VA Loans 101

November 1, 2018

Veterans Affairs (VA) loans are invaluable for homebuyers. Their advantages include little or no money down, qualifying with a lower credit score, competitive interest rates, potentially lower closing and auxiliary costs, and no private mortgage insurance requirements.

VA loans are administered through approved lending institutions, and backed through an entitlement of up to $36,000. This entitlement can guarantee a home loan of up to 453,100 without a down payment and possibly higher in some high-cost counties.

You may qualify for a VA loan if you're an active duty service member, a veteran in good standing, a current or discharged National Guard or Selected Reserve member, a spouse of a service member who died on active duty, or a spouse of a veteran who died as a result of military service. Your lender will require a Certificate of Eligibility, which requires different evidence depending on your status (usually a completed form DD 214 or DD 1300, or a statement of service from the appropriate commanding officer). Get more details on eligibility and the proof required here.

Types of loans covered by the VA include:

Traditional Fixed-Rate Loan: Typically, a 15- or 30-year fixed loan with equal payments over the life of the loan, covering some principal plus all accrued interest. Graduated Payment Mortgage (GPM): Lower monthly payments for a few years (typically five years), then a gradual increase and a leveling-off to a larger payment for the remaining term. This effectively delays a portion of the interest and adds it back to the principal balance. Adjustable-Rate Mortgage (ARM): Issued at a lower-than-market interest rate and adjusted later in the life of the loan (based on market values plus a fixed margin). The upsides of an ARM loan are similar to a GPM, but they are less predictable in later years. Growing Equity Mortgage (GEM): Sets up a gradual increase in payments with all the increase applied to the principal. This greatly reduces the overall interest paid and can cut the payoff time of the loan in half. GEMs can be arranged to adjust to a typical index like an ARM, or as a fixed rate like a GPM.

Certain specialty loans are available, such as Specially Adapted Housing (SHA) Grants for specific disabilities and Native American Direct Loans. Check the VA website for current options.

Lenders will make evaluations as they normally do but will take VA backing into account. For VA loans, a score as low as 620 will generally qualify for a loan (compared to mid-700s for non-VA loans). Lower scores will require explanation but may still qualify.

A debt-to-income ratio of less than 41% will usually qualify (compared to 36% or less for most non-VA loans). Good credit management practices help, such as paying credit cards on time and maintaining a low balance and credit utilization (credit balance divided by total available credit). Before engaging a lender, check your credit reports for free by joining MoneyTips to make sure there are no errors. Bankruptcy or past foreclosure doesn't automatically disqualify you from a VA loan, but will require stricter verification to prove creditworthiness.

There are fees involved, including a VA funding fee (usually between 0.49% to 2.4% of a first-time loan). Check with your lender to verify all fees related to VA loans.

Remember — a VA loan is still a loan — it is not a gift. You do have to repay it.

MoneyTips is happy to help you get free mortgage and refinance quotes from top lenders.

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