Takeaways
- Are you eligible for the VA loan? Use it!
Advantages / Pros
The VA loan boasts numerous advantages to those who are eligible. The main advantages are the 0% down payments and lower interest rates compared to alternatives. VA loans also don’t require mortgage insurance, which can add $100 or so to a monthly mortgage payment.
| VA Loan | FHA Loan | Conventional Loan | |
|---|---|---|---|
| Minimum Down Payment | 0% | 3.5% | 5% |
| No Mortgage Insurance Required? | YES | NO | NO |
Who Should Use the VA Loan?
Everyone who is eligible and expects to own their house for at least 5+ years. It is almost always a better deal than conventional or FHA mortgages. The only other program I would consider using first before using a VA loan is a USDA loan if available.
Disadvantages / Cons
There are few disadvantages to using your VA loan entitlement. However you should still use it smartly.
Having no down payment is both a blessing and a curse. Combined with financing the VA funding fee, VA borrowers who don’t use a down payment are underwater on their mortgage starting Day 1. That is not necessarily a bad thing, but it still means you need to be smart when using your VA loan.
VA loans can take a little longer to process, maybe a week or so, than FHA or conventional loans.
Who Should NOT Use the VA Loan
Anyone who wants to sell their home within 5 years of purchasing it.
If you had no down payment, under 5 years is usually not enough time to build equity and break even when selling your home. If you know you are not going to live in the home for 5+ years, consider turning it into an investment eventually, and use your VA loan to build wealth!
If you are not comfortable investing, consider if buying is right for your present circumstances.
Eligibility
Active duty with at least 90 days of active service
Veterans. The rules vary depending on the service dates, but generally, you are eligible if you served 90 days of active service.
Spouses cannot use the VA entitlement separate from their VA eligible spouse (e.g., you can’t buy four VA financed homes, 2 x 2). Surviving spouses generally have all VA benefits, though they may give up benefits if they remarry.
National Guard and Reserve members who were activated for at least 90 days are eligible, or if they served at least 6 years of service and were honorably discharged or retired.
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Frequently Asked Questions – FAQ
- Who provides the VA loan?
- Do all lenders provide the VA loan?
- Do I still have to qualify for a loan?
- How many times can I use the VA loan?
- How do I get my entitlement back?
- When does the VA loan entitlement expire?
- What is the Certificate of Eligibility?
- Who determines the VA interest rates?
- Can I use the VA Loan for a Vacation Home?
- Can I use the VA Loan for and Investment Property?
- Can I purchase duplexes or fourplexes with a VA loan?
- Can I buy new construction homes?
- Can I buy land with a VA Loan?
- Can I buy mobile homes or manufactured homes with the VA Loan?
- Can I buy foreclosures with the VA Loan?
- How much can I spend?
- What does it mean my entitlement is only $36,000?
- Can National Guard members use the VA loan?
- What is the down payment?
- Is mortgage insurance required?
- How does dual-military spouses use the VA Loan?
- Where can I use the VA Loan?
- Are there closing costs?
- Is the VA loan the only veterans loan available?
Who provides the VA loan?
NOT the VA. The Department of Veterans Affairs does not make loans, but rather guarantees a portion of the loans that traditional lenders provide.
I often work with buyers who tell me they have a preapproval “with the VA”. That is no accurate. Usually it is the case that they have a preapproval with the company Veterans United – a lender just like anyone else. I don’t know how Veterans United’s marketing is such that everyone thinks of them as “The VA”, but they’re not.
Do all lenders provide the VA loan?
No. Each bank and lender decides which loans they wish to provide.
Here in the Fort Hood area, however, the local lenders are experts on the VA loan. Over half of loans in our area are VA loans, far higher than the average in most US markets.
Please feel free to view the local lenders I recommend!
Do I still have to qualify for a loan?
Yes.
Being entitled to the VA loan does not mean you don’t have to qualify for the loan. Individual lenders have the final say on qualification, but generally a 620 credit score is adequate to take advantage of the full benefits of the loan.
How many times can I use the VA loan?
You may have up to two homes with a VA loan at any time.
Strangely, the purchase price of your second home must be at least $144,000 – not less. The reasons for this strange rule is complicated.
The VA funding fee is also higher for the second property, usually 3.3% instead of 2.15%.
How do I get my entitlement back?
If you have bought two homes with your VA entitlement and want to buy a third, you have to pay off at least one of your previous VA loans first. For example, you might sell one of your previous homes and pay off the mortgage. As part of the closing documents you will have your eligibility released back to you.
Note, if you sell a home with a loan assumption, your VA entitlement is still tied up in the property. That is a major downside of loan assumptions for VA loan holders.
When does the VA loan entitlement expire?
Never.
What is the Certificate of Eligibility?
