Breaking Down the VA Loan: What to Know Before You Apply
Before you apply for your VA loan, you should know a good amount about them. With all the benefits of having one, the many options to choose from, and the occasionally complicated eligibility guidelines, there’s a lot for one person to know, but don’t worry. Based on the 2022 updates, this article contains everything you’ll need to know before you apply.
What are the Benefits of a VA Loan?
Supported by the Department of Veteran Affairs, VA Home loans are one of the many perks for past and present members of the military community. They help veterans and active servicemembers buy a house or refinance an existing loan. As a lifetime benefit, these loans can be used multiple times depending on the loans’ sizes and the location of the homes bought.
VA Home loans require no down payment or Private Mortgage Insurance for the entire life of the loan. These loans also offer low interest rates, low closing costs when buying a house, and no penalty fee for paying off the loan earlier than expected.
First-time recipients also have no limits on the home loan they receive.
Another valuable benefit is called a VA loan guarantee. That means that the federal government promises to repay your lender part of the loan in the cases of default and foreclosure. The amount of money the government promised to repay is called your entitlement. Its size determines the size of the loan you can receive. For returning loan recipients, you may be able to redeem your entitlement. If so, your second loan may also come without a loan limit depending on your financial history.
Unlike other home loans, you could still secure a VA Home loan even if you have experienced a prior bankruptcy or foreclosure.
What Can You Do with a VA Loan?
With a VA Home loan, you can buy a single-family home, townhouse, or multifamily units (these units are limited to 4 units per loan). You can also purchase a condo in a project approved by the VA or a manufactured home and lot. If you want to build your home, your loan must be approved before construction starts, and your money will pay the builder during the construction.
When you buy a home, you have the option to take over or “assume” the seller’s VA loan. This means that you would apply your loan toward the seller’s mortgage and make payments on their loan. Your interest rates would be those chosen by the seller’s lender when they first got their loan, so you may end up paying a lower interest rate than the national average. If you are the seller and someone uses their VA loan to assume yours, you may be able to fully redeem your entitlement which would allow you to purchase a new home without worrying about a downpayment.
Who is Eligible for a VA Home Loan?
Since VA loans are meant for the military community, active service members, veterans, and National Guard and Reserve members can be eligible as well as some spouses and those affiliated with specific military organizations. In addition to the requirements explained below, you must also live in the home you buy with your loan and have enough money to pay for the VA appraisal and closing costs of buying your home.
Active Service Members & Veterans
If you are an active service member, your eligibility is determined by how long you have served and the character of your service (COS). Your COS must be either honorable, general, uncharacterized, or under honorable conditions; you must also have served for at least 90 continuous days to qualify for a VA loan.
For veterans, your eligibility is determined by your manner of discharge and service length. The minimum length of your active-duty service depends on when you served. If you served in World War II, during and/or after the Korean, or in the Vietnam War, your minimum service requirement is 90 total days. If you did not serve in these wars, your service requirement may be 181 continuous days (for service between July 6, 1847, and June 26, 1950, and between May 8, 1975, and September 7, 1980) or 24 continuous months (for service since September 8, 1990).
Current National Guard and Reserve members are eligible for a VA loan if they have served for 90 continuous days, not including training. Veterans of the National Guard and Reserve must have served for at least 6 creditable years; you must have been either discharged honorably, added to the retired list, or have joined the Standby Reserve.
All that said, you may be exempt from this service requirement if you were discharged for hardship, a reduction in the force, convenience of the government, early out, certain medical issues, or a disability that is related to your service. For more specifics on the eligibility requirements for Veterans, you can go to this VA document.
Eligible Spouses
If you are a spouse of a service member, you are eligible for a VA loan if one of the following is true:
- You are an unmarried spouse of a veteran who died in service or is completely disabled
- You remarried after December 16, 2003, and you are older than 57 years old.
- You are the spouse of a service member who has either been missing in action or a prisoner of war for more than 90 days.
- You are currently receiving or could receive certain types of Dependency Indemnity Compensation (DIC).
If you think you meet one of these requirements for spouses, you can find out how to apply here.
Last Things to Know Before You Apply
Before you apply for your VA loan, you need to know the options about your loan terms, mortgage rates, and bearing the costs of owning a home These important aspects of your loan will affect how much you pay each month and how long you can expect those monthly payments.
Loan Terms
First, you must choose your loan term which is the amount of time during which you are expected to pay off the loan and any interest it gathers. VA Home loans come with two different loan terms: 15 and 30 years. The 30-year loan will have lower monthly payments but will accumulate more interest than 15-year loans. The 15-year loans, however, have higher monthly payments but a lower cost overall.
Mortgage Rates
Once you decide on your loan term, you must next choose the type of mortgage rate. Like most VA loan recipients, you could go with a Fixed Rate Mortgage that “fixes” the mortgage’s interest rate at the same percentage throughout the loan’s term. In other words, you would be paying the same amount of interest each month; the interest rate would not change as the national rates change. This low-risk option provides consistency and few surprises but often charges higher interest rates.
If you would like a lower starting interest rate, however, you may want to pick an Adjustable-Rate Mortgage. With this mortgage, your interest rates would fluctuate depending on the national market. Because the national market’s rates can increase over time, your interest rates may increase as well. As a result, Adjustable-Rate Mortgages tend to have higher risk and more uncertainty about the actual interest rate you will be paying. But, for some loan recipients, the higher risk is worth the lower starting interest rate.
Costs of Owning a Home
Before you decide to purchase a home through a VA loan, you may want to review your personal finances. You will want to have enough money to pay your monthly mortgage including interest, property tax, and the loan principal in addition to your homeowner’s insurance. You may also consider the cost of utilities like water, electricity, and gas and the maintenance of your appliances. Once you know you can pay these expenses, congratulations! You can move on to the next steps toward your homeownership.
Interested in Nashville or Clarksville, Tennessee?
Sapphire Realtors may be the perfect real estate team to work with you. As very successful professionals with many connections in the Nashville area, we will work with you to get your dream home. We specialize in buying and selling residential properties as well as developing ground-up Urban Infill in Davidson County core. These options will work perfectly with your VA loan which allows you to buy or build your home. For more information about the Sapphire Team click here, or to contact us click here.
What’s Next?
And that’s it! Now that you know what to expect from your VA Home Loan, you are ready can take the next step in your homebuying journey: find out how to apply.
Frequently Asked Questions
How much money can I get with a VA loan?
How do I close on a house with a VA loan?