Everything You Need to Know About VA Home Loans

Home buying is an important milestone in many people’s lives. For service members who move a dozen (or more!) times during a career, it can be a daunting task. Fortunately, the U.S. Department of Veterans Affairs (VA) has an amazing set of home loan benefits for eligible service members.

I set out to learn the basics, benefits, savings, and limitations of the VA home loan program, which makes owning a home easier for military families. Let’s discuss the law as well as loan limits, funding costs, and basic options for homeowners seeking to use the VA loan. We can also look at a sample cost savings calculation for a conventional versus a VA loan, when buying a home without a down payment.

The Law

Here are the actual rules on VA loans, and what they means for you.

Eligibility

There are three basic requirements to become eligible for a VA home loan:

  1. You need to have served or be on active duty in the Armed Forces of the United States. Widows of fallen service members are also eligible under certain conditions. Reservists and National Guard members who meet the prerequisites qualify for the VA home loan. The basic time limits for qualification are 90 consecutive days of active service during wartime, 181 days of active service during peacetime, or six or more years of service in the Reserve or National Guard.

Image courtesy of benefits.va.gov

  1. You need to have available entitlement, which means you do not own a home financed with an active VA loan or you have not used your one-time exception (more on that later).
  2. You need a certificate of eligibility. This is proof that you are eligible for a VA-sponsored loan. Today, lenders have electronic access to the VA system that automatically produces this certificate for the borrower.

Entitlement

Those qualified for a VA loan have a basic entitlement of $36,000. If your prospective VA loan is larger than $144,000 – four times the basic entitlement – lenders may want a down payment on your home.

However, they usually do not. It depends on your credit history, the property appraisal versus the asking price, and your income level.

Loan Limits

Before writing about VA Home loans, I thought the loan limit for a VA Home purchase was a set number ($450,000). Turns out I was wrong, and where you buy matters.

If you want to buy in Honolulu, Hawaii using a VA Loan, the maximum allowable loan amount is $721,050. If you want to buy in Nashville, TN, the limit is $466,900. However, for over 90% of the country, the loan limit will be exactly $424,100 (for 2017). The VA guarantees the loan for the lender up to 25% of the county-specific limit. In the Hawaii and Nashville examples, the VA guarantees $180,250 and $116,725, respectively.

Related: US Conforming Loan Limits Rise for First Time Since 2006

You can click here to access an interactive map that illustrates VA Home loan limits in each county in the United States. Locations with higher costs of living have a higher upper limit for the VA home loan.

All of this means that, in most cases, lenders will not demand a down payment on loans at or below the county limit for buyers with full entitlement ($36,000) and good credit.

Jumbo VA Loans

VA Loans that exceed the county limit are considered jumbo loans. Yes, you can buy a home for more than the limit, but you will automatically have to give a down payment. The amount of the down payment is 25% of the difference between the county limit and the loan amount.

Learn More: Where Should You Put Your Down Payment When Saving for a Home?

Let’s see an example:

      • Assume that you’d like to buy a home in a county with the standard $424,100 limit.
      • You choose a home which costs $474,100. This means you will have an excess of $50,000 over the loan limit.
      • You must put down 25% of that overage, which comes out to $12,500.
      • You will also pay any closing costs tied to the jumbo loan.

The Easier Way: Down Payment Calculator

Given the above rules and reading the entitlement explanation on the VA home loan website, you may not be sure as to whether you would need to make a down payment on your particular VA loan. Well, this down payment calculator helped me personally figure out exactly how much house I had to buy before a down payment was required.

Once again, breaking the county-specific limit means the borrower must meet a down payment requirement. I entered the city and state where I was looking to buy into the calculator above, finding that the area had a loan limit of the baseline: $424,100. If I wanted a home for $425,000 in that county, I would need around $225 for my down payment.

No PMI

One of the greatest features of the VA home loan is being exempt from paying private mortgage insurance (PMI). The lender allows this because the VA is guaranteeing the loan. I will illustrate the cost savings of not paying PMI and making a zero-money-down purchase later in the article.

The Basic Options

VA Home loans can take on five forms:

      • The Purchase Loan is the most popular VA loan. This loan helps homebuyers get a competitive interest rate that they may not have qualified for elsewhere.
      • The Cash-Out Refinance Loan is a VA guaranteed loan of “up to 100% of the value of your home.” Homeowners can use the VA cash-out refinance loan to pay for school, fund home improvement projects, or cut other financial liabilities.
      • The Interest Rate Reduction Refinance Loan (IRRL) is a standard refinancing of your current VA loan. This is also known as the Streamline Refinance Loan.
      • Adapted Housing Grants help Veterans with service-connected disabilities to purchase, build, or change a home to meet their access and mobility needs.
      • The Native American Direct Loan (NADL) Program gives Native American Veterans the same benefits as a regular Purchase Loan and the ability to buy, build, or improve homes on Federal Trust Land.

Funding Fee

The funding fee is a unique feature of VA home loans. The purpose of the funding fee is to offset the taxpayer burden for covering the costs associated with VA loans. The fee varies based on how much you borrow and increases for second time VA loan users.

You can finance the funding fee into the loan or pay it in cash. Additionally, you are exempt from funding fees if you are a disabled veteran or a surviving spouse of a fallen service member.

