VA Loans: How Do They Work?
Veterans and military service members dedicate their lives to the country and often give up on dreams such as becoming homeowners. This dream can now become true, thanks to VA loans. VA loans are a loan type made possible by the United States Department of Veterans Affairs (VA). VA loans are the only widely available loan helping veterans become homeowners with no minimum credit score and no down payments.
How does a VA Loan Work?
Active-duty personnel, veterans, and their families can benefit from VA loans as they offer up to 100% on a home’s value. Moreover, a VA loan can be used to buy or build a home, improve and repair a home, or refinance a mortgage for eligible borrowers.
The VA establishes the eligibility requirements, determines the conditions of the mortgages available, and backs the loan, but it doesn’t provide the funds. VA loans are offered by private lenders and mortgage companies.
Borrowers must turn in a certificate of eligibility from the Veterans Administration (VA) while applying for a loan. Moreover, individuals need to show service-related papers to acquire the certificate, which can differ depending on whether you’re a veteran or active duty personnel. In addition, the certificate is available on the VA’s website. Despite, having the lender’s underwriting requirements, VA loans are still easier to qualify for as compared to commercial loans.
The Government National Mortgage Association (GNMA), often known as Ginnie Mae, securitizes VA loans, Federal Housing Administration (FHA) loans, and other loans insured by US government departments. These securities are backed by the US government’s guarantee against default.
Types of VA Loans
The VA offers various loans such as:
Home Purchase Loans
Home purchase loans assist veterans in purchasing homes at low-interest rates. A down payment or private mortgage insurance isn’t normally required with these purchase loans.
Cash-Out Refinance Loans
Mortgage holders can use cash-out refinance loans to pay off debt, pay for education, or make home improvements by acquiring against their home equity. This refinancing option gives you a new mortgage for a higher amount than your previous one and turns your home equity into cash.
Interest Rate Reduction Refinance Loan
Interest rate reduction refinances loans (IRRRLs) or VA streamline refinance loans, allow borrowers to refinance an existing VA loan and get a lower interest rate. This is a VA loan-to-VA loan procedure allowing homeowners that already have a VA loan to refinance a fixed-rate loan or convert an adjustable-rate mortgage (ARM) to a fixed-rate mortgage at a cheaper interest rate.
Native American Direct Loan
The Native American Direct Loan program assists qualifying Native American veterans in purchasing, building, or improving houses on federal trust land. These loans also come with lower interest rates.
What Are VA Loan Entitlements?
Usually, the VA guarantees at least 25% of the loan amount for individuals that don’t make down payments, which are known as the VA loans entitlement. In various states, the VA loan entitlement is about $113,275. In simpler words, it means you can borrow up to $453,100 without any down payments. However, if you desire to borrow higher than this amount, you’ll need to make down payments.
Luckily, for veterans that have never availed VA loans before, they’ll receive a “full entitlement.” The maximum loan amount that the Veterans Administration will pay your lender if you default on your mortgage loan is known as a VA loan entitlement. The lender’s risk of accepting a loan for a borrower with no down payment and a below-average credit score is reduced by this guarantee.
However, entitlement depends on the area since in high-cost places like California and Hawaii; your entitlement may be higher. If you already have a VA home loan or have gone into foreclosure on a preceding VA loan, you may be eligible for less than the whole amount. The amount you can borrow without a down payment is limited if you don’t have full entitlement.
VA Loan Limits
The VA no longer has a limit on how much you can borrow with a VA loan as of January 1, 2020. However, the amount you can borrow without making a down payment is limited by your VA entitlement. Not only does the amount of the loan depend on your eligibility, but it also depends on how much you can afford to pay. Your lender will look at your income and bills to see how much you can afford, just like they would if you were applying for any other loan.
VA Loan Benefits
VA loans have emerged as a valuable financing option for veterans simply due to the benefits they offer. Here are some:
- No down payment needed
- No private mortgage insurance (PMI)
- Easy refinancing in case interest rates drop
- VA loan modification can come in handy if you fall behind
- No minimum credit score constraints
- No maximum loan quantity
VA Loan Drawbacks
Every financing option has its fair share of benefits and drawbacks, and VA loans aren’t any different. Here are some drawbacks of VA loans:
- No down payments can imply higher interest rates
- VA funding fee is an additional cost
- Financing the funding fee can mean additional interests
- With zero down payments, you can end up paying more than the home’s value
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