What is a VA Loan?

A VA or Veterans Affairs loan is a mortgage loan program available to eligible veterans, active-duty service members, and eligible surviving spouses of military personnel. The program is administered by the Department of Veterans Affairs (VA) in the United States. It has several benefits for borrowers as well as possible limitations.

How it works

To qualify for a VA loan, you must meet specific criteria set by the Department of Veteran Affairs (VA). Generally, veterans who have served a minimum period of active-duty service are eligible. Reservists and National Guard members who have served a minimum period of six years are generally also eligible. Surviving spouses of service members who died in the line of duty or as a result of a service-related disability may also be eligible.

While the Department of Veteran Affairs (VA) guarantees your loan, it does not directly lend the money. VA loans are provided by private lenders such as banks and mortgage companies. The VA's guarantee protects the lender against loss if you default on the loan. This guarantee encourages lenders to offer favorable terms to veterans and service members.

Benefits

No down payment: One of the significant advantages of a VA loan is that it typically allows you to finance the entire purchase price of a home without requiring a down payment. This can make homeownership more accessible.

Lower interest rates: VA loans often offer competitive interest rates compared to conventional loans. These lower rates can result in lower monthly mortgage payments and potentially save you a significant amount of money over the life of the loan.

No private mortgage insurance (PMI): Private mortgage insurance (PMI) is typically required for loans with a down payment of less than 20%. It is an additional cost that can increase your monthly mortgage payments. Unlike many conventional loans, VA loans do not require you to pay private mortgage insurance if you do not meet the standard down payment.

Flexible credit requirements: VA loans have more flexible credit guidelines compared to conventional loan programs. While there is no specific minimum credit score requirement set by the VA, lenders may still have their own credit score requirements. This can make homeownership more accessible.

Assumption of loans: VA loans are assumable, which means that if you decide to sell your home, the buyer may be able to assume the existing VA loan rather than obtaining a new mortgage. Assumable loans can be an attractive feature when interest rates are higher, as assuming a lower-rate loan can be financially beneficial for the buyer. The assumption privilege is generally limited to eligible veterans and service members.

Limitations

Funding fee: VA loans require you to pay a funding fee, which is a one-time upfront cost. The funding fee helps offset the costs of the VA loan program. The amount of the funding fee varies based on factors such as your military category, down payment amount (if any), and if it is your first use of a VA loan. While the fee can be rolled into the loan amount, it does add to the overall cost of the loan.

Property eligibility requirements: VA loans have specific property eligibility requirements. The property must meet certain criteria to be eligible for VA financing, including being in acceptable condition and serving as your primary residence. Some properties, such as investment properties or vacation homes, may not be eligible for VA loans. Certain condominiums and manufactured homes may have additional requirements for VA loan eligibility.

Appraisal process: VA loans have a unique appraisal process conducted by a VA-approved appraiser. While this is intended to ensure that the property meets the VA's minimum property requirements and is worth the loan amount, it can sometimes result in delays or additional requirements if issues are identified during the appraisal. The appraisal process can pose greater challenges in highly competitive real estate markets. The appraisal value may not match the agreed-upon purchase price which can lead to difficulties in obtaining full financing for the property.

The information in the market value appraisal available as part of the Home Facts on Realtyless can help you avoid potential challenges with the appraisal process required by the VA.

Potential seller limitations: VA loans come with certain restrictions on what costs and fees you can pay. These restrictions can place some limitations on the seller. For example, there are limits on the types of closing costs you can pay which means the seller may be required to cover some of these costs. This can potentially impact negotiations and seller willingness in certain real estate transactions.

Conclusion

VA loans have several benefits as well as possible limitations for borrowers. A professional lender experienced in VA loans can help you understand the specific eligibility requirements and benefits that apply to your situation. When you use Realtyless as a homebuyer, you can easily compare rates from up to 3 local mortgage loan officers to secure the best financing option tailored to you.