While buying a home is a stressful experience, adding multiple moves with the military can make the process even more overwhelming. Lucky for you, the VA Home Loan allows service members to get approved for reliable, low-cost, 0% down mortgages. By understanding the VA Home Loan, you can enter into the home buying process with newfound confidence.
The VA Home Loan provides service members the ability to buy a home with less than a 20% downpayment. The program offers 0% downpayments without private mortgage insurance (PMI), competitive interest rates, and more lenient approval standards. While there are certain drawbacks such as the VA funding fee, the benefits severely outweigh the cons.
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What Is a VA Loan?
Beginning in 1944, the VA loan was created by the US Department of Veteran Affairs (VA) to assist servicemembers in establishing a foothold after coming home from WWII. Today, the VA loan has provided over 30,000,000+ loans to service members by offering them a route to homeownership that doesn’t require a large downpayment or perfect credit history.
The VA loan is most widely known for offering 0% downpayments without the need for private mortgage insurance (PMI). While the loans are offered through private lenders, they are backed by the VA, which takes on the extra risk. Acquiring a VA loan is easier due to not only a lower/non-existent downpayment, but in regards to credit scores as well. Service members with low credit or blemished financial records from a bankruptcy/foreclosure will be approved faster for the VA loan when compared to a conventional loan.
Despite all of these advantages, fewer than 14% of veterans utilize this benefit, either from failing to know they qualify, or not knowing how to get started. Today, I hope we will change that.
Who Is Eligible for the VA Loan?
Your eligibility for the VA loan will depend on your length of service, duty status, and character of service. The three qualifying groups are:
- Active Duty Servicemembers
- National Guard/Reserves
- Surviving Spouses (to include spouses of POWs/MIA)
*NOTE: if you are dishonorably discharged from the military, you will not qualify for VA loan benefits.*
|Active Duty|| ||-Statement of service (if serving)|
-DD214 (if retired)
|National Guard/Reserve|| ||-NGB Form 22 (confirms the character of service)|
-NGB Form 23 (verifies total time as “active duty”)
|Surviving Spouse|| ||–VA Form 26-1817 (PDF) (If receiving dependency/indemnity)|
–VA form VBA-21P-534EZ-ARE (If NOT receiving dependency/indemnity)
-Supporting documentation may include spouse’s death certificate, spouse’s DD214, and or marriage license.
Certificate of Eligiblity (COE)
If you believe you meet the above qualifications, you can attempt to acquire a certificate of eligibility. A COE simply provides confirmation to your lender that you do qualify for VA loan benefits. However, you should be aware that you do not need a COE to begin the VA Home loan process.
While you only need to have the certificate of eligibility before closing, I would highly recommend getting a certificate of eligibility BEFORE visiting lenders if you are National Guard/Reserve or a Surviving Spouse.
This is in case you believe you are qualified but truly aren’t, an inexperienced mortgage broker may pre-qualify you, then after you have already gone house shopping you realize can’t close on the deal. Not only will this dash your hopes for your new house, but you may also lose money on an escrow deposit, or find yourself homeless after your current lease expires.
Obtaining a COE Yourself (eBenefits/Mail)
Obtaining a COE can make shopping around for rates with different lenders easier, as you don’t need to wait for approval from your lender. It may also make it easier to avoid getting overly attached to a certain lender since you won’t feel as though you ‘owe’ them anything from running you through the system.
In order to apply online, you will need to go through the process at eBenefits. As long as you ensure you have all of the required documentation from the above table, it should be a quick and relatively painless process!
While you do have the option to apply for a COE through snail mail using the VA Form 26-1880 (PDF), this is a long process and typically not worth your time.
Obtaining a COE Through Your Lender (ACE System)
While you can get your COE before visiting lenders, your lender may have the ability to run you through the system themselves.
For lenders, they may use the webLGY portal to use the Automated Certificate of Eligibility (ACE) system. Often they can get the result in mere minutes, by running your basic information through the database.