Type of Loan Down Payment Percentage (1st Use) Percentage (2nd Use)
Purchase Loan None

5%

10%

2.15%

1.50%

1.25%

3.3%

1.50%

1.25%

Cash-out Refi N/A 2.15% 3.3%
IRRL N/A 0.50%
Loan Assumption N/A 0.50%

The full table of fees is here. The above numbers are higher for National Guard and Reserve members. You can see that the largest penalty is for those making no down payment. Even a 5% payment reduces the fee by 65 basis points.

The Benefits: Purchasing and Refinancing

      • Purchase Loan: Since the VA guarantees the loan you take out for your home, this covers the PMI cost you would otherwise incur when buying a home with less than a 20% down payment.
      • In the realm of closing costs, the VA loan protects the buyer in two ways. The first protection is that you can negotiate to have closing costs covered by the seller. The second is that the VA limits the closing cost amounts for buyers.
      • You will not pay early pay-off penalties – meaning you can pay the loan off ahead of schedule.
      • You are assisted if you have trouble making payments. VA Regional Loan Centers offer financial counseling to help avoid foreclosure.
      • IRRL: This one lets you refinance your existing VA home loan. The greatest benefit to this loan is the ability to break an Adjustable Rate Mortgage (ARM) and roll all costs of the refinance into the new loan. Note that you can only use the IRRL if you have an existing VA loan for the home.
      • Cash-Out Refinance: This is a variation of the Purchase loan. Use this to turn a non-VA loan into a VA loan. This loan covers up to 100% of the value of your home.

Related: How to Save on Closing Cost When Buying a Home

      • NADL: The NADL has the most benefits of all the VA home loans. The interest rate is around 4% over a 30-year term. It is re-usable and, like the purchase loan, includes no PMI, no down payment, and county-specific loan limits. But to use the NADL, you must meet the credit risk standards and use the property as your primary home. You must also buy a property on Federal trust lands.

The Benefits: Adapted Housing Grants

As mentioned previously, these grants help disabled service members and veterans buy a home that meets their access needs. The VA keeps a list of disabilities here and has a great infographic covering the basics of this grant. There are two types of Adapted Housing Grants: The Specially Adapted Housing (SAH) and the Special Housing Adaptation (SHA) Grant.

The SAH allows you to build an adapted home on land you own or plan to buy. It allows you to remodel your existing home to become suitable for specially adapted housing. It also allows you to apply the SAH grant money to the unpaid principal mortgage balance if you previously bought the home without VA assistance.

The SHA lets you adapt a current home, a future home, or buy a home that already meets your needs. An example would be buying a home that has a stair elevator or wheelchair ramp already installed. You can also find the house you want, and then use the adapted housing grant to change the home to meet your needs. If you become disabled during the period you own the home, the adapted housing grant lets you alter that home.

The Savings

Because the United States government backs the VA loan, there is no PMI for homeowners who cannot make a 20% down payment on their home. Using the loan calculators at whatsmypayment.com, you can easily see the savings of a VA loan versus a conventional loan.

Let’s assume you are buying a house for $175,000. Your interest rate is 4.00%, and you are making no down payment. Assume that your property taxes are about 1% of the value of the home and that you’ll pay $500 a year for insurance. The loan term is 30 years.

When using the calculator, you’d enter no down payment for the VA Loan and $6,000 (3%) for the conventional loan down payment:

$175,000 / 4.00% / 30 years VA Loan Conventional Loan
Down Payment $0 $6,000
Monthly PMI $0 $180
Funding Fee $3,762 0
Loan Amount $178,762 $169,000
Monthly Payment $1,040 $1,174
Total Cost of Loan $374,737 $382,166

Over the life of the loan, the difference in savings is $3,953. However, over the first 9.6 years, the savings of the VA loan versus the conventional loan is around $15,000. That 9.6 years is the time it will take to pay down 20% of the mortgage principal, ending the PMI fee for a conventional loan.

In this example, the VA home loan demonstrates a marked advantage for home buyers who plan to sell their home within the first decade of ownership.

Learn More: How to Get Rid of PMI

How Many Homes Can I Buy?

You can use the VA loan more than once, but you must meet certain requirements. If you pay off the loan and sell the house, you go back to square one. It’s as if you never even received a VA loan. It essentially clears the slate.

There is also a “one-time only” exception that allows you to use the VA loan to buy another home even if you still own the original property. This also requires your having paid off the entire loan, though. You can own one home free and clear and use the VA loan program once more in this instance. The approval process for this option is briefly explained here.

More Info

If you are searching for VA offices in your state, click here to go to the VA state directory. You’ll find a list of VA offices by county, along with their address, phone numbers, and even a direct email link to at least one Veterans Service Officer at each county office.

If you have ever wondered about the steps of buying a home with the VA, they break down the steps via their Buying Process webpage.

Check out the VA Loan Captain for tons of great articles that answer a broad range of VA loan-related questions.

Closing Thoughts

The VA home loan program is an outstanding asset for members and veterans of the armed services. With no down payment, competitive interest rates, and no PMI, home ownership is possible for military members on a tight (but predictable) budget. You can connect with any local mortgage lender to find out if you qualify for a VA loan and learn about the options that match your individual situation.

Remember to do the math on how much house you can actually pay for and do not buy more house than you can afford! Do this, and the VA Loan will be a well-deserved and appreciated benefit in your search for a new home.

Topics: Mortgages

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