If you served in the military, you are probably eligible for a VA Loan. VA loans are available to:
- Veterans (honorably discharged)
- Active Duty (after 6 months of service)
- Reservist & National Guard (after 6 years of service or 6 months called to active duty)
- Some surviving spouses
The VA loan is somewhat of a misnomer as it isn’t actually a loan, instead the Veteran’s Administration (VA) guarantees a portion of the loan. This guarantee gives potential home buyer more favorable terms. However, they still have to shop around to get approved for a loan from a bank or mortgage company.
VA loans are becoming more popular, and if you are eligible it is a GREAT alternative to a conventional loan. When the housing bubble burst several years ago, banks began to tighten standards on lending to try to stop the flow of defaults, foreclosures, and bankruptcies. The VA loan, however, remains one of the few mortgage options for borrowers that don’t have the standard 20% down payment. These loans are also easier to qualify for.
Veterans are securing homes with little to no money down once approved for a VA Loan. Another huge advantage is that private mortgage insurance is not required. This is typically an added expense for buyers not paying a 10% down payment. A $200,000 home purchased under FHA with a 3% down payment would cost on average $200 more per month than the same house purchased with a VA loan.
There are funding fees associated with filing for the loan that are based on a percentage of the loan amount. These are typically lower than standard loans.
Technically there is no minimum credit score for a VA Loan, BUT lenders generally require a score of 620 or higher. It is possible to get a loan with a lower score (interpret – rare), but you will probably pay a higher interest rate. Manual underwriters want to see proof of income before granting eligibility. Because this is a benefits program there is added flexibility and underwriters try their best to approve those that are eligible. However, they can’t work miracles, and the better the credit score, the better the interest rate and amount approved for. These loans however, are typically more forgiving, allowing buyers to be eligible for benefits 1-2 years after a bankruptcy or foreclosure.
VA loans are for primary residences only. So if you want to flip houses or purchase a vacation home or rental property, you’ll need to seek another type of loan. Also, there is a limit on VA loans, typically around $400,000 (which is more than I’ll ever need for a home in the Midwest)! It can go as high as $1 million in high cost areas. Just because that is the limit, that is not what you are automatically approved for…that is based on your credit history.
Also, VA loans are very strict about housing inspections and making sure the home which will be a primary residence is a good value for the buyer.
With all the great benefits, veterans taking advantage of the VA loan is generally low. That is because most do not fully understand the benefits. I waited 10 years until after I was eligible to buy the home I’m in now. At the time I had a fair credit score (above 620) and was able to get a loan with no money down. Being pre-approved is great because it allows you to go shopping knowing exactly how much you can spend.
No matter what you are pre-approved for, you should have an idea ahead of time how much “house” you can afford. For example, if you determine you can only afford $275K mortgage but are pre-approved for $325K….STICK TO YOUR BUDGET.
Statistically, the VA program has seen the lowest foreclosure rates of any of the lending programs. This surprises many since you can get a loan with no money down and less than perfect credit. However, the manual underwriters do a good job at looking at the whole picture and only approving what they think buyers can afford.
Don’t think that you can walk into a home with no expenses. Just because there is no money down, there are funding fees (which may be waived for veterans with disabilities), escrow money, inspections and moving costs. Also, if you have the cash for a down payment, it is advisable to put something down as it can result in an even lower interest rate.
Want to learn about another military benefit?
Check out my guest post on Thrift Savings Plans (military version of 401K) at Stacking Benjamins
What about you?
Have you taken advantage of the VA Home Loan or know someone who has?