When buying a home, a good credit score is essential. Not only will it help your approval chances, but it can also greatly reduce the interest rate for your loan meaning more money goes into your pocket.
If you have a credit score of 640+ you will have decent chances of receiving approval for the VA home loan. That being said, the VA has no mandated minimum credit score, meaning that if your lender is okay with the risk, they can approve you at a lower score. The flip side of this is that they also may have more stringent requirements meaning a 640 score won’t cut it.
If you are able to reach a score of 740+, that is where your excellent credit history pays off, and you may qualify for much lower interest rates. If you want to build your credit score, or learn about the best credit cards for military members, check out the linked pages!
Cash Reserves Requirements
While there is no hard and fast rule regarding how much ‘liquid’ money you must have in your bank before beginning the home buying process, both your income and cash reserves will be a factor in VA loan approval.
Your lender is going to want to verify that you can handle the mortgage payments, ensuring your odds of foreclosure are slim. The cash reserves requirement will depend on the type of property you plan on purchasing.
Cash Reserves – Single Family Home
If you are buying your first home for you and your family with the VA loan, typically you will not require any form of cash reserves.
While your lender will ensure you have the capital for closing costs and the VA funding fee, they will typically stop things there. Your VA loan funding fee can be rolled into your total loan balance, but the closing costs (typically 3% of the total loan amount), will need to be paid for out of pocket.
Cash Reserves – Multi-Family Home
While you cannot purchase rental properties directly with the VA home loan, one way around this would be to purchase a multi-family home.
You could purchase a duplex, and live in one half of the house while you rent out the other unit in the house. If you plan on going through with this option, you will need to be prepared to have 6 months of cash reserves ready for the mortgage of the whole house. So if you have a $2,000 mortgage payment, lenders will expect to see a minimum of ($2,000 x 6 = $12,000) inaccessible cash.
Cash Reserves – Real Estate Investors
If you are looking to purchase a new home while renting a different property out, you will need to show 3 months of cash reserves for the rental property. So if you are renting out another property with a $1,000 mortgage payment, expect to show ($1,000 x 3 = $3,000) in cash reserves.
This is to ensure that in the case of vacancy, (i.e. your tenant leaves), that you will not be at risk of missing payments on your multiple mortgages.
VA Home Loan Benefits
No Downpayment (0%)
The best perk of the VA home loan is the ability to completely avoid a downpayment.
The majority of home buyers will opt for a 20% downpayment on a conventional/FHA loan. This would mean paying $100,000 upfront on a $500,000 home! They don’t do this because they enjoy paying 6-figures out of pocket but instead avoid private mortgage insurance (PMI).
By not having to put 20%+ down on a home, the VA loan allows homebuyers to circumvent saving year after year just to be able to afford the downpayment. If you are someone who plans on putting a 20%+downpayment on your house, then you will be better off getting a conventional/FHA loan.
No Private Mortgage Insurance (PMI)
As we touched on above, whether you put 10%, 5%, or even 0% down on the house you plan on buying, you won’t need to get private mortgage insurance with a VA loan.
For conventional loans, putting down less than 20% makes you a liability. If you end up defaulting on a loan with less than a 20% downpayment, your lender will end up getting the short end of the stick. In order to protect against this, they will require you to secure private mortgage insurance that can cost anywhere from 0.5%-1.0% annually.
So let’s say you secure a conventional $500,000 home loan with a 1.0% PMI cost, you could be paying over $400 a month in PMI. That $400 doesn’t help build your equity, instead, it goes directly to the banks. These payments will typically continue until you have reached 20% equity in your home.
The VA loan avoids PMI by having the Department of Affairs (VA) guarantee the loan should the buyer find themselves unable to afford the mortgage payments.
Competitve Interest Rates
Even with 0% downpayments and no PMI, the interest rates you secure with the VA loan are typically 0.5%-1.0% lower than conventional loans.
