The Basics: What Is a VA Loan?
VA loans are mortgage loan products that are guaranteed by the U.S. Department of Veterans Affairs (VA). You borrow from a private lending company, but the VA guarantees a portion of your loan.
That guarantee means that if you default and go into foreclosure, the company that gave you the loan can recover at least some of their loss. It also means that there’s less risk involved for the loan company, which is why a VA-backed loan is often more affordable than a conventional private loan.
Here are some of the benefits you might get with a VA loan:
- No down payment, as long as you’re not borrowing more than the property’s appraised value
- Lower interest rates than you’d get without the VA backing
- Exemption from mortgage insurance, which protects loan companies against default-related losses
- Lower closing costs
- No early repayment fees
Sound good? Let’s look at what the loan application process involves, starting with eligibility.
A VA-backed loan is often more affordable than a conventional private loan.
Step 1: Check Your Eligibility
VA loans are available to qualifying veterans, active-duty service members, and members of the National Guard and Reserve. Here’s how to know if you qualify.
Veterans and Active Duty Servicemembers
Your eligibility as a veteran or active-duty service member depends on your length of service and when you served.
Before 1980 or 1981
If you served before 1980 (or before 1981 if you served as an officer) expect your cutoff service duration to be:
- 90 total days if you served during wartime
- 181 continuous days if you served between wars
If you received a discharge for a service-connected disability, these minimums don't apply to you.
Between 1980 or 1981 and the Present
If you served within the past 40 years, your minimum service will probably be:
- 24 continuous months
- The full period of your call or order to active duty
Your active-duty minimum will be shorter if you were on active duty service during the Gulf War. You may also have a reduced minimum if you were discharged under certain circumstances, including hardship or a service-connected disability.
If you're currently serving, you just need 90 continuous days of service to be eligible.
National Guard and Reserve Members
If you served in the National Guard or Reserve service between August 2, 1990 and today, you qualify for a VA loan if you’ve been on active duty for 90 days or more.
Otherwise, as long as you’ve served for six creditable years in the Selected Reserve or National Guard, you’re eligible for a VA loan if you were one of the following:
- Discharged honorably
- Placed on the retired list
- Transferred to the Standby Reserve or Ready Reserve after honorable service
You also qualify if you continue to serve in the Selected Reserve past your six-year creditable service mark.
Creditable service has to do with whether your service counts toward the Federal Employees Retirement System. Most service is creditable as long as it ended honorably and happened before you retired as a civilian. When you apply for a Certificate of Eligibility, the government will verify that your service was creditable.
Getting a Certificate of Eligibility
If you qualify for a VA home loan based on your length of service and discharge status, the next thing you need is a Certificate of Eligibility. You’ll need to bring this document to a loan company to apply for your VA loan.
There are three ways to obtain a certificate of eligibility:
- Apply online through the VA’s eBenefits portal
- Download the Request for Certificate of Eligibility, also known as VA Form 26-1880, and mail it in
- Apply through your lender using the VA’s Web LGY (Loan Guaranty) system, available under limited circumstances
What documents you need to apply for a Certificate of Eligibility will depend on how you qualify. If you have discharge or separation papers, have a copy ready to submit. Active-duty service members and current, non-activated National Guard or Reserve members need signed statements of service.
There are different requirements for discharged and current Guard or Reserves members, and for surviving spouses. You can find all of the information you need on the VA’s official Certificate of Eligibility application instructions page.
VA loans are available to qualifying veterans, active-duty service members, and members of the National Guard and Reserve.
Step 2: Review Your Finances
Your Certificate of Eligibility verifies that you can apply for a VA-backed loan, but it doesn’t confirm that you can afford a mortgage. You have to figure that out by reviewing your income, expenses, and credit score.
Residual Income
The VA loan program requires that all borrowers have a certain amount of income left over after housing and debt payments. This is known as residual income. It’s based on your family size, the region where you live, and whether or not your DTI is above the recommended 41% maximum.
As of 2020, residual income minimums range from $441 for a one-person household in the Midwest and South, to $1,158 for a five-person household in the West. Households with more than five people add $80 for each additional family member up to seven.
