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Veterans Affairs VA Mortgage Loan Requirements Guide

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Seal of Veterans AffairsLast week, I wrote an FHA loan requirement guide to help folks looking to find more information about the Federal Housing Administration’s loan insurance program. In that post and in emails, many readers told me that I should take a look at the FDA and VA programs because it may be more appropriate for someone looking to purchase or refinance their existing home.

This article will cover the loan guaranty service offered by the United States Department of Veterans Affairs, also known as the VA home Loan program.

One warning, I’m not a mortgage expert, I hope that everything I’ve written is correct and accurate but I recommend you speak to a professional before making any decisions.

VA Loan Program History

The mission of the VA home loan program is to “to help veterans and active duty personnel purchase and retain homes in recognition of their service to the Nation. All veterans and other participants in the program will be treated in a courteous, responsive, and timely manner. We will endeavor to operate in the most efficient manner possible to minimize costs and ensure the best use of the taxpayer’s dollar.”

The program was created to help minimize the economic and socialogical problems of post-war readjustment following World War 2. It was created by the Servicemen’s Readjustment Act of 1944 as a loan guaranty program because it was cheaper than giving cash payments.

The logic behind the insurance program was that soldiers, especially in times of war, aren’t able to establish credit because they’re deployed in combat. The insurance would put them on even footing with their non-veteran citizen, who could build a credit history. If you’re curious about the full history of the VA program, you can read it here (it’s 28 pages long).

How the VA Loan Program Works

The program is a loan guaranty, like traditional private mortgage insurance, and it’s greatest appeal is that qualified individuals can get 100% financing of the sales price as long as they satisfy certain income or credit requirements. There is no limit to the maximum loan amount but lenders generally cap them because they resell the mortgages on the secondary market.

Cost of an VA Loan

The VA does not offer the loan, just the guarantee, so the rates and points can change from lender to lender. There isn’t a mortgage insurance premium each month, like with private mortgage insurance, but the VA charges an up front VA funding fee that can be financed. If you are eligible for a VA home loan, it’s best for you to request a bunch of quotes and compare the costs of each loan to one another.

In general, the decision is based on how much of a down payment you have. If you have less than 20%, a conventional mortgage will require a monthly private mortgage insurance payment that a VA mortgage wouldn’t require. Instead, the VA loan will have a “funding fee” that increases the size of the loan.

The funding fee is a percentage of the loan amount based on this schedule:

  • 0% down payment: 2.15% of the loan amount for first time homebuyers
  • 5% down payment: 1.50%
  • 10% down payment: 1.25%

VA Loan Eligibility Requirements

If you are active duty or honorably discharged, chances are you are eligible. The VA only gives general rules of eligibility and they are:

  • Served 181 days during peacetime (Active Duty)
  • Served 90 days during war time (Active Duty)
  • Served 6 years in the Reserves or National Guard
  • You are the spouse of a service member who was killed in the line of duty, missing in action, or a prisoner of war.

Obtaining a Certificate of Eligibility: It is important that you obtain a Certificate of Eligibility for VA home loan benefits. You do this by completing the a VA Form 26-1880 and submitting it to the VA Eligibility Center with proof of service. The Certificate of Eligibility is important and you can also get it through your lender, who will use the ACE (Automated Certificate of Eligibility) system.

The Loan Process

In general, the whole process takes about five steps, outlined in greater detail at VA Home Loan Product page:

  1. A veteran picks a home, the purchase and sales agreement will include a VA option clause that lets it be terminated should the veteran not be able to obtain a VA loan.
  2. Contact a lender to apply for a loan. This includes all of the processing of eligibility, loan applications, and collection of supporting documents.
  3. The lender processes the credit and income information and orders a VA appraisal of the property.
  4. Lender collects the remaining information and underwrites (or rejects) the loan.
  5. At close, if the loan satisfies VA regulations and guidelines then the transaction closes.

As you can see, the process is very much like a regular home sale process.

If anything on this page is incorrect, please let me know and I will correct it immediately!

(Photo: terren in Virginia)

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9 Responses to “Veterans Affairs VA Mortgage Loan Requirements Guide”

  1. Jim – I’m glad you brought this up. It’s important our government does more to reward our solders who’ve fought for our country. One city I know of, 60% of the homeless are ex veterans. How can this be? It shouldn’t be.

    The NFL has a pension for players after a couple years, so should all military personnel.

    FS

  2. Jim,

    Articles of this type are special. You probably don’t have too many readers who qualify, but this information is not always easy to find and your collecting it in one place is a fine idea.

    Well done.

    • Jim says:

      Thanks Mark, I wrote it because after reviewing Checks for Vets, I felt I’d be remiss if I didn’t cover this in some way.

  3. Caroline says:

    My husband qualifies for a VA loan and has the certificate for it. We have used it before. When we were looking to buy another home, we still had money left on the guarantee that we could use to help with the purchase after the down payment required by our local banks. However, many local state banks and credit unions will not use the VA loan because they don’t want to go through the paperwork. We live in a rural area of the UP and I checked with 7 banks within a 100 mile radius of our current home. Not one of them would process the paperwork. No reason given except that they just did not do it.

    The program is great when you can use it. Just don’t expect your local bank to handle the paperwork.

    • saladdin says:

      One of the reps of the VA loan is that the appraisals/inspections are very specific and are such a pain in the ass. And the program limits what fees you can be charged as a veteran. These things can make it hard to find someone who wants to do these loans.

      Also, the funding fee can be waived if you have a certain % of service disability.

      Do not underestimate the historical power of this bill. The GI Bill changed American history. All of a sudden millions of Americans could buy a house and get a college education. Two things that were only available to a certain tier of society. This act greatly helped the creation of the “middle class” that we enjoy. This act is truly on the list of great governmental contributions.

      saladdin

  4. Mccavity says:

    I just closed on a VA loan house 4 days ago. I got a great rate, a good price, and the entire process was about as smooth as it could be. Since it’s our first home, we even get the tax credit on top of it! The lack of PMI payments on the mortgage dropped the monthly price to a percentage of our income we were more comfortable with.

  5. jdm says:

    thank you for this excellent article. I’m a veteran of OIF and wasn’t very well informed about this process. I’m currently looking into this process to determine if the benefit will be worthwhile for me. Your article was a great, concise summary of the process and requirements for eligibility.

    Sincerely,

    jdm

  6. Boopie says:

    McCavity, what was your rate & closing costs? any points on it? I’m told that the VA Loan default rate is less then conventional loans, thus the rate should at least be equal or better than conventional loans, but have not found that anywhere.

  7. Mika says:

    Hi Jim,
    This is a well written article. I just want to add that the first step is to be pre-approved before you go on the search for a house. This way you know what you can afford and it’s in writing so that you can make an offer on a house.
    These loans are awesome loans for Veterans. My husband is a loan officer and manily works with Veterans. Please don’t let anyone talk you out of using this benifit, make sure you find someone with experience with it, and who will explain it to you. I am not advertising for my husband here, it’s just that after learning so much about these loans and knowing that so many Veterans don’t realize how great they are and how easy the process is, I just want to tell them to take some time to find out who you can work with and don’t be talked out of the benefits you have earned. It’s well worth the research!


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