How Do VA Loans Work?

Are you thinking about getting a VA loan to purchase your home? We have the information you need. Read here to learn more about how do VA loans work.

In 2016, the VA granted a total of 707,107 home loans, and this was the highest figure of issued loans in the history of the program.

The Veteran Affairs program was created in 1944 and has benefited more 22 million veterans. This program helps the veterans, service members and eligible surviving spouses of military personnel to get homes.

If you are an American veteran or service member, it helps to take the time to learn more about the VA program.

You might want to ask to ask: How do VA loans work?

Well, we are going to provide you details on how these loans work and more relevant information about them.

Let’s get straight to it.

What Are VA loans?

A VA loan is a home mortgage that is available to veterans and service members. The U.S. Department of Veterans Affairs guarantees these loans, but they are offered through private lenders.

You do not require mortgage insurance to get a VA loan, and there is no minimum credit score requirement for applicants. Typically, it is a good option for people who do not have money for down payment.

In the general mortgage market, VA loans are somewhat easier to qualify for than most mortgages. The Department of VA is not a direct lender, but it requires all the necessary guidelines to be met.

So, how do VA loans work?

How Do VA Loans Work?

The Department of Veteran Affairs doesn’t issue the loans but insures a part of them. This guarantee gives lenders the confidence to offer loans without down payments at competitive terms and rates. 

If you are interested in VA loans, you can apply through the approved financial institutions and banks, which have been authorized to extend home financing through the VA loan program.

The program has a particular requirement known as residual income. This is the balance you have in your account every month after a significant expense. You might want to ensure that you meet the residual income benchmark, which can vary by family size and your location.

Although it is not a condition, you can choose to pay a down payment if you want to borrow an amount that is more than the VA’s county limit, which is $424,100 as of 2017.

Keep in mind that being a veteran doesn’t make you automatically eligible for the loan. You must meet service requirement and other income requirements.

Also, the requirements differ by the time or period you were in service.

Are There Different Types of VA Loans?

A better approach to the question “how do VA loans work?” is to understand the types of VA loans that are available to the borrowers. Essentially, this will allow you to pick an option that you feel will meet your needs.

1. Traditional Fixed-rate Loans

This option usually has a particular interest rate that does not change. If you are certain about making timely and full loan payments, then this one is a great option for you.

If you don’t love taking risks, also a fixed-rate loan is ideal as the rate is locked for the whole life of the loan. Keep in mind that economic shifts won’t impact the rate. However, you can change the rate only through a refinance.

2. Traditional Adjustable-rate Loans

Adjustable-rate loans are ideal for risk takers because they tend to carry risks. The good thing they have a potential of reward. This option if great for those who love planning their finances and

The rates of these loans tend to be lower compared to fixed rate loans. This means more money for you from the beginning.

Adjustable-rate loans usually get annual rate adjustment and this based o the lender’s margin and economic shifts.

3. Hybrid Adjustable Rate Mortgage

For these types of VA loans, they come with a fixed rate for at least three years. After that, the lender adjusts the rates every year. This loan is a good option for you if you are expecting to relocate in the near future.

You can take advantage of the fixed rate period to build your home equity and save money. Once the adjustable rate starts, you can use your remaining entitlement to get a second loan or refinance for a new home purchase.

How To Get a VA Loan

How do VA loans work when it comes to qualifying for a home?

To qualify for a VA loan, you need to meet all the requirements of a VA approved lender. If you are a veteran, reservist, military, or National Guard member, you are eligible to apply for the loan.

Spouses of service personnel who lost their lives while on duty or suffered permanent disability are free to apply to the VA program, too.

For active-duty members, you are eligible to apply for the loan after six months of service.

National Guard members and reservists must wait for six years before applying. But, if they are recalled to active-duty, they can apply after 181 days in service.

During war periods, you can apply for a Va loan after 90 days of active-duty.

You might need to get a certificate of eligibility before the loan application. However, some lender can get it for you during the pre-approval phase.

The application might feature two stages:

• Prequalification – This helps the lender to determine if you are eligible for the loan and may take about 10 minutes.
• Pre-approval – Here, the process is much detailed and the lender will look at your financial portfolio, including pay stubs, tax returns, and bank statements to give you the amount you qualify for.

You can bring a legally married spouse to co-sign the loan if you want. Unmarried couples are also able to co-sign the loan.

Underwriting Requirements

This is another vital area to cover when answering the question: How do VA loans work?

In as much as the U.S. Department of Veteran Affairs provides guidelines for the loans, lenders also have their own internal requirements and rules.

Some lenders might need a credit score of 620 or higher. You can find lenders accepting a score below 620, but will charge high-interest rates. You must be capable of repaying the loan on a timely manner.

You should not have excessive debt, but some of these rules are flexible that conventional loans. The lender will examine your credit history and determine if you are eligible.

Keep in mind you can only use the loan to finance a primary home. So, it’s not to be used to buy or refinance an investment or vacation home.

What Are the Fees?

Here is another important part of the explanation for your question: How do VA loans work?

Generally, the costs for obtaining VA loans is lower than for other types of mortgages. But, they have funding fees that vary depending on the type of veteran and the amount of down payment.

If it’s your first time using the VA loan program, the funding fee is 2.15 percent of your home buying price. You can also get a fee of 1.25 percent if you choose to make a downpayment of 10 percent or more.

However, 90 percent of approved loan applicants get the loan without any down payment.

Should you decide to use the VA program for the second time, the fee will be 3.3 percent of the amount.

These fees usually go to the VA as they help to keep the program running to benefit coming generations. You can also roll the fees into the overall loan amount.

The VA limits closing costs on the loans, so it’s possible to purchase a new home with little to no closing fees.

They have lower interest rates than other mortgage programs and that’s the reason the program is growing exponentially.

When shopping for a loan, ask questions like: how do VA loans work? what are your terms?

What Can You Purchase with a VA Loan?

You can use the loan to buy a new house, condominium or townhouse. Or, use it to refinance an existing mortgage to reduce the interest rate or to refinance to get cash.

The money can be used to purchase a farm residence, but you should not use the arm to generate income.

You can also use the loan to build a new house. It is also acceptable to use the money to fund home improvement projects such as energy-efficient additions, insulation and storm windows or doors.

For veterans that are interested in settling outside the United States, keep in mind that the program doesn’t allow buying properties outside the country using the loan money.

Get a Home You Love

Well, I hope this answers your “how do VA loans work?” question and helps you understand the VA loans.

It is important to take the time and find a loan that meets your specific needs. Talk to various lenders to understand their terms and fees before making your decision.

After you get your loan, invest in getting a home that your family will love.

If you pass away before paying the loan and you don’t have a mortgage life insurance, the responsibility of the mortgage is passed to your spouse. Your spouse must continue making the loan payments.

A mortgage insurance can be a great option to use, but the VA does not offer it. However, you can find a private insurance to help you make these arrangements.

If you want to sell the property that you bought using the VA home loan, you must request a “release from liability” to transfer the obligation to the new owner.

With this simple explanation to “how do VA loans work?”, you can now focus on getting the right option for you.

We appreciate our military members!

And, if you have a question about our mortgage services, don’t hesitate to contact us.

You may also find our step-by-step guide: How to Get Home Loans for Veterans useful.