Just how significant is this? Over the lifetime of a 30-year home loan, this could save you hundreds of thousands of dollars.
|Loan type||Loan Amount||Interest Rate||Total interest paid over the lifetime of the loan|
|Conventional Loan (30 years)||$500,000||3.5%||$309,307|
|VA Home Loan (30 years)||$500,000||2.5%||$211,847|
Securing a lower interest rate with the VA home loan means more equity for you, and less interest paid to the bank.
Limited Closing Costs
While all buyers will have to pay some form of closing costs, the VA loan limits which costs can be passed to the buyer. All of the following are prohibited for VA home loan buyers to pay:
- More than 1% of lender’s origination fees
- Real estate attorney services
- Settlement charges
- Prepayment penalties
- Mortgage broker commissions
Keep in mind that you should still expect to pay around 3%-5% of the home value, the VA loan just puts extra protection in your case. While some of these closing costs fees can be tacked on to your loan balance, expect to pay the majority of these out of pocket.
For many homebuyers, having a foreclosure/bankruptcy on your record can make acquiring a new loan take much longer. The VA loan can help cut the waiting period in half.
|Loan Type||Bankruptcy (Chapter 7)||Bankruptcy (Chapter 13)||Foreclosure|
|Conventional Loan||4 years|| ||7 years|
|VA Home Loan||2 years||1 year||2 years|
VA Home Loan Disadvantages
VA Loan Funding Fee
The largest disadvantage to the VA loan paying the funding fee. The funding fee is an added cost paid by borrowers to allow the program to continue functioning for the foreseeable future.
The funding fee can be anywhere between 0.5%-3.6% of the total loan amount. An individual using a VA loan for the first time, with a 5% downpayment has a 0.5% funding fee, compared to someone paying 0% down on a second property would have a 3.6% funding fee.
You can choose to either pay the full amount during closing or add the funding fee to the total loan balance.
Individuals Exempt From Funding Fee
The following persons DO NOT need to pay any form of VA funding fee:
- Individuals receiving disability for service-related disability
- Individuals eligible to receive disability for service-related disability, but receiving active-duty pay/retirment pay
- Surviving spouse of veteren who died in service or service-related disability/totally disabled AND recieving dependency and indemnity compensation
- Individuals with a proposed or memorandum rating, before loan closing date, saying you’re eligible to get compensation due to a pre-discharge claim
- Purple heart recipients
VA Loan Prohibits Investment Properties
The VA loan is more limited than FHA/Conventional, in that you can not use the loan directly for investment purposes.
The language from the VA.gov website directly states that in order to qualify for a VA purchase loan, you must “…live in the home you’re buying with the loan.” The VA.gov website also states that the:
- Homebuyer has 60 days to move into the home after closing (Certain situations may allow for up to 1 year) AND
- Homebuyer must certify that they INTEND to personally occupy the property as their primary residence
Additionally, since the buyer cannot be eligible for another VA home loan until the loan is paid off in full AND the home is sold, this prevents individuals from running around and buying up multiple properties using the VA loan.
The only way to use the VA loan towards an investment property would be to purchase and live in a multi-family home while renting out the additional units, which the VA loan does allow.
Stricter Apprasial Process
The VA appraisal process is both a blessing and a curse. The VA appraisal process is in place to ensure that the condition of the home is safe and at a “fair market value”. Since the VA is backing the home, they are going to put in more effort to ensure its condition is good before backing the loan. While this adds a bit more security to your purchase, it has two potential downsides as well.
- A tougher apprasial process can make the deal take more time, which hurts you in a buyer’s market
- This can prevent you from buying “fixer-upper” homes
If your main priority is to purchase a ready-to-move-in home, and you aren’t in a time crunch during the home buying process, then the appraisal should be an overall benefit to you.
Types of VA Loans
The VA offers more than just purchase loans.