Residual income can help you calculate what size mortgage you can afford, but it shouldn’t be your only determining factor. It’s also smart to enter your income, down payment preferences, and debt levels into a mortgage affordability calculator and find out what you could reasonably handle. This will help you determine your price range.
The VA loan program requires that all borrowers have a certain amount of income left over after housing and debt payments.
Step 3: Understand Your Loan
Every company will charge some fees to cover the cost of processing your loan, so make sure to review your Loan Disclosure documents for that information. In addition to any lender fees, you will also most likely have a VA funding fee. The VA calculates this fee based on your down payment amount and whether it’s your first use of a VA-backed loan. Expect this fee to be the same across lenders.
Entitlement
Your Certificate of Eligibility from the VA will include a line about entitlement. Entitlement refers to the amount of your loan that the VA will guarantee.
If you’ve never used your VA home loan benefit or you have and you’ve sold the home, you’re not subject to a limit on how much of the loan will be federally guaranteed. That doesn’t mean you have no borrowing limit, but it does mean that the lender can get the maximum amount back if you default.
If you have a remaining entitlement, the VA will subtract the amount you’ve used from the amount it will guarantee. Some lenders may consider remaining versus unlimited entitlement to determine the terms and amount of your loan.
Pre-Approvals
You don’t have to choose a lender before you’ve found a home, but it helps to have a pre-approval letter in hand. Knowing how much you can borrow can help you to narrow down your search.
Look for companies that will pre-approve you and quote you rates without conducting a hard credit check.
Step 4: Find a Home
This is the exciting part of the home-buying process. Going through an agent is usually easier than searching on your own, so take some time to find a qualified professional in your area. The National Association of Realtors directory is a great place to start.
Choose an agent who has experience working in your target neighborhood. It can also be helpful to have someone who’s worked with VA borrowers, since that person will know about specific contract considerations.
Choose an agent who has worked with VA borrowers in the past.
Step 5: Prepare and Sign a Purchase Agreement
Once you’ve found your next home, you’ll work with your agent to draw up a sales contract. Make sure it includes a VA Escape Clause, which confirms that you can back out if the property appraises for less than the sale offer.
You may also choose to add other contingencies, or specific reasons why you'd be allowed to cancel the sale. For example, if you're not prepared to invest a lot in repairs, you could add a contingency that you can withdraw your offer if the home fails inspection.
Be sure to include contingencies that describe specific reasons why you'd be allowed to cancel the sale.
Step 6: Get an Inspection and Appraisal
Before you close on your new home, you will need to have a VA-approved appraiser to inspect the house. This has two purposes:
- To make sure the loan meets minimum property requirements (MPRs) which the VA uses to establish that a home is in good condition
- To estimate the home’s market value
In most cases, especially if you’re planning on putting zero down, the property will need to appraise at or above the sales price. If it doesn’t, you have a few options:
- Pay the difference between the appraised value and the selling price in cash at closing
- Ask the seller to lower the price to the appraised value
- Ask your agent to provide the lender with data showing that the property’s value is higher than the appraised price
If you go this last route, the lender will present this data to the appraiser and ask the appraiser to reconsider their estimate.
Keep in mind that an appraisal is not an inspection and that not all issues will come up under MPR guidelines. The VA recommends that you have the property professionally inspected to see if there are any defects or necessary repairs.
In most cases, especially if you’re planning on putting zero down, the property will need to appraise at or above the sales price.
Step 7: Review Closing Paperwork and Sign
If everything goes as planned, your lender will have a Closing Disclosure ready for you at least three business days before you’re scheduled to close on the home. Make sure you read everything and agree to all terms before you sign on the dotted line
Once that’s done, the home is yours!
Key Takeaways
If you’re a qualifying military veteran or active-duty service member, a VA loan can help you to afford your next home. A VA loan offers benefits like affordable interest rates, mortgage insurance exemptions, and the potential for zero down.
For the most part, getting a VA loan is like applying for any other mortgage. You even go through a private mortgage lender. Follow this plan and before you know it, you’ll be signing at the closing for your brand-new home.
Need help comparing your options? Apply today and get the lowest rates on the market.
