like your favorite Uncle Earl, offers veterans a streamlined way to reduce their VA loan interest rate by at least half a percent or more without the need for an appraisal, income verification, equity requirements, or a specific credit score. This streamlined refinance option is a valuable tool for veterans to lower their monthly mortgage payments, especially during periods of declining interest rates.
The VA IRRRL serves as a powerful financial tool for veterans to save money on their mortgage payments without the typical requirements associated with traditional refinancing.
Comparing VA and Conventional Loans
- Interest Rate Difference:
Typically, VA loans offer an interest rate from 0.25% to just over 1% lower than conventional loans.
- Monthly Payment Savings:
Even with a 0% down payment (as opposed to the 5% down payment required for a conventional loan), the monthly payment on a VA loan is still usually lower. This is primarily due to the significantly lower interest rate and the absence of private mortgage insurance (PMI) on VA loans, even with less than 20% down.
- Total Savings:
With a $500,000 home, choosing a VA loan can result in savings of approximately $86,000 compared to a conventional loan over a 10-year period.
While VA loans often provide significant financial advantages, there are situations where a conventional loan may be competitive. These include scenarios where the buyer is putting down 20-25% or more, has a high credit score (780+), and is subject to a VA funding fee. In such cases, it’s crucial to carefully compare the two loan types.
Qualification for a VA loan can vary among lenders and may be influenced by factors such as credit score requirements, the ability to use gift funds, and how different types of military income are treated. It’s essential to work with a lender who understands these nuances.
How to Win a Home with the VA Loan
The key to successfully leveraging a VA loan is to work with a lender who gets the VA loan.
This concludes our VA Loan Masterclass. We hope that this information equips you with knowledge of the benefits of VA loans and enables you to pursue your dream of homeownership. Remember, a VA loan can be a powerful tool on your path to securing the perfect home. So, go out there and win with the VA loan!