10 things you need to know before applying for a VA loan

Veterans Administration (VA) loans are some of the most common types of loans used in today’s financing market. They offer many benefits to eligible borrowers and are mainly used to buy, refinance and even improve a home.

Here are 10 important things to know before applying for a VA loan:

1) It is a guaranteed loan. A Veterans Administration loan is a guaranteed loan by the U.S. Department of Veterans Affairs, meaning that the lender making the loan is protected against loss if the buyer fails to repay the loan.

2) Not everyone can qualify for a VA loan. One must be a veteran or active duty personnel to be eligible for VA funding. Veterans can apply for VA financing from any mortgage lender participating in the VA home loan program, and a valid Certificate of Eligibility (COE) must be presented along with credit and income requirements to qualify for the loan.

3) It offers lower than usual rates to eligible veterans. With a VA loan, the borrower usually receives a lower interest rate than is customary with other forms of loan. Also, a VA loan can be used to obtain lower rates for refinancing up to 100% loan to value.

4) It offers more flexible credit guidelines. The minimum credit score accepted for a VA loan is about 620, but depending on unique circumstances, some lenders may accept a credit score as low as 550. Even though other types of loans offer similar credit score guidelines, a credit score of 620 for a conventional or FHA loan will be more obligations to the borrower and will require a larger down payment.

5) No private mortgage insurance (PMI) is required on VA loans, and the program can also be used to eliminate mortgage insurance (MI) on other loans. For example, one can refinance an existing loan by changing their loan program to a VA loan, eliminating the PMI and reducing the monthly mortgage payment. Although mortgage insurance is not required for VA loans, the VA charges a financing fee to give a lender a guarantee against a borrower defaulting on a mortgage; however, unlike PMI, which is present for the life of the loan on other types of loans such as FHA and USDA, the financing fee (FF) can be paid in cash upfront by the buyer or seller, or can be financed into the loan amount. Lender-paid credit options are also available for VA financing if requested up to 3.3%, and some veterans may even be exempt from paying a financing fee on their loan (additional documentation required).

6) Veterans Administration loans often require no down payment. Usually, a VA loan does not require a down payment, but if the loan amount exceeds the VA limit for the county where the property is located, the borrower will be required to make a down payment. The down payment depends on the remaining amount of the borrower’s VA claims and the purchase price or appraised value of the home and is a percentage of the difference between the two.

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7) One can be eligible for more than one loan from the Veterans Administration at the same time. There is no limit to the number of VA loans one can have at one time, as long as there is a residual VA entitlement to be used. For loans over $144,000, the amount of entitlement is usually 25% of the VA financing limit for the county where the property in question is located.

8) There is no prepayment penalty on Veterans Administration loans. Any VA loan can be paid in full at any time which is a great advantage as it can help one save huge amounts of interest.

9) The preparation period for bankruptcy, foreclosures or short sales is shorter for Veterans Administration loans compared to other types of loans such as conventional or FHA. In most cases, someone can qualify for a VA loan after 2 years of bankruptcy or foreclosure on their home, as opposed to a 4-year bankruptcy and 7-year foreclosure period on a conventional loan.

10) It can only be used to buy a primary residence. The VA benefits cannot be used for the purchase of a second home or an investment property; however, it can be used to refinance a VA loan previously used as a primary residence to lower the interest rate (VA IRRL).