VA Loan

Veterans Affairs (VA) loans are government-backed home financing offered by the Department of Veterans Affairs to help qualifying members, specifically veterans, service members, and surviving spouses, to own homes with little to no down payment at competitive interest rates. 

The department sets qualification rules and organizes the terms under which the home loan should be offered. It also guarantees the mortgage under the program. It’s important to note that private lenders, not the Department of Veterans Affairs, make VA loans. However, not all lenders provide the VA loan program. 

How  VA Loans Work 

With competitive terms and interest rates, these Veterans and other eligible members can buy a condominium, single-family home, new construction, manufactured house, or multi-unit property. The lender provides up to 100% financing of the home value. 

Qualifying members can also use VA loans to improve and repair their homes or refinance a mortgage. When members apply for VA loans, they must provide the lender with a certificate of eligibility from the Department of Veterans Affairs. 

The certificate is acquired by giving documents related to service. These service-related documents vary depending on whether you are a veteran or on active duty. You can get this certificate from the VA website if you qualify. 

While these loans are easier to get than conventional loans, some lenders may still need you to meet certain underwriting requirements in specified cases. Generally, VA loans and others under the United States government departments are usually secured through the Government National Mortgage Association (GNMA), sometimes called Ginnie Mae. These are US government guarantees against default. 

With VA loans, eligible members can borrow or apply for financing more than once. However, the funding fee for the VA loan increases after your first time if the down payment is below 5%. 

But, in most cases, the funding fee is between 1.25% and 3.3%, applicable whether refinancing or buying a home, with some exceptions. Also, you don’t need to pay mortgage insurance. 

Who Is Eligible for the VA Loan?

While veterans, service members, and surviving spouses qualify for this loan, the VA stipulates service requirements mainly: 

• You served at least 90 consecutive and active days during wartime
• You served at least 181 successive and active days during peacetime
• You are a veteran who was honorably discharged and met the minimum service requirements, or you’re currently on active military duty 
• You served more than six years in the National Guard or Selective Reserve
• Your spouse was a service member who died from service-related disability or in line of duty 

It’s vital to verify your eligibility with licensed professional experts and also understand other situations that could make you qualify for the VA home loan. When you get full entitlement, you get an unlimited loan size. 

Still, the lender will assess the amount you are eligible for depending on your finances, mainly income and other debt, and may impose a loan limit. This is also linked to conforming mortgage limits. Also, a member may not get full entitlement with some lenders if they are still paying back an active VA loan. 

Some lenders may specify that eligible members can only use the loan on a primary residence, not vacation homes or investment properties. 

Pros and Cons of VA Loans

VA loans may be easier to get, including other financing for eligible members, but it’s important to consider its benefits and drawbacks. 

VA Loan Pros

• You don’t need a down payment as long as the home purchase price is not more than the appraised value. Compared to most conventional home loans, where you may need at least a 3% down payment, VA mortgage financing lets you buy your home with zero upfront payment.
• Unlike conventional loans, where private mortgage insurance is a requirement, you don’t have to pay for it with VA loans. For instance, the Federal Housing Administration (FHA) loans have a monthly or an upfront form of insurance, making them more costly than VA loans. 
• It has low interest rates. VA loans have very low interest rates, making it easy for Veterans to access larger mortgage financing. These low interest rates help you save more on monthly payments and eventually over the loan life. 
• They offer you flexible credit guidelines. One of the main reasons VA loans were created was to help Veterans and other eligible members access mortgage or homeownership funding through flexible credit underwriting requirements.
• VA loans have closing cost limits. Most home financing loans have varying and sometimes costly closing fees. With VA loans, lenders are limited or capped in how much they can charge to process a loan.
• The VA helps borrowers avoid default.
• Veterans with qualifying disabilities are eligible for special benefits, including additional perks such as property tax exemptions, VA financing fee exemption, and eligibility for diverse disability housing grant programs such as:
• Specially Adapted Housing (SAH) or Special Home Adaptation (SHA) grants
• Temporary Residence Assistance (TRA) grants
• Home Improvements and Structural Alterations (HISA) grants

VA Loan Cons

• Funding fees may vary depending on whether you are refinancing, buying a home, or making a down payment.
• The loan is limited to use only on primary homes or residences. You cannot use it for rental or vacation properties. Still, you can use the loan to buy up to a four-unit property if you will use one unit as a primary residence.

