American veterans have access to a variety of benefits that are not available to non-service members. One benefit is access to veteran loans to purchase, retain, build, adapt, or repair a home for the veteran. There are many benefits of applying for a VA home loan instead of a conventional mortgage.
Top 9 Benefits of Veterans Loans
- No Down Payments
- Lower Closings Costs
- No Private Mortgage Insurance
- Cash-Out Refinances
- Adapted Housing Grants & Native American Direct Loan Program
- No Prepayment Penalty
- Easier to Qualify
- No Loan Limits
- No Limits on Number of VA Home Loans
How Does a VA Loan Work?
The US Department of Veterans Affairs backs veteran loans issued by a private lender or mortgage company. Active duty service members, veterans, and widowed military spouses may qualify for these special loans, first introduced in 1944 as part of the GI. Bill.
A VA home loan is different from a conventional loan in several ways. One of the important differences is that the government backs the loan. If a veteran defaults on a home loan, the government repays a portion of the debt to the lender or mortgage company.
A private lender assumes all risks for a conventional loan. Because the government is assuming some of the risks for veteran loans, lenders and mortgage companies can relax some of their requirements for obtaining a VA loan. This makes it easier for veterans to purchase a home. The lower risk associated with VA loans encourages private lenders to offer loans to veterans at better rates and terms.
How to Take Advantage of Veteran Loans
Veterans and active-duty personnel make enormous sacrifices for their country and deserve access to veterans benefits of all types. Making it easier to afford a home is just one way our country gives back to veterans, service members, and their families who may have trouble qualifying for a conventional loan. Veteran loans make it possible for many military members and surviving spouses to have a home they can call their own.
Veterans who want to purchase a home, repair their home, refinance a loan, or modify their home can take advantage of the many benefits of veteran loans. It does not cost anything to apply for a VA home loan, and in many cases, it can save you money. It's worth the time and effort to explore the many benefits of VA loans.
1. No Down Payments
You can obtain a VA home loan without a down payment. With a conventional loan, FHA loan, or other traditional loan, you must have a down payment of at least 3-5% of the purchase price. In some cases, the lender may require a 10% down payment. But with a VA loan, a veteran can finance up to 100% of the purchase price of a home.
This can make a huge difference for a veteran or active service member. It can be tough to save for a down payment when you are on active duty. When you leave the military, it can also be challenging to save money as you transition into the private sector.
Because the government backs VA loans, lenders are not as concerned about a down payment. A down payment is designed to give the lender some protection in case you default on the loan. Foreclosed homes often sell for less than market value. The lender wants to protect its interest by having some equity in the property. With a VA loan, the lender is not as concerned about the down payment because the government is responsible for a portion of the debt if you default on the mortgage loan.
2. Lower Closings Costs
The seller and the purchaser pay closing costs. Each party has assigned closing costs that it must pay. The purchaser’s closing costs are typically higher than the seller’s closing costs because they include the fees charged by the lender or mortgage company. With a VA loan, the interest rate, fees, and costs are generally lower than a conventional mortgage.
Each lender sets the interest rate, fees, and costs for a VA mortgage loan. It is usually a good idea to shop around to determine which VA mortgage companies have the lowest closing costs for veteran loans.
One fee that is required for most VA loans is the VA funding fee. The VA funding fee is a one-time fee paid by the veteran or service member to help lower the cost of veteran loans for American taxpayers.
The VA funding fee can be paid up front at closing or financed in the loan amount. The amount of the VA funding fee depends on several factors, including the type of loan, the loan amount, whether this is your first VA-backed loan, and the amount of the down payment. The VA funding fee decreases as the amount of the down payment increases. Also, some veterans or service members may not be required to pay a VA funding fee, including a disabled veteran and a surviving spouse.
3. No Private Mortgage Insurance
Mortgage insurance significantly increases the monthly payments for some homeowners. Mortgage insurance protects the lender in case you default on the VA home loan.
Lenders generally require mortgage insurance when the borrower does not make a large enough down payment on the home—typically 20% of the purchase price. However, VA loans do not require mortgage insurance. This advantage could save a homeowner over $100 per month on their monthly payment, depending on the amount of the loan.
