The complete guide to VA loans

A VA loan is an affordable home financing option for active military members and veterans. VA loans offer a variety of advantages compared to traditional mortgages, including lower down payment options. Below is a look at the requirements to qualify for a VA loan and the steps to purchase your dream home with one.

What is a VA home loan?

VA home loans are backed by the U.S. Department of Veterans Affairs (VA) and are available to eligible active duty service members and U.S. veterans. VA loans are typically issued by private lenders. 

Who is eligible for a VA loan?

To be eligible for a VA loan, you must prove you have completed a minimum amount of time in active military service, Reserves or the National Guard. The VA determines if you’re eligible based on the type of service, when and the amount of time served. You may also be eligible if you’re the spouse of a service member who died while providing active military service or passed away due to a service-related ailment. You can check on your status at:

https://www.va.gov/housing-assistance/home-loans/eligibility

In addition to these general requirements, you must show you meet minimum credit requirements and have a stable income to make mortgage payments. While the VA typically doesn't have a credit score requirement, some lenders may apply a requirement. These requirements vary according to the lender and it's best to clarify with them before diving into the homebuying process.

How does a VA loan differ from a conventional mortgage?

Aside from the qualification requirements, the biggest difference between a VA loan and a conventional one is the down payment amount. While most conventional loans require a minimum down payment, VA loans may not require any down payment. Here are some other differences between the two loan types:

• VA loans tend to have lower interest rates than conventional loans
• You can avoid paying private mortgage insurance (PMI) with a VA loan.
• Credit qualifications are usually less strict with VA loans compared to conventional loans
• VA loans typically take longer to process because additional approvals and documentation are required

Are there any special fees I should expect to pay?

Yes. While VA loans usually involve fewer costs, there are still some fees you need to pay. One fee unique to VA home loans is a VA Funding Fee. This fee is paid directly to the Department of Veterans Affairs. The funding fee is currently set at a maximum of 3.6%.

If you’re looking for a way to reduce the funding fee, you can choose to make a down payment of at least 5%. You may avoid paying the fee in certain situations such as if you’re currently receiving disability payments due to your military service. Active duty service members who show proof they received the Purple Heart are also exempt.

Are there any restrictions to VA Loans?

If you have not used or restored your VA entitlement:

• No down payment
• No maximum loan limit
• Lenders may impose their own loan restrictions

If don’t have full entitlement:

• The amount of entitlement is capped by the FHFA 1 unit county loan limit
• A down payment may be required if you exceed the FHFA loan limit

Entitlement is the amount of guaranty – or insurance – that the VA will provide the lender for the loan. This determines the maximum loan amount the lender will approve.

There are some other restrictions on VA loans. For instance, if you include anyone other than you and your spouse on the loan or title, then the amount of entitlement may be impacted.  Also, you can only purchase a home that will be your primary residence.

Additionally, the home you purchase must meet the minimum requirements related to physical condition. For example, the home you purchase should have the following:

• A roof in adequate condition
• A functional means of heating and cooling the home
• A clean and continuous water supply
• A structure and foundation free of termites and fungi
• Walls free of lead-based paint, often found in homes built prior to 1978

Another restriction relates to condominium purchases. If you plan to buy a condo, you must make sure it's on a list of condominium developments approved by the VA. If it isn't on the list, your lender can request approval from the VA.

How does the VA loan process work?

If you've never applied for a VA home loan, you may wonder how a loan is finalized and what you can do to get things started. Obtaining a VA loan is much like securing a conventional mortgage, but with a few extra steps. We’ve outlined the steps below to help ensure you don't miss any important requirements.

1. Find a lender

The path to securing a VA loan begins by finding a VA-approved lender. Schedule a consultation and tell your Home Lending Advisor you’re interested in obtaining a VA home loan. Your lender will review mortgage options with you and outline the home loan requirements.

2. Secure a Certificate of Eligibility

A Certificate of Eligibility (COE) is a document showing your lender you have the required active duty service or service history to qualify for a VA loan. You can apply for a COE online or by mail. In most cases, the online application process is much faster. Your lender can also assist you with this process.

3. Prequalify for your loan

Once your lender has your COE, the next step is to get prequalified for your loan. Many lenders make it easy for you to start this process online by providing some general financial information and details about your home loan needs.

4. Find your home

This is the most exciting part of the loan process. Unless you’ve already prequalified for your loan, remember to calculate how much home you can afford. This helps you narrow your search and ensures you don't strain your finances.

5. Make an offer

Once you find your home, it's time to make an offer. If you’re working with a real estate agent, they can provide valuable guidance as you negotiate with the sellers. Remember to keep these points in mind when making an offer:

• Current real estate trends in the area
• The price the sellers paid when they purchased the home
• Sale prices of comparable homes in the same area
• The home's physical condition
• The length of time the home has been on the market

6. Submit required documentation

To complete the VA loan application process, you need a signed purchase contract. Also known as a Contract of Sale, this document formally outlines the price the buyer and seller agreed to and is required to move forward with the appraisal process and loan closing. Your contract should also have a VA Escape Clause (aka VA Option Clause) which ensures if the appraised value comes in less than the sales price, you can cancel the contract and get a refund of any earnest money you may have put down.

7. Obtain an appraisal

To qualify for VA financing, your home must be appraised by an appraiser assigned by the VA through your lender . The appraiser is responsible for estimating the value of your property. Additionally, the appraiser must verify that the home meets or exceeds VA minimum property requirements. Once the appraisal is successfully completed, the underwriter can continue proceed with the approval review.

8. Conduct a final walkthrough

The purpose of a final walkthrough is to ensure the home's condition has not changed. Ideally, the walkthrough should be done by you and your real estate agent. If possible, it should take place the day of or before your scheduled closing.

9. Head to your closing