Listed below are all the loan types, their requirements, as well as the approximate competitive interest rates. If you want information on VA loan types beyond this table, then check out this section on the VA’s website.
|Loan Type||Requirements||Interest Rate Range ||Purpose|
|VA Purchase Loan||-COE||2.25%-3.00%||Purchase a primary residence|
|VA Interest Rate Reduction Refinance Loan (IRRRL)||-COE|
-Current VA loan
|2.00%-2.60%||Refinance a current VA Loan|
|VA Cashout Refinance|| -COE|
-Current VA loan
|2.00%-2.60%||Receive money from the equity built-in home to be used for non-mortgage purposes|
|VA Energy Efficient Mortgage (EEM)||-COE||2.25%-3.00%||Invest in energy-efficient upgrades to reduce heating/cooling/other expenses, typically $6,000 or less|
|VA Native American Direct Loan (NADL)||-COE|
-Native American Servicemember
-Tribal organizations must participate in VA direct loan program
|2.75%+||Purchase/Construct/Improve/Refinance homes on Native American lands|
Additional Benefits for Disabled Veterans
In order to assist veterans with service-connected disabilities, the VA offers financial grants to help veterans live more independently. This can be in the form of construction such as building ramps, widening doorframes, or relocating to a home with the necessary amenities already built-in.
The type of grant you can receive will depend on the severity of your injuries.
|Grant Type||Required Home Ownership||Qualifying Service-Connected Disabilities||Max Grant Value|
|Specially Adapted Housing (SAH)||You own/will own home||$100,896|
|Special Home Adaption (SHA)||You or a family member own/will own home||$20,215|
|Temporary Residence Adaption (TRA)||Living temporarily in a family member’s home (Home Ownership not required)|| ||(SAH)-$40,637|
If you want to take a deeper look into these grants, check out the VA’s official handbook [PDF]
How to Find the Best VA Lender
Deciding which VA lender to work with is not a decision to take lightly. The mortgage rate you lock in will either limit the total interest paid or add thousands to your bill.
Step 1: Avoid Online Lenders
You need to be careful when reading online posts about which VA lender to choose.
More often than not, the online VA lenders you find online will not have your best interest at heart. There is a lot of money to be made for the lenders, so offering you a higher rate means more money for them, and bigger interest payments for you. Even pages that blog about the VA loan, (just like this one), often get hefty affiliate commissions for providing leads to particular lending companies.
Step 2: Shop Around for Rates
Search on the internet to find 3-5 local lenders to work with who offer VA loans. Next, go through the pre-approval process with each lender to determine how much, and at what interest rate different banks will charge. You may be surprised to find how large of a disparity there is between banks!
This will give you a general ‘feel’ for what working with that particular lender is like, and more importantly, what the competitive interest rates are for your area.
Step 3: Ask Around for a Referral
The best referral for a lending company will come from a close friend/co-worker, possibly in your command.
Please do not be mistaken. I am NOT advocating for blinding listening to another servicemember’s recommendation. If step two is done correctly, you have a strong idea of the competitive interest rates you are eligible for. So if the lender they advocate for is offering horrible rates, you will know to avoid them.
That being said, if you trust someone, and they give glowing reviews for a lender they worked with, odds are you are bound to have a good experience as well. Just make sure to double-check that the interest rates they offer are still competitive!
The VA loan is a great program set up for servicemembers and their families. If you meet the eligibility requirements and stand to benefit from 0% downpayment, no PMI, competitive interest rates, and bankruptcy/foreclosure forgiveness, you should begin the process by obtaining a COE. While the VA loan does have disadvantages like a funding fee, it is the best option for anyone buying a house with less than a 20% downpayment.
It is also important to be aware of the additional benefits you may be eligible for if you are a disabled veteran. By offering benefits like the Specially Adapted Housing (SAH), you could obtain up to $100,896 for making your house easier to live in.
If you are reading this and still have additional questions I could not answer, please leave a comment, contact me directly, or check out the official VA website. If you need help deciding the best state to retire in, check out our special guide for military retirees here!
If you want to learn more about other programs like the Thrift Savings Plan (TSP) / Savings Deposit Program (SDP), or the military education benefits that make the military a financially lucrative career, go check out other posts on my blog!