4. Cash-Out Refinances
Veteran loans can be used to refinance a current mortgage loan and receive cash from the closing. A cash-out refinance allows a homeowner to access the equity in the home for a variety of uses. A veteran may refinance a VA home loan and take cash out to pay off debts, pay for college, or make home improvements and repairs.
The ability to access the equity in your home can be vital, especially during financial hardship. However, before using the equity in your home to consolidate debt, it’s a good idea to speak with a debt management professional about your options for resolving debt problems without putting your home at risk.
5. Adapted Housing Grants & Native American Direct Loan Program
Housing grants are one way we help our veterans and service personnel. Service members and veterans with certain service-related disabilities can obtain funding to purchase or modify homes to meet their needs. Adapted Housing Grants help disabled veterans obtain the funds needed to make their homes suitable for their needs. Whether you are building your home, buying a home, or modifying your home, these grants can provide the home you need to improve your quality of life after being injured in the line of duty.
The Native American Direct Loan (NADL) Program assists veterans who are Native American or who are married to a Native American obtain loans to purchase, build, or improve homes on federal trust land. The program also helps an eligible veteran refinance an existing NADL and lower the interest rate. The NADL program offers many of the same benefits of other veteran loans, but it also offers limited closing costs, reusable benefits, and other advantages.
6. No Prepayment Penalty
A prepayment penalty requires the borrower to pay a fee if the borrower pays off the mortgage early. Prepayment penalties are sometimes used with a conventional loan or personal loan. However, a VA borrower does not need to worry about a prepayment penalty. VA mortgage lenders are not permitted to include a prepayment penalty in a mortgage loan under the VA home loan program.
7. Easier to Qualify
You don’t need to have a perfect credit score to qualify for financing with a military loan. You can qualify for a VA home loan even with some bad credit and a lower credit score. Each lender has its own requirements for loan qualifications. While a very low credit score or extremely bad credit may prevent some individuals from qualifying for veteran loans, it is not always an automatic denial.
VA mortgage lenders have an incentive to approve veteran loans. They make money by lending money. Because the loans are partially backed by the government, they can take a greater risk in extending credit to a veteran or service member with poor credit.
8. No Loan Limits
There is no maximum loan amount for veteran loans. Veterans and service personnel can qualify for low-interest, VA loans to purchase higher-value homes.
Removing the maximum loan amount for VA mortgages also means that you can finance more of your closing costs and the VA funding fee into the mortgage amount. This advantage can help if you don’t have enough money to pay all closing costs up front. However, by financing the closing costs into the mortgage, you are increasing the amount you owe on the home. In some cases, you could owe more than the home is worth if you do not make a down payment on the home.
9. No Limits on Number of VA Home Loans
There are no limits on the number of VA home loans you can have during your lifetime or at one time. VA loans can only be used to purchase a residence in which you will reside, so you will likely only have one or two loans at a time. However, an eligible veteran who meets the eligibility requirements for a VA mortgage can use the VA home loan program to finance a home loan as many times as he desires throughout his lifetime.
In other words, you can buy and sell homes or refinance your current mortgage as many times as you desire. This benefit helps service members who are frequently transferred. They can use the VA home loan program to purchase a home for their family near their new assignment.
Tips for Locating and Apply for Veteran Loans
As with any home loan, the key to qualifying for a VA home loan is preparation. Take the time to research several VA lenders to find a mortgage company that offers the best interest rate and fees for your home loan.
Additionally, some steps you can take to help improve your chance of qualifying for a mortgage through the VA home loan program include:
Secure Your COE First
Begin by applying for and receiving your Certificate of Eligibility from the Department of Veterans Affairs. Having your COE in hand can make the process of applying for a VA home loan easier.
Understand the Occupancy Requirements
VA-backed loans are for homes in which the veteran intends to use as a primary residence. There may be exceptions to the residence requirement, such as members deployed overseas.
Also, make sure that you understand the acceptable use of the loan funds. Funds from a VA loan are not intended for the purchase of vacation homes. In most cases, a VA home loan can be used to purchase, build, or modify a modular home, single-family residence, condominium, or manufactured home.
Check Your Credit Report
Before you begin applying for veteran loans, check your credit report and your credit score. If you have any debt collections or other negative information on your credit report, try to repair this damage before applying for a loan. Even though VA loans are easier to obtain, having good credit can make the process smoother and lower your interest rate.