VA Loan Types

The VA, through approved lenders, has created different VA loans to give eligible borrowers options for homeownership. These mortgage loans include:

Home Purchase Loans

This loan type helps veterans, service members, and other qualifying members purchase a home at competitive interest rates, with no down payment, private mortgage insurance, credit score minimum, income limits, and mortgage limits if you have full entitlement.

Cash-Out Refinance Loans

The cash-out refinance loan lets mortgage holders apply against home equity to clear debt, fund school, or make repairs or home improvements. This offers a new and larger mortgage amount than the existing one.

RenoFi cash-out refinance is designed for major renovation or remodeling projects and allows you to borrow up to 80 % of your home’s future equity after the renovation.

Interest Rate Reduction Refinance Loans (IRRRLs)

This type is also called a VA-streamline refinance loan. It helps members get lower interest rates through refinancing an existing VA loan. It lets homeowners with a VA loan refinance a fixed-rate loan at a reduced interest rate or turn an adjustable-rate mortgage (ARM) into a fixed-rate mortgage.

Native American Direct Loan

As the name suggests, this loan type helps qualifying Native American veterans fund home construction, purchase, or improvement on federal trust land. It also offers interest rate reductions. 

VA Manufactured Home Loans

The VA loan type helps borrowers acquire a manufactured home and put it on land they own. It can also be used to acquire land and a manufactured home together or finance vital improvements that meet VA manufactured home foundation requirements. 

VA Land Loans

This loan allows eligible members to purchase land and build a home on it with one mortgage. Borrowers can also use it to refinance land already bought and the home built on it. 

Jumbo Loans

The VA jumbo loan allows borrowers to apply for more than the existing conforming loan limits allow. In most parts of the United States, the existing loan limit for single-family homes is $766,550. With the Jumbo loan option, you can get more. 

VA Energy Efficient Mortgage

The energy-efficient mortgage allows eligible borrowers to get extra funding to finance energy-efficient home improvements as part of a home refinance or purchase. Borrowers can get an additional $6,000 to fund qualified enhancements, such as solar heating and cooling systems, heat pumps, or storm or thermal windows. It’s vital to note that this VA loan type cannot be used to buy window air conditioning units, appliances, or other non-permanent additions.

Applying for a VA Loan 

The process is usually similar to applying to other mortgage types, which involves comparing offers from lenders, showing proof of income and employment, and promptly responding to underwriting requests. Generally, the basic steps to applying for a VA loan or mortgage include:

• Step 1: Obtaining your Certificate of Eligibility (COE)
• Step 2: Organizing information file regarding your finances, which also includes bank and brokerage statements, recent pay stubs, and tax returns
• Step 3: Understand the rates 
• Step 4: Requesting a preapproval and then begin searching for homes
• Step 5: Finalizing the loan application once you get an accepted offer
• Step 6: Getting ready to provide more or additional financial or credit information as required during underwriting

Understanding the VA Loan Guaranty

As mentioned, while this loan is a federal program, the government doesn’t give loans directly to veterans and other qualifying members but uses primarily private lenders to give loans, as the Department of Veterans Affairs offers a guarantee. 

The VA guarantee protects the lender from total loss if a borrower defaults. It further incentivizes the private lender to provide loans with more suitable terms than other home loans. 

Is the VA Loan Risky?

Generally, VA loans are some of the safest mortgage financing in the market. The loan remains safe for the borrower and lender. For the borrower, it’s mainly the low interest rates, no down payment, private mortgage insurance, and other benefits mentioned. 

