How VA Loans Work
Though VA loans are backed by the Department of Veterans Affairs, the U.S. government doesn’t issue the loans directly. Instead, a VA-approved lender, such as a bank, credit union, online mortgage company, or other financial institution, will be the one you're doing business with.
What sets VA loans apart are the interest rates and favorable terms that you can get. Because the federal government is backing your ability to repay the mortgage, you’re considered a less risky person to lend money to.
VA Loans carry many benefits, such as:
- No down payment required
- No private mortgage insurance required
- Increased likelihood of qualifying for a fixed-rate loan
- Additional support if you have difficulty paying your loan payment
This program offers Veterans who may be working to improve their credit scores the opportunity to purchase a primary home for themselves or their families. But these benefits aren’t just for your first home. If you qualify for the VA loan program, you can enjoy a lifetime entitlement.
In the future, you'll also be able to skip many of the normal steps others take when refinancing their loans for better interest rates. The program is known as IRRRL, or Interest Rate Reduction Refinance Loan. It’s designed to help Veterans refinance their VA loans with new VA-backed loans with even better terms.
If you qualify for the VA loan program, you can enjoy a lifetime entitlement.
VA Loan Eligibility Requirements
Before you apply, you'll need to confirm your eligibility for the program.
Eligibility is based on when you served, whether you saw active duty or volunteered during peacetime. You'll also have to have been honorably discharged, placed on the retired list, or discharged due to a disability you incurred as part of your service.
It’s worth noting that the only person that can be on your VA loan is your spouse.
If you happen to be the surviving spouse of a Veteran, you may also qualify through their service if you are still unmarried or if your spouse is missing in action.
It's best to go to the VA website to confirm whether your service qualifies for this home loan program. You'll need to line up the dates that you served, where you served, and in what capacity.
To confirm that you are eligible, you'll want to get what is known as a Certificate of Eligibility, or a COE. It's not necessary to have this document before you begin your process, since any mortgage company you work with should be able to retrieve this for you. But you can request a copy yourself from the VA's eBenefits portal.
Eligibility is based on when you served, and you have to have been honorably discharged, placed on the retired list, or discharged due to a disability.
How to Get a VA Loan
Once you know what it is and if you are eligible, the next play is to understand the process for getting a VA loan.
Step 1: Look for lenders.
Not every bank, credit union, or online mortgage company is able to process VA-backed loans. You'll want to look for an agency that is approved by the U.S. Department of Veterans Affairs.
Step 2: Know what you're eligible for.
Didn't get the COE and went straight to house-hunting instead? You're not alone. Don’t worry, any VA-approved lender will be able to explain your entitlement benefits to you and confirm your eligibility. You may be able to get pre-approved at this time too.
Step 3: Find a real estate agent with VA experience.
Real estate professionals can help you search for homes that meet your needs. When you've found a home you love, they'll also be able to help you enter a purchase agreement with the seller. You'll need this to order a VA-approved appraisal.
Step 4: Get the appraisal.
Home appraisers will use research on the property, an inspection of the state of the property, and an understanding of the neighborhood and other factors to determine the market value of the home. The VA uses this information to approve the loan, and the appraiser has 10 days to complete their work.
Step 5: Do your due diligence.
Once you're under contract on a property, you'll want to continue your due diligence to ensure you're making a sound investment.
The VA is not responsible for which home you pick. They don't have the ability to make sellers fix defects, and they only have minimal ability to pressure builders if your new home is having issues. It's your responsibility to complete the home inspection and procure your own insurance before closing.
Step 6: Close on your home and get the keys.
Once the ink is dried, you will be able to pay your monthly mortgage payments and escrow to the mortgage company, just as you would on a conventional home loan.
Once you're under contract on a property, you'll want to continue your due diligence to ensure you're making a sound investment.
Tips for Getting the Best Terms, Rates, and Fees
Veterans still need to know the behind-the-scenes tricks to get in the right position for the best terms, rates, and fees with their VA loan. Take note of these tips from experts.
Get a pre-approval.
A pre-approval letter will let you know exactly how much loan money you qualify for. This will be helpful for your real estate agent, so that you'll only see homes that you can afford. Plus, in a competitive market, sellers will want to see the pre-approval so that they know they aren't wasting their time.
Remember, you'll also be paying for homeowners insurance, taxes, and closing costs. Use an online mortgage calculator to get a realistic idea of your financial responsibility.
Connect with an experienced real estate agent.
Not every real estate professional knows what Veterans expect and are entitled to, so look for an agent with experience in handling home transactions involving VA loans. They'll be able to let you know, for example, that you can't use your benefit to buy a vacation home or an investment property like a multi-family unit where you won't be living.
Scan your credit report.
Veterans who are eligible for VA loans don't have to have anywhere close to perfect credit, but you still want to make sure that everything is accurate on your credit report. You can request a free credit report from the three main credit reporting bureaus on an annual basis.
Request this early in your home search to ensure there are no errors that need addressing. Even the most minor error can hurt your credit score.
Get organized.
Along with your credit report, you'll want to collect your pay stubs and W-2s that show you've had steady employment during at least the last two years. If that's not the case, you may want to wait a few months until you can show that you have a reliable means of income.
Some mortgage companies will also ask about your debt-to-income ratio (DTI). This is the number you get when you take all the debts you owe each month, add them up, and divide that number by your gross monthly income. In general, the VA wants to see a DTI equal to or less than 41%.
If your DTI is much larger than that, it may be better for you financially to create a plan for reducing the debt before applying for a mortgage.
Compare many mortgage companies.
Since the government isn't involved in setting the interest rates for different lenders, you may find a big difference in offers among banks and other financial institutions that you approach.
That's why it's important to look at many options—but only during a short window of time. Mortgage companies will check your credit in order to see if you are pre-approved, but all those credit checks won't impact your credit score if it stays within a 45-day window.
Get your financial profile in shape before applying, and look for an agent with experience in handling home transactions involving VA loans.
Next Steps for Your VA Loan
Once you've got the playbook down, the next thing you'll want to do is decide between a fixed-rate mortgage and an adjustable-rate mortgage. Your choice will depend on how long you plan to stay in your home, and if you are willing to refinance through one of the VA-backed programs.
You'll be able to discuss these options with representatives of VA-approved mortgage companies once you've made sure that you’re eligible for a VA-backed loan. Begin the pre-approval process, along with gathering your COE, so you can make a play for the home of your dreams.
To compare your options and make sure you’re getting the best rates, check us out at Lower.com.
