What Is a VA Loan and Who Qualifies for the Program?

The United States federal government thanks its servicemen and servicewomen in many different ways throughout their lives. From health care, insurance, education, and jobs, the government tries to provide constant resources for its military members — even long after their service is completed.

Another area in which the federal government provides assistance to active duty members or veterans of the military is in purchasing a home. Through the VA loan program, the U.S. Department of Veterans Affairs provides a home loan guaranty benefit on mortgages that private lenders underwrite. The VA guarantees a portion of the loan, which then allows the lender to offer more favorable terms to the homebuyer.

As with any special mortgage program, there are certain terms and conditions that will determine who is eligible for a VA loan, and who can receive the many benefits of participating in the program for those who do qualify.

Who Qualifies for a VA Loan?

A VA loan can be used to either purchase a new home or refinance a home you already own. To qualify for a VA loan to be used for a purchase, you must meet one of the following criteria:

• Currently on active duty
• Formerly on active duty for at least 181 days during peace-time or 90 days during war time
• A Guard or Reserve member for at least six years
• A surviving military spouse
• In addition to these eligibility requirements, the home you are looking to finance with a VA loan must be used as your primary residence.

To be eligible for a VA refinance loan, you must meet one of the following criteria:

• A service member on active duty or an honorable discharged veteran
• The spouse of a current service member or veteran
• Widows or widowers of a veteran must be unmarried at the time they are refinancing

In any of these scenarios, you’ll need to verify your eligible by obtaining a Certificate of Eligibility from the VA. This is a process that an experienced lender can walk you through, primarily using a copy of your DD-214.

Much more detailed information about eligibility and requirements for a VA loan can be found on the U.S. Department of Veterans Affairs website.

What Are the Benefits of a VA Loan?

The benefits of a VA loan are quite extensive for those who qualify. The idea behind the program is to aid active and former service members and their families for making a sacrifice that might have resulted in them not being a qualified home purchaser in the eyes of many private lenders. As such, the VA loan program makes it easier for those who are eligible to purchase or refinance a home by lowering the requirements for qualifying for a loan and by minimizing the money required upfront.

One of the biggest benefits of a VA loan is there is little to no down payment required. While VA loans typically carry a 3.3% funding fee that helps ensure the VA can continue the program for future service members, that fee can be financed in the loan. As a result, a VA loan allows borrowers to finance 103.3% of the home’s value in the mortgage, meaning it’s possible for borrowers to make no down payment on the home at all if they so choose.

In addition, VA loans limit the closing costs for veterans so they don’t have to have a large chunk of money upfront to get into their new home. Other non-conventional loan programs may require borrowers to pay monthly private mortgage insurance (or PMI) if they don’t make a down payment of at least 20% on the home. However, this is not the case for VA loans. Since the government is backing the loan, the risk to the lender isn’t as high, and so PMI is not required.

Finally, because the government backs the VA loan, lenders are able to offer lower interest rates than most other mortgage types. This will help the qualified borrowers even further, as monthly payments on the mortgage will be lower as a result.

While borrowers still must pass muster in terms of a good debt-to-income ratio, VA loans typically require a minimum FICO credit score of 580, which is lower than some other mortgage types.

What Are the Options for Refinancing with a VA Loan?

In addition to being able to finance the purchase of a primary residence, military veterans, active duty personnel, and their spouses can use a VA loan to refinance their mortgage. There are two refinancing options offered under the VA loan program. The first is a traditional cash-out refinance that is available under other loan programs. The second, which is special to VA loans, is an Interest Rate Reduction Refinance Loan, also known as an IRRRL.

The cash-out refinance allows qualified borrowers to refinance their current mortgage into a new VA-backed loan, whether they currently have a VA loan or not. This could allow a borrower to cash out the equity they have in their home to use for repairs or improvements on a home, with the added benefit of potentially lowering the monthly payment on the loan.

The IRRRL is a program that allows veterans the opportunity to lower their monthly payments and enter into better loan terms by lowering their interest rate. To qualify for this type of refinance, though, a borrower must already have a VA-backed loan and either must now qualify for a lower interest rate than they originally did when they closed on the mortgage or must be able to change from an adjustable-rate to a fixed-rate mortgage.

Use a Trusted Lender for All Your VA Loan Needs

The U.S. government continues to thank its service members and veterans through programs such as VA-backed mortgage loans. If you qualify for such a mortgage, it’s best to work with an experienced lender like Embrace Home Loans who can help guide you through the process of applying and getting approved for a VA loan. Embrace’s seasoned professionals have experience not only underwriting VA loans but helping veterans and active duty service members obtain Certificates of Eligibility from the VA.