The lender usually has a unique underwriting requirement called residual income. It gives them a more holistic look at the borrower’s finances and ability to withstand fiscal challenges, ensuring their capacity to repay. They also have the VA guarantee. 

How do VA Loans Compare to Other Loan Types?

While all home loan types present their benefits and drawbacks, when you compare them, the VA loans have an edge and rise above others for most Veteran and military homebuyers. When you stack VA loans and conventional mortgages side-by-side, here is what they look like:

• VA loans have no down payment requirements for eligible borrowers, while conventional mortgage financing has up to 20% down-payment feature. You may get as low as 3%, but the high down payments are the most common with traditional home loans.
•  The VA loan doesn’t require a private mortgage insurance payment, but conventional home financing needs one unless you have a down payment that exempts you from the charge.
• VA mortgage financing has the lowest and most competitive interest rate average in the market compared to traditional home loans, which require borrowers to have a top-tier credit score to get the best interest rates.
• Unlike conventional home loans, where average origination fees go up by about 22%, VA loans have the lowest origination costs in recent years. 
• VA loans have an easy qualifying procedure for veterans and other members with more flexible and forgiving credit underwriting guidelines. On the other hand, conventional mortgages have hectic eligibility processes, such as the need for higher credit scores, down payments, and strict underwriting guidelines in some cases. 

Understanding the VA Funding Fee

Much has been mentioned about the VA funding fee. To better understand this charge, the VA funding fee is usually a one-time but non-refundable VA fee when you apply for a VA-backed home loan. It is paid to the US Department of Veterans Affairs when they finalize a VA loan. This fee is used to help defray some loan guaranteeing costs where a borrower defaults since they don’t make a down payment. It varies mainly between 1.25% and 3.3% of the loan amount.

However, the actual fee depends on your loan purpose, service history, down payment where applicable, and whether you have used a VA before. However, there are borrowers exempt from the VA funding fee. These include:

• Qualifying borrowers who get VA compensation for any service-related disability
• Surviving spouses of veterans who died in service or from a service-related disability
• Purple Heart recipients on active-duty 

Being a veteran doesn’t mean the VA mortgage is automatically the right or only fit. However, it’s the most beneficial homeownership path for veterans, service members, and surviving spouses. While the VA loan is among the top for veterans, comparing three to five loan types will help you make the best financial decision. 

For instance, RenoFi presents a partner network that gives eligible members the lowest rates and more borrowing power.

Alternatives to VA Loans 

The VA loan may be a good and reliable option for veterans, but RenoFi offers other smart alternatives, including:

RenoFi HELOC

A home equity line of credit allows you to borrow up to 95% of your home’s value. For veterans and other borrowers looking for alternatives, it gives them more than the standard HELOC limit, usually 80% to 85% LTV. 

For example, imagine your home is currently valued at $500,000, and your outstanding mortgage balance is $400,000. You are planning a renovation and expect that the after-renovation value of your home will be approximately $640,000. 

Your current loan-to-value ratio (LTV) is at 80%, which means that you effectively can’t borrow anything to fund your renovation. A RenoFi loan, however, would allow you to go as high as 150% LTV or 90% LTV using the after-renovation value.

So, in this example, while using a standard home equity loan results in your borrowing power being $0, a RenoFi loan allows you to borrow up to $176,000, thanks to the after-renovation value of your home!

If you find that you don’t qualify for a VA Rehab loan, for example, then RenoFi is a great alternative! 

Personal Loans

While this may have a higher interest rate, it allows you to borrow a personal unsecured loan without putting a lien on your property.

Final Thoughts

When you talk to RenoFi experts, you will understand how various home financing loans work and eligibility. You will get affordable and favorable options for the VA loan. 

Additionally, our RenoFi loans are the smartest way to finance a home renovation project. Unlike traditional loans, which are based on your current home value or require you to refinance your primary mortgage and give up your low rate, RenoFi loans are based on the after-renovation value of your home. This allows you to borrow, on average, 11x more, get a low monthly payment, and keep your low rate on your first mortgage. Talk to our experts today to make the right decision.