If you’re a current or past service member or veteran, and have run into barriers trying to qualify for a conventional home loan, you may be eligible for special funding available only to those who have served in our armed forces. Read below to find out more.
What is a VA Home Loan?
A VA home loan is a mortgage that is insured by the Department of Veterans Affairs and is available to past and current service members, veterans, and surviving spouses. Though the loans are backed by the federal government, they still go through an approved traditional lender who agrees to special provisions that allow them to extend loans to borrowers who might not qualify for a conventional loan.
Service members face unique hardships that their civilian counterparts typically do not. They often have breaks in employment due to deployment, transfers, or delayed higher education. All of these can affect savings, credit scores, and accumulation of debt. Because of this, the VA created programs that allow veterans to obtain a loan, save money throughout the process, and stay in their homes longer.
How do I know If I’m eligible?
To be eligible for a VA loan you must meet the following criteria:
- Be an active service member or have been honorably discharged, or
- Served more than 90 consecutive active days during wartime, or served more than 180 consecutive active days during peacetime, or
- Served in the Army Reserves or National Guard for at least six years, or
- Are the surviving spouse of an active duty service member who died in the line of duty, and
- Have a current COE (certificate of eligibility). These are typically easy to get and your lending officer can request one on your behalf.
VA Loan vs. Conventional Loan
What are VA entitlements?
Your VA entitlement is the amount that the VA will pay back to your lender should you default. This is appealing to banks and lenders because it offers them extra insurance for people who may have lower creditworthiness than a conventional borrower.
The VA has a set entitlement amount of $36,000 for loans up to $144K. Because VA loans are meant for primary residences, borrowers cannot use their entitlement for an investment property. You only qualify for this entitlement once unless you sell your current property and apply with VA to restore it.
If the loan amount you’re looking for is higher than $144K, or if you live in an area where the cost of living is above average, the VA offers bonus entitlements. These are in addition to your basic entitlement and insure 25% of the total loan amount. In general lenders will approve a loan of up to 4x the entitlement amount.
The maximum bonus entitlement is $68,250, but can stretch even higher for outlying areas such as New York City or San Francisco where the cost of living is significantly higher. Entitlements can be tricky to understand, so it’s best to look at an example:
Basic entitlement of $36,000 x 4 = $144,000
Bonus entitlement of $68,250 x 4 = $273,000
In this scenario by taking the maximum allowance of both the basic and bonus entitlements, you could qualify for a loan of up to $417,000 ($144,000 + $273,000 = $417,000).
What kind of purchase can I make with a VA loan?
VA home loans are used for primary residences and cannot be used for investment properties or second homes. Primary residences can be single family homes, condos, mobile homes, or townhouses. They can also be used to refinance your current primary residence.
The VA has recently added eligibility for purchases of multi family residences (MFR’s) of up to four units, but the borrower is required to live in one of the units. There are also some VA construction loans specifically for borrowers who wish to build their own primary residence from the ground up.
Are there any drawbacks to a VA loan?
There are some potential drawbacks of getting a VA loan that you should be aware of.
- Because VA loans offer down payments as low as 0%, this means the size of your loan is bigger and your monthly payments may be bigger than with a conventional loan. So, although you may save money up front, you will end up paying more in interest over the life of your loan and you’ll see higher monthly costs.
- VA loans require an additional payment called a VA funding fee. This fee can change based on the amount of your down payment, but is typically between 1.25% and 3.3% of the loan amount. This fee is rolled into your loan, so you don’t need to pay it upfront, but it does increase the size of your loan and will therefore add to your total interest payments and monthly payments.
- You can only use a VA loan to buy a primary residence. If you wish to purchase a vacation home or an investment property, you must obtain a conventional loan.
- You may run into sellers who are hesitant to accept an offer funded with a VA loan. This is mainly based on myths circulating about the security of VA loans.
What is the CAIVRS list?
CAIVRS stands for the Credit Alert Verification Reporting System. When you apply for a VA loan, your lender will run this report to determine your standing with any previous government loans. This is separate from a traditional credit check that only looks at private debt like credit cards or car loans. The CAIVRS report looks at government-backed debt like Dept. of Education loans and DOJ judgements. If you have defaulted on any of these, you will not be eligible for a VA loan.
What if I have a foreclosure or bankruptcy in my past?
The VA recognizes that veterans and service members are more likely to have a foreclosure or bankruptcy in their past, and don’t want that to stop them from the dream of home ownership. You’ll have to wait two years after a foreclosure before you can apply for a VA loan. To qualify for a VA loan with a Chapter 7 bankruptcy you’ll be required to show at least 24 months of on-time payments, and 12 months of on-time payments for Chapter 13 bankruptcy. With a conventional loan the wait period is 4 to 6 years for bankruptcy, and as much as 7 years for a foreclosure.
Are there other mortgage programs for veterans?
- Homes for Heroes: This program does not insure loans, rather it helps borrowers to reduce lending fees and also gives them rebates after their purchase (usually .7% of the purchase price). This program is also available to teachers, medical workers, firefighters, and law enforcement. Borrowers typically save $2,400 on average. In order to qualify for this service, you must use one of the HFH approved lenders.
- Local loan programs: There are many mortgage programs for veterans that are state or region specific. Ask your mortgage broker for state-run loans you may qualify for. Some of the bigger ones are CalVet Home Loans for California residents, Home for the Brave Home Loan Program for veterans residing in Massachusetts, and the Home is Possible program in Nevada.