Quick Guide to VA Loans
Another great benefit of being either active duty or a veteran is having the VA guarantee your home loan. The VA does not provide home loans or mortgages; rather they back your loan, which is provided by private banks or mortgage companies. When your loan is VA-backed, these companies can provide you with better terms than without that guarantee. There are also programs for refinancing, home-equity loans, and home improvement loans.
A purchase loan is the most common VA loan – the VA is backing your mortgage, so you get better terms. One of the best features of this is that there is NO REQUIRED DOWN PAYMENT*! There is an equivalent to a down-payment, called the VA funding fee, is a fee you must pay in addition to the cost of the mortgage. Although it is extra money and sounds bad, it is rolled into your total mortgage, so you do not have to pay anything up front; it is part of your monthly mortgage fee. This chart shows how much your funding fee would be. There is also NO private mortgage insurance requirement, since the VA is backing your mortgage. You do not have to be a first-time homeowner to use these benefits, and you can reuse it as many times as you like! It is an amazing VA benefit, in my opinion on par with the GI Bill. It will currently cover a mortgage up to $417,000, unless you live in one of these counties.
To be eligible, you must’ve served at least 24 months continuously if you’re now a veteran, or 90 days continuously if you’re currently active duty (there are many other exceptions who are eligible in the above link).
First, you must obtain a certificate of eligibility, accesible through the eBenefits portal. If you’re active duty, you must have a letter with your eligibility information signed by your CO, and if you’re a veteran, you must have your DD-214.
Then you will find a lender who participates in the VA loan process. Although I love USAA, they often don’t have the best mortgage rates; I went through lendingtree, which offers several different VA mortgage lenders. The bank at the time which offered the best rate for me was National Bank of Kansas City, which was able to offer me a loan even though I live in PA. Generally, there are 15 and 30 year fixed loans, and 3 and 5 year ARM loans. One of the nice things about the hybrid ARMs backed by the VA, is that whereas regular ARMs can gain a lot of interest after the initial 3 or 5 year terms, the VA hybrid ARMs can gain only a maximum of 1% per year, up to 5 times. In essence, there is a maximum of 5% that the APR can appreciate over the life of the ARM; the loan term for both ARMs is 30 years. So, if you succeeded in getting a 2.85% 5 year hybrid ARM (like I did), the maximum rate to which it could appreciate is 7.85%, even if non-VA backed loan rises higher. If you know you’re going to move out of a house in 3 to 5 years (like I did), a hybrid ARM could be a better choice than a 15 or 30 year mortgage.
If you already have a non-VA backed mortgage, and would like to convert it into a VA backed loan, you can do that through a Cash-out refinance loan. You can also use this to take cash out of your home equity to take care of concerns like paying off debt, funding school, or making home improvements.
VA loans are assumable, meaning the owner can allow another person to assume responsibility for the loan with the participation of the lender, and there should be no restrictions on the owner’s ability to sell the home.
You cannot use a VA loan for houses outside of the US, with the exception of US territories and possessions such as Puerto Rico, Virgin Islands, American Samoa, Guam, and the Northern Mariana Islands.
One of the cool things you can do with a VA loan is get anywhere from $3,000 to $6,000, rolled into your mortgage, to use on home energy improvements. Up to $3,000 can be rolled in with no questions asked, and anything over $3,000 up to $6,000 must have a contractor plan and invoice before it can be released. You must ask your mortgage originator to add this (most of them do not know about this benefit). I had $3,000 rolled in to mine, used $150 for an energy assessment, then used the rest on eco-insulation for my basement and sealing my doors, which have markedly reduced my energy bills in the summer and winter.
Once you have a VA loan, you will get a letter from several different banks at least once a week offering an IRRRL, an interest rate reduction refinance loan. This is simply a refinance loan, and can be useful if the current interest rate is much lower than your original mortgage interest rate, or if you want to convert an ARM into a fixed rate loan. No new credit inquiry or appraisal is required when applying for the IRRRL, and it can be obtained without any money out of pocket, by rolling all of the new costs into the total mortgage. Just be aware that when you do this, your monthly payment very well could go higher, so make sure you check on the terms and rates with several different banks to get the best deal.
If you are in the market for purchasing a house and are eligible, you should definitely apply for a VA home loan. If you have any other questions, check out the VA site, this non-VA associated site, or you can message me with any questions.
*as long as the sale price does not exceed the appraised value of the house