Purchasing a home can be a complicated process, especially for first-time buyers who are just learning the ropes. But one thing that doesn’t have to be overly complicated is a VA mortgage loan. Designed for veterans, these mortgages can be a great deal—especially for buyers who are struggling to save for a down payment.
VA mortgage loans have certain eligibility criteria that must be met along with program specific forms to complete prior to applying for a VA mortgage. So that you can confidently prepare yourself for the process ahead and decide if a VA mortgage is right for you, let’s walk through several of the most commonly asked questions and facts you might not know about the program.
1. WHAT IS A VA MORTGAGE LOAN?
The U.S. Department of Veterans Affairs (VA) makes it easier for veterans and current members of the military to afford a home. Requiring no down payment and no private mortgage insurance, these loans can cut both your up-front costs and monthly payment costs.
2. HOW IS A VA MORTGAGE LOAN DIFFERENT FROM A TRADITIONAL MORTGAGE?
Most traditional mortgages want you to put down a hefty 20 percent down payment. If you cannot afford the down payment, you’ll have to pay private mortgage insurance (PMI) on top of your monthly mortgage payment—an extra fee to ensure your lender gets paid even if you cannot make your payments. But in the case of a VA mortgage loan, your loan is guaranteed by the U.S. government, which means lenders don’t require these standard fees. Additionally, a VA mortgage gives you the benefit of avoiding prepayment penalties.
3. WHO IS ELIGIBLE FOR A VA MORTGAGE LOAN?
Many current and former members of the military—including reservists and National Guard members—are eligible to apply for a VA mortgage loan. In certain conditions, surviving spouses may also be eligible. You will need to meet specific service requirements—ranging from 90 days to six years, depending on type of service. Check with the Department of Veterans Affairs for complete eligibility requirements.
If you’re eligible, you’ll need to get a Certificate of Eligibility (COE), which confirms your military service, to apply for a VA mortgage loan from a lender. You can apply online, through the mail, or potentially through your lender. If you’re applying through your lender, the electronic system could confirm eligibility within a few minutes—but if you’re applying by mail, be aware the process could take some time.
4. HOW DO YOU GET A VA MORTGAGE LOAN?
Other than the need to prove your military service with a COE, the process of applying for a VA mortgage loan is much like the process for applying for a traditional mortgage. Your financial institution will review your credit—looking to see if you have good credit and the ability to make monthly payments.
However, even if you qualify for a VA mortgage loan, a lender can still decide to turn you down due to poor credit. As with any major loan, it is always best to ensure your credit is in good shape before you apply.
5. ARE THERE ANY FEES ASSOCIATED WITH THE VA HOME LOAN PROGRAM?
Yes. Required by law, the VA Home Loan program does charge an up-front VA funding fee. The fee ranges from 1.25 percent to 3.3 percent depending upon the following conditions:
· Type of service (reservists and National Guard pay slightly higher rates)
· How much of a down payment you are able to make (down payments over 10 percent get the lowest rates)
· Whether this is the first time you’ve used your VA mortgage loan entitlement (subsequent uses pay higher rates)
The VA funding fee can be pretty steep, but it’s much less than you would need for a down payment, and it keeps your monthly payment low because you won’t pay for PMI. Disabled veterans and their surviving spouses are typically exempt from funding fees, making it even easier for them to get into a home. Check with the VA for full rate details.
6. ARE THERE ANY ADDITIONAL FEES?
Beyond the VA funding fee, you’ll still have the closing costs associated with a traditional mortgage. These fees could potentially include: appraisal, title insurance, credit report, taxes, and discount points.
Like any mortgage loan, you’ll pay an interest rate set by the lender, as well as home insurance and taxes—the latter of which may be rolled into your monthly payment and put into an escrow account. Without the need for a down payment, you’ll pay less up-front, but getting a VA mortgage loan isn’t completely free, even if you qualify to have the funding fee waived.
7. WHAT TYPES OF PROPERTIES ARE ELIGIBLE FOR FINANCING?
There are some restrictions to what you can buy with a VA mortgage loan, but for most homebuyers this should not be a problem. You can use your loan to buy a home (or multi-unit property), build a home, refinance your existing home loan (whether it’s a VA or non-VA loan), or buy a manufactured home.
Regardless of the type of home you’re buying, VA mortgage loans are only for your primary residence. You cannot use a VA mortgage loan to buy a vacation home, second home, or investment property. However, if you move into a new home, but intend to keep your VA mortgage loan-purchased property as a rental, you typically can—as long as you don’t do so immediately. Check with your lender to be sure.
8. CAN YOU GET MORE THAN ONE VA MORTGAGE LOAN?
Yes. However, you must fully pay off one mortgage loan before you can apply for another. Keep in mind that the VA funding fee for subsequent VA mortgage loans will be higher—but it’s still likely to be a good deal for buyers who cannot manage a 20 percent down payment.
9. IS A VA MORTGAGE LOAN A GOOD DEAL?
For many borrowers, yes. The combination of no down payment and no PMI makes a VA mortgage loan an appealing way to get into a home without big up-front costs. However, it’s not necessarily a good deal for everyone. If you have the savings to make a 20 percent down payment on a house, you wouldn’t need to pay PMI in the first place—and if that’s the case, the VA funding fee is an extra expense. In this case, a traditional mortgage is most likely to be a better buy.
Before rushing into make a final decision, run the numbers. Take the time to compare rates and the costs associated with more traditional mortgages versus a VA mortgage with your lender—like PenFed. Then decide which type of mortgage is best for you.
CONSIDER PENFED FOR YOUR FINANCING
The VA itself does not provide loan financing for mortgages. You will need to borrow directly from your bank or credit union. Check with your financial institution to see whether they offer VA mortgage loans.
*Rates and offers are in effect as of July 20, 2016 for new applications only, for a limited time, and subject to change without notice.