During the loan process, keep your credit clean by avoiding late payments and avoid applying for any new debt.
Seek Loan Pre-Approval Before Searching for a Home
Having a pre-approved VA loan gives you purchasing power. As you search for a home, you know what you can afford and what you cannot afford to purchase. Also, preapproval demonstrates to realtors and sellers that you are a serious buyer.
Lower Your Debt-to-Income Ratio
Lenders want to see a steady, reliable source of income, even for veteran loans. You need to provide proof of income for at least a year or more. However, you also need to demonstrate that you can afford to make the monthly payments for the mortgage. If your debt-to-income ratio is too high, the lender may determine that you cannot afford to make the mortgage payments.
Lower your debt-to-income ratio before applying for a VA loan by paying off credit card accounts and other credit lines. If possible, pay down your car loans or other loan accounts. By paying down your debt, you have more disposable income each month to dedicate to a mortgage payment.
Find a Realtor Experienced with VA Home Loans
VA loans are not as common as conventional loans or FHA loans. Some real estate agents may have never worked with a veteran or service member. It can help to work with a real estate agent who is familiar with and understands the VA loan process.
A realtor who has experience with VA loans usually knows which lenders offer the best rates and terms for veteran loans. They also know how to handle issues or problems that may arise during the VA mortgage loan process.
Do Not Change Jobs During the Process
If possible, try not to change jobs during the mortgage loan process. The mortgage company looks for a steady income stream, but it also likes to see a long, consistent job history. If you take a new job during the process, the lender could become nervous that the new job may not work out. If the job does not work out, you are out of work and may not make your mortgage payments.
If you must change jobs, make sure that you let the lender know that changing jobs is better. Explain that the change in jobs means more money, more security, and job advancement. By being proactive with the lender, you indicate that you understand the change in jobs could make the lender nervous, but you have dedicated a great deal of careful thought to the situation to ensure that the job change is a beneficial move for your financial well-being.
Common Questions About VA Loans
Here are some commonly asked questions about VA loans.
How often are veteran home loans denied?
Because lenders and mortgage companies have underwriting requirements for home loans, a veteran could be turned down for a VA loan. Even though VA loans are easier to get than other types of home loans, each loan application is reviewed on a case-by-case basis. The veteran must meet the income, credit, eligibility, and other requirements to obtain a VA home mortgage.
Most lenders work very hard to approve VA loan applications. In some cases, the loan must go through a manual underwriting process to obtain approval. If you are denied for a VA home loan, ask for a written explanation from the lender. Depending on the reason, you may be able to work with your loan officer to gain approval. Don’t give up. Check with other lenders because each lender has different underwriting policies.
How many VA loans can a veteran get?
A VA borrower can have multiple veteran loans during his or her lifetime. In some cases, active-duty personnel and veterans may have more than one military loan at a time. As with an FHA loan or other financing, the person’s current financial circumstances determine how many VA loans a veteran can qualify for at once or during his or her lifetime.
Who qualifies for veteran home loans?
In most cases, a person qualifies for a VA home loan if he or she fits into one of these categories:
- The person is an active duty service member or a veteran who has served at least 90 consecutive active service days during wartime or 181 days of consecutive active service days during peacetime;
- The person served at least six years in the National Guard or Reserves; or,
- The person is the surviving spouse of a service member who died in the line of duty or because of a service-related disability.
In some cases, qualifying for a VA loan could depend on when you served and your rank when you served. The first step in determining if you qualify for veteran loans is to apply for your Certificate of Eligibility for Home Loan. You can do this online through the Veterans Affairs Department.
When did veteran home loans start?
The Servicemen’s Readjustment Act (G.I. Bill) in 1944 established the VA loan guarantee program. Numerous laws have expanded and enhanced the program over the years, including extending the VA home loan program to Reservists and National Guard members.
The Many Benefits of Veteran Home Loans
Veteran loans are better than traditional bank loans for many reasons. Primarily, VA home loans make it possible for veterans to become homeowners. They also make it possible for wounded and disabled veterans to access the equity in their home to make home modifications that increase their quality of life and ease of daily activities.
With lower interest rates, military loans are often more affordable for veterans who are transitioning to civilian life. More favorable terms on VA loans also make it possible for active-duty personnel to ensure that his or her family has a safe place to call home while the service member is defending our country.