This is a form the lender requires to prove you are eligible for the VA loan. You can get the form online, or your lender can help you get the form.
Who determines the VA interest rates?
There is no predetermined interest rate. Lenders are free to charge whatever interest rate they like.
Because VA loans carry a government guaranty the protects the lender against some losses, the VA loan is almost always a better interest rate than FHA or conventional loans.
Can I use the VA Loan for a Vacation Home?
No.
Can I use the VA Loan for and Investment Property?
No. The VA loan is for owner occupants only. You generally must occupy the home yourself within 60 days of closing, though exceptions can be made for as late as 12 months after the closing date.
How soon can you move? If you plan on buying another home in the same area, you have to provide a rationale to your next lender for why you are moving, e.g. you need a larger home.
For military, PCS order, deployment orders and retirements are also valid reasons for moving.
Can I purchase duplexes or fourplexes with a VA loan?
Yes.
As long as you occupy at least one of the units, you may buy any building with between 1 to 4 units. Buying a multi-family can be an awesome option to consider for the financially savvy. You can use owner occupant financing to “house hack“.
Can I buy new construction homes?
Yes.
Can I buy land with a VA Loan?
Not really. You can buy vacant land if you are planning to build on it. Most builders will buy the land first, build your home, and you then close on the home and the land at the same time. That is how most lenders will require the deal to be done.
For Texas veterans, the Veterans Land Board has land options!
Can I buy mobile homes or manufactured homes with the VA Loan?
Yes, but it is up to the lender. Many lenders will not lend on mobile homes because they generally lose value over time instead of gaining value. Manufactured and modular homes might be easier, though they have to be fixed to the land, or “retro-fitted”.
Can I buy foreclosures with the VA Loan?
Yes.
However it has to be in good condition. A VA requires that its homes be in fair condition. The VA sends out an appraiser during the purchase process. If the appraiser may require that certain repairs be made to the home before closing. Most banks, who own foreclosures, will not make repairs.
There are many foreclosures in the Fort Hood area that were recently built and often still in good condition. I wouldn’t automatically cross foreclosures off your list if using the VA loan.
How much can I spend?
There is technically not a limit to the VA loan. However you can only get a loan for 100% of the purchase price up to $453,100.
If you use the VA loan for a home priced over $453,100, then you generally will have to provide a down payment equal to 25% of the amount over $453,100. For example, a $553,100 VA loan would require a $25,000 down payment.
The Fort Hood area is a very affordable area, and most buyers will find a lot to like in a home well under $453,100.
What does it mean my entitlement is only $36,000?
As mentioned, the VA does not make loans. They guarantee a portion of the loan. Specifically, they guarantee 25%. So the $36,000 entitlement is actually $144,000 ($36,000 / 0.25). $36,000 was the original guarantee amount, but the VA has since pegged the amount to the conventional loan limit ($453,100), and guarantees 1/4 of the loan amounts.
Can National Guard members use the VA loan?
Yes. Their funding fees may be slightly higher.
What is the down payment?
Down payments, unlike other loans (except the USDA loan) can be as low as 0%.
There are some benefits to a slightly higher down payment. At 5% and 10% increments, your funding fee is reduced.
Is mortgage insurance required?
No, however there is a funding fee.
Most other loan types require mortgage insurance if your down payment is anything less than 20% of the total purchase price. Mortgage insurance can add $100 or so to your monthly bill. It is called PMI for conventional loans, or MIP for FHA loans.
VA loans do not have PMI or MIP, but they do have funding fees. The other loans do not. The funding fee is an upfront payment that acts as the mortgage insurance for the rest of the loan. The funding fee is 2.15% (2.4% for National Guard members) for your first VA loan and 3.3% for your second VA loan.
The funding fee is the only item that is financed into your loan cost. E.g., a $150,000 home, financed with the buyer’s first VA loan and with 0% down payment would have a total loan amount of $153,225.
How does dual-military spouses use the VA Loan?
Spouses each have their full VA entitlement, even after getting married.
When buying a home, the spouses can choose whether to use one spouse’s entitlement, or split the entitlement between both spouses.
Where can I use the VA Loan?
America!
And America’s territories.
Are there closing costs?
Yes. A common misconception is that the VA loan has no closing costs. That is not accurate. There are closing costs.
Unlike other loans however, there are specific closing costs that they buyer is not allowed to pay – the seller must pay instead. But in most cases, that amount is far less than the total closing costs. In the current Fort Hood area market, it is common to negotiate for the seller to pay most or all of the closing costs. Many buyers do get to closing owing $0.
The down payment and VA funding fee are not part of the closing costs. Any down payment is separate. The VA funding fee is financing into the loan amount.
Is the VA loan the only veterans loan available?
No.
Texas offers the Tex Vet loan, which can be used in conjunction with the VA loan or other loan types.