Loans are either backed by the government or private lenders. Loans offered by the government are easier to qualify for as compared to those offered by private lenders, such as conventional loans. These loans are available through government agencies such as the Federal Housing Authority (FHA), U.S. Department of Agriculture (USDA), U.S. Department of Education, U.S. Department of Housing and Urban Development, and U.S. Department of Veteran Affairs (VA). Veterans who have low credit scores may easily get loans for purchasing homes through the VA. Understanding VA loans, their eligibility requirements, and how they work is important for the real estate exam. Learn the basics of these loans here.

What Are VA Loans?

VA loans are government-backed loans available for veterans, their family members, military members, and service members for purchasing homes. These types of loans have low or zero down payments, no mortgage insurance, and are given exclusively to veterans.

VA loans are backed by the Department of Veteran Affairs (VA) and are issued by private lenders. Military borrowers can easily purchase homes with lenient credit requirements. Through this program, the government aims to reduce inequalities in the housing market.

There are generous terms and conditions for VA loan borrowers, but they work similarly to other loans, including conventional loans and FHA loans. The borrower has to fill out a loan application and provide proof of military service history, credit history, and verification of income.

The following are the main features of VA loans:

Low or no down payment
No Private Mortgage Insurance (PMI)
No restrictions on the amount of loan
Better interest rates and terms
No penalty fees for paying the loan off early
Fewer closing costs

VA Loan Requirements

VA loans are not available for everyone; there are certain eligibility requirements that the borrowers must meet. The following are the main requirements for VA loans:

Eligible borrowers:

To be eligible for a VA loan, the borrower must show proof of 90 continuous days of active duty, 90 consecutive days during wartime, 181 days during peacetime, and more than six years in the National Guard or Reserve.

Maximum Debt-to-Income ratio requirements