Personal Insights

Understanding VA loans

If you’re a veteran or a member of the military, you may have access to the VA Home Loan program, which aims to make homeownership attainable. But what is a VA loan exactly, and is it right for you? The answers to these questions (and a few others) can help you decide.

What is a VA loan?

A VA loan is a mortgage loan issued by private lenders to United States military service members, a portion of which is guaranteed by the U.S. Department of Veterans Affairs. The primary benefit of a VA loan is that it allows eligible veterans, active service members, and some military spouses to purchase a home without a down payment or private mortgage insurance requirement.

Who qualifies for a VA loan?

Many members of the military and National Guard, veterans, reservists, and military spouses are able to apply for VA loans. Eligibility for service members and veterans is based on length of service, and the applicant must have been discharged — if not currently on active duty  — under conditions other than dishonorable.

If you are the spouse of a veteran, you may be eligible for a VA loan if you meet certain conditions:

• If your military spouse died on active duty or as a result of a service-related disability —and you have not remarried
• If your military spouse was totally disabled before his or her death, and you have not remarried
• If your military spouse is missing in action
• If your military spouse is a prisoner of war

If you are the spouse of a veteran, and you have remarried, you are only eligible if you remarry after reaching age 57. Children of veterans are not eligible to obtain a VA loan based on their parents’ eligibility. If you have questions regarding your eligibility, consult with the Department of Veterans Affairs.

What are the benefits of VA home loans?

In most cases, you can finance 100 percent of the home purchase price plus the VA funding fee. That means there is no down payment required as long as the sales price does not exceed the home’s appraised value. You may even be able to refinance with a cash-out mortgage — in which you take cash out of your home’s equity, depending on the amount refinanced and the amount owed on your home — up to 100 percent of the appraised value. Unlike FHA loans and most conventional loan transactions, there is no monthly mortgage insurance premium to pay.

“However, there are situations where a veteran may be purchasing a home that is priced above the county loan limit for where the property is located, or they may have a portion of their entitlement tied to another, unsold property,” says Jennifer Rollins, a Mortgage Loan Officer at Regions Bank. “In these situations, a down payment may be required.”

An added benefit is that you may not be limited to only one VA loan transaction. Subsequent or additional loans may be permitted if you haven’t reached the maximum amount that the VA will guarantee.

Additionally, because the VA home loan program was created to make buying a home easy and affordable, you may still be able to use a VA loan if you’re in the process of building credit.

What are the limitations of VA home loans?

Each veteran is required to pay a funding fee when using their VA eligibility unless they are deemed exempt because of a service-connected disability. The VA funding fee is a set cost applied to every purchase loan or refinance. Borrowers have the option to pay the fee upfront or roll it into the loan. While the veteran has the ability to use and reuse the VA home loan benefit, the funding fee percentage rate increases after the first use.

You’ll also need to factor in closing costs when you apply for a VA loan. “For purchase transactions, closing costs aren’t rolled into the loan, but sellers are allowed to contribute up to 4 percent of the sales price toward closing costs that would typically be paid by the borrower,” Rollins says. A funding fee for the loan may also apply.

Another drawback is that a VA loan cannot be used for second homes or investment property. So be sure you’re looking for a home that will be your primary residence when using a VA loan. Additionally, there may be limitations on condo purchases, which must be approved by the VA. If you’re seeking financing for a condo, check with your lender regarding VA eligibility.

Before you make a decision, sit down with your lender to discuss the ins and outs of purchasing your home using a VA loan. Consider all your mortgage options, and make sure you ask questions and explain your goals to get the most out of homeownership.