The VA Loan is not your typical housing loan. It’s a loan that’s guaranteed by the U.S. Department of Veterans Affairs (VA). Active-duty service members, veterans, Reserve members and some surviving spouses of service members are all potentially eligible for a VA loan, which comes with perks like zero down payment requirement. Let’s take a closer look at the VA loan, including benefits, fees and alternatives.
The VA Loan was set up as part of the Servicemen’s Readjustment Act (known as the G.I. Bill) in 1944 to help returning troops from World War II settle back into civilian life. At first, the VA loan was only available to active duty service members and returning vets. In recent years, the benefits of the G.I. bill have been expanded to members of the Army Reserve and National Guard. The VA Benefits website provides more information on the loans the VA provides. For example, a VA loan can be used to purchase a mobile home.
The Benefits of a VA Loan
The Department of Veterans Affairs doesn’t act as the lender on VA loans. Instead, the Department of Veterans Affairs has guaranteed participating private lenders that the VA will accept liability for VA loans in case of default. This added security allows private lenders to provide additional benefits to those who qualify for VA loans. These benefits include:
- No down payment requirement
- No private mortgage insurance requirement
- No prepayment penalty
- Limited closing costs
The most prized benefit of a VA Loan is probably the 100% financing option (a.k.a. no down payment requirement). The VA does not limit the percentage of a home’s value that can be financed through a VA loan. It does, however, set limits as the the amount it will guarantee. Those limits vary by county.
VA Loan Fees
VA loans come with fees. The fee is a percentage of the loan amount that must be paid and that helps prop up the VA’s financing for future generations. The percentage of your loan value that you’ll pay as a VA Funding Fee depends on the following factors:
- The category of your service (Fees for members of the Reserves and National Guard are higher than fees for regular service members)
- Whether this is the first time that you’re using a VA loan
- Whether you’re making a down payment and how big the down payment is
How VA Loan Guarantees are Calculated
Veterans have a maximum VA loan “entitlement” of $36,000. That’s assuming that they meet all qualifications and that they don’t already have a VA loan. The VA will guarantee an amount equal to four times a veteran’s entitlement, which in the case of someone with full entitlement would be $144,000.
Suppose that you’re using a VA loan for a home in a county with the usual VA loan limit, $424,100. That’s the maximum size loan the VA will guarantee, not how much you can borrow. You want to buy a house that’s $350,000 and you have full entitlement. Since the VA only guarantees a quarter of the loans it backs, so for this particular home the VA is willing to guarantee the lesser of either 25% of the loan limit in your county (which would be $106,025) or 25% of the value of your home (which would be $87,500). In this example, the VA would guarantee $87,500 of your $350,000 home and a down payment would not be required.
VA Loan Alternatives
VA loans aren’t limited to home purchases. There are other ways to use a VA loan. For example, VA loans can also be used to take cash out of your home equity. This option could be used to help you refinance your current loan, or to take money out of your home equity to pay for a college education, home renovations, or debt payments. The VA will guarantee these loans up to 100% of the house value. In addition, when refinancing a current VA loan, veterans can take advantage of the Interest Rate Reduction Refinance Loan (IRRRL). The VA IRRRL allows refinancing to current market rates. If the market rate is lower than your current interest rate on a VA loan, an IRRL will lower your monthly payments, saving you money.
This was a brief look at VA loans. There are other VA funds available, such as funds for adapting a home to accommodate service-related injuries and disabilities. These specific loan types still follow the same general VA loan guidelines outlined here. Need answers to more specific questions? You can reach out to the Regional Loan Center in your local area.
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