VA loans, guaranteed by the U.S. Department of Veterans Affairs, are widely used in today’s financing market. Designed to benefit eligible borrowers, these loans offer a range of advantages when purchasing, refinancing, or improving a home. Whether you’re a veteran or an active-duty service member, understanding the key aspects of VA loans is crucial before applying. In this article, we’ll delve into 10 important things you should know to make the most of this financing option.
1. Guaranteed Loan:
A VA loan is a guaranteed loan, providing protection to lenders against losses if the borrower fails to repay. This guarantee by the U.S. Department of Veterans Affairs adds a layer of security for lenders, making it an attractive option for financing.
2. Eligibility Criteria:
Not everyone can qualify for a VA loan. To be eligible, you must be a veteran or an active-duty service personnel. Applying for a VA loan requires presenting a valid Certificate of Eligibility (COE), along with meeting credit and income requirements set by the lender.
3. Lower Interest Rates:
One of the significant benefits of a VA loan is the lower interest rate it typically offers compared to other loan types. This feature enables eligible borrowers to secure a more affordable financing option. Additionally, VA loans can be used to refinance existing loans at lower rates, even up to 100% loan-to-value.
4. Flexible Credit Guidelines:
VA loans provide more flexibility in credit requirements. While the minimum accepted credit score is around 620, some lenders may consider scores as low as 550 based on unique circumstances. Other loan types, such as Conventional or FHA loans, typically have stricter credit score guidelines, requiring larger down payments and imposing more obligations on borrowers.
5. No Private Mortgage Insurance (PMI):
Unlike many other loan types, VA loans do not require Private Mortgage Insurance (PMI). Additionally, VA loans can be used to eliminate Mortgage Insurance (MI) on other loans. By refinancing an existing loan to a VA loan, borrowers can eliminate PMI, resulting in a lower monthly mortgage payment. However, VA loans do have a funding fee, which can be paid upfront or financed into the loan amount.
6. No Down Payment (in most cases):
In many cases, VA loans do not require a down payment. However, if the loan amount exceeds the VA limit for the county where the property is located, a down payment will be necessary. The down payment amount depends on the remaining VA entitlement and the purchase price or appraised value of the home.
7. Multiple VA Loans:
An advantageous feature of VA loans is that there is no limit on the number of loans one can have as long as there is remaining VA entitlement to be used. The VA entitlement amount is typically 25% of the VA financing limit for the county where the property is located, with a threshold of $144,000.
8. No Pre-Payment Penalty:
VA loans come with the benefit of no pre-payment penalty. Borrowers can pay off their VA loan at any time without incurring additional fees, helping them save significant amounts of money on interest.
9. Shorter Seasoning Periods:
Compared to other loan types like Conventional or FHA loans, VA loans have shorter seasoning periods for bankruptcies, foreclosures, or short sales. Typically, borrowers can qualify for a VA loan after two years of filing for bankruptcy or foreclosing on their house, as opposed to longer waiting periods required for other loan types.
10. Primary Residence Requirement:
VA loans can only be used to purchase a primary residence. They cannot be used for second homes or investment properties. However, VA loans can be used to refinance a previously occupied primary residence,