Reaching that crossroad in life where one can buy a home and take out a mortgage is a big moment. Qualifying for a home loan can be a stressful and complex process. For veterans and service members, this milestone can be an even steeper climb. Because of this, there is a federally-backed mortgage option tailored to help those affiliated with the military buy, build, or remodel a home—called a VA home loan.
The US Department of Veterans Affairs (aka the VA) guarantees home loan assistance to active service members, reservists, veterans, and surviving spouses through approved lenders. VA home loans can help those who qualify to afford purchasing a home, building a home, remodeling or refinancing their existing home.
VA loans were created in 1944 as part of the GI Bill, and they have grown in popularity since.
Some potential perks for borrowers are that VA home loans require zero down payment and no private mortgage insurance. VA home loans are issued through private lenders, such as mortgage companies and banks, with the VA guaranteeing some or all of the loan.
Types of VA Home Loans
So, what is a VA home loan? Several different types of VA home loans are available to help eligible borrowers buy, construct, or renovate their home, or refinance a current mortgage. Some VA home loans include:
• VA Direct Home Loans
With VA Direct Home Loans, the U.S. Government acts as the mortgage lender. Borrowers work with the U.S. Department of Veterans Affairs when applying for and managing their loan.
• VA-Backed Home Loans
If a borrower qualifies for a VA-Backed Home Loan, the U.S. Government guarantees a portion of the loan received from a private lender. In practice, this federal guarantee makes lenders more likely to agree to the loan. The majority of VA-backed home loans don’t even require borrowers to chip in with a down payment. With this type of loan, if a home goes into foreclosure, it’s possible for the lender to get back some or all of the money they loaned out.
• Purchase Loan
VA-backed Purchase Loans are for borrowers interested in buying, building, or improving a home. Often, these loans require zero downpayment. Applicants for a VA -backed purchase loan must meet certain requirements for credit and income, and they must also plan to reside in the home they’re obtaining the loan for.
Purchase loans are fairly flexible in terms of what type of home can be purchased. For example, a buyer might buy a single family home, a condo, or a manufactured home. They can also opt to buy a plot of land to build on or buy an already-built home and then improve it.
• Native American Direct Loan (NADL)
If either a veteran or their spouse is Native American, they may qualify for a Native American Direct Loan. NADLs help borrowers to secure financing for a home on federal trust land. It’s worth noting that the availability of this type of loan depends on a number of factors, including whether the borrower’s tribal government has an agreement with the US Government regarding VA loans.
• Interest Rate Reduction Refinance Loan
For those who’ve already taken out a VA-backed home loan, it’s still possible to qualify for an interest rate reduction through an additional refinancing loan. Such refinance loans can help borrowers to reduce monthly payment amounts by replacing a current loan with a new one that features lower or fixed interest rates.
Refinancing a loan, however, can cost thousands of dollars in closing costs. So, it’s likely borrowers might want to track these expenses against the amount saved each month before they decide whether a refinancing loan is a fit for their financial goals.
• Cash-Out Refinance Loan
Borrowers with an existing home loan could consider taking out a VA-backed Cash-Out Refinance Loan. With this loan type, borrowers can replace a current loan (including non-VA ones) with a federally-backed option that provides different terms. Cash from this loan can be used to pay for other expenses, including schooling, other debts and home improvement.
Buying a Home With a VA Loan
Eligible borrowers hoping to purchase a home with a VA-backed loan will need to apply for a VA Purchase Loan. Before applying, borrowers might first want to review their finances—income, monthly expenses, assets, and existing debts. Assessing their finances can help borrowers decide if they’re ready to buy a home right now (and estimate how large of a mortgage they might qualify for).
Once a buyer has decided they’re ready to purchase a home, they can apply for a VA-backed home loan Certificate of Eligibility (COE). This certificate proves to lenders that an interested buyer qualifies for the federal VA-backed loan.
Next, borrowers might shop around to find a private home lender that offers the solid mortgage rates, terms, and fees. Once borrowers find a lender they trust, they could seek out a realtor to help with the house hunt or start looking for a home on their own.
Qualifying for a VA Home Loan
Those looking to apply for a VA loan must fit into certain requirements. The primary categories that qualify are:
• Service members who served six years or more in the Selected Reserve or the National Guard
• Active duty service members or honorably discharged veterans who have served 90 consecutive days of active service during wartime, or 181 days during peacetime.
• Spouses of service members who died in the line of duty.
Reservists may also qualify for a VA home loan.
Benefits of VA Home Loans
A few of the benefits of VA loans include:
• Zero down payment (if the final sale price of the home is the same or lower than the appraised value of the home).
• More attractive interest rates and terms than loans available from some mortgage lenders or credit unions.
• Lower closing costs when buying the home.
• No limit to the amount that can be borrowed with a VA home loan. However, there is a limit to the amount of the loan that the VA will guarantee.
• No minimum credit score requirement. (Although this is technically the case, some affiliated lenders may still not lend to those with a lower credit score.)
• A VA home loan can be for first time homebuyers or those who have already owned a home.
Downsides of VA Home Loans
Although there are many benefits to VA loans, there are some potential pitfalls to keep front of mind:
• VA loans can’t be used to purchase investment properties or vacation homes. Buyers must plan to reside in the home the loan is intended for.
• Not all types of properties will qualify for a VA loan. For example, co-op properties are not eligible.
• There is a VA loan fee of 1.25% to 3.3% of the amount being borrowed. This increases monthly payment amounts as well as total interest paid over the life of a loan.
• Paying zero down payment may seem like a nice option, but it can have negative results. If the housing market goes down, borrowers may be paying more on their home than it’s even worth.
After comparing the pros and cons of VA Home Loans, many borrowers may find that a traditional loan is a better fit for their long-term financial goals. Even if they save money upfront, in the long term buyers often end up paying more. VA loans can actually turn out to be one of the most expensive ways to buy a home.
Conventional loans could be used for more types of properties, such as a vacation home or investment property. They also don’t include the added VA loan fee and VA appraisal fee, so both monthly payments and total interest over time tend to be lower.
Apply for a Home Loan
There are many types of home loans available on the market today.So, figuring out the right fit can be a stressful and confusing process. Not everyone wants (or may qualify) for a VA home loan, but there are additional home loan options that exist. One possible choice is SoFi Home Loans.
SoFi offers home loans that require as little as 10% down payment, and the qualification process is simple and straightforward. There are several SoFi home loan options, including 30 year and 15 year mortgages.
SoFi Loan Products
SoFi loans are originated by SoFi Lending Corp (dba SoFi), a lender licensed by the Department of Financial Protection and Innovation under the California Financing Law, license # 6054612; NMLS # 1121636 . For additional product-specific legal and licensing information, see SoFi.com/legal.
SoFi Home Loans
Terms, conditions, and state restrictions apply. SoFi Home Loans are not available in all states. See SoFi.com/eligibility for more information.
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