Men and women who choose to invest a portion of their lives committed to service in the United States military gain certain benefits in thanks of their service, such as a VA loan for purchasing residential real estate. Many people, however, don’t understand the way VA loans work, where they come from, or how to obtain a home mortgage loan through the Department of Veteran Affairs. Here’s what you need to know about using a VA loan to purchase a house.
What is a VA Loan
Contrary to what many people assume, a VA loan is not an amount of money borrowed from the Department of Veteran Affairs. The VA does not loan money for real estate. Instead, the Department of Veteran Affairs is willing to lend their word to your application. As a member of the military, the VA will make it easier for you to qualify for a loan, and will also repay the lender up to 25 percent of the loan balance should you default. You can obtain your VA loan from any financial institution that has a VA loan program, just like you would a standard home loan application.
The Benefits of a VA Loan
There are several reasons military members will find benefit in applying for VA loans when buying real estate. The VA loan eliminates the requirement for the significant down payment. However, the buyer is still responsible for closing costs, out-of-pocket, which usually run around 1-8 percent of the home’s total value. Additionally, the requirements for qualifying for the loan are less stringent, meaning the credit score can be a little more bruised and dinged for a military member than for a civilian when applying for a home mortgage loan.
One of the other benefits to a VA loan is a perk called residual income. Although the large down payment is eliminated and the credit requirements are more relaxed, the VA does require applicants to have steady income enough to cover their monthly expenses – including the mortgage payment – and still have a specific amount left over for food, transportation, and emergencies. This emergency nest egg named residual income does more to ensure that buyers can afford their purchase, aren’t over extending themselves, and the results of which are demonstrated in lower foreclosure rates on homes purchased with VA loans.
What Can You Buy with a VA Loan?
VA loans are designed specifically to assist military personnel and retired military members with the purchase of a home mortgage loan. The support from the VA makes it easier to have credit approved, lower or eliminate down payment, and ensure long-term affordability. However, the VA has limits to what it will support. The home you’re buying must be your primary residence, not an investment property or vacation home. The property must be a single family home that is move-in ready, and you’re also limited as to how many co-borrowers you can have.
Fees of a VA Loan
Because the home mortgage loan is being generated through a traditional lender, all of the traditional lender’s fees for borrowing the money apply, including interest rates, etc. While the VA loan is helpful in reducing or eliminating the down payment and creating more relaxed credit requirements, there is a fee for obtaining the assist in the loan, which is about two percent of the value of the home purchased.
Who can Apply for a VA Loan?
There are specific stipulations about length of time in service and character of service, but members of the United States Armed Forces who meet those length and character requirements qualify for support from the Department of Foreign Affairs when applying for home mortgage loans from financial institutions.
What You Need to Apply for a VA Loan
There’s a particular certificate you’re going to need to have along the process, known as a Certificate of Eligibility, or COE. There are three ways you can access the COE. You can start the loan application process and apply through the VA approved lender, which is best case scenario because it secures pre-approval of the home mortgage loan prior to shopping for real estate agents or houses. You can apply online through the eBenefits portal of the VA website, or send in VA Form 26-1880 by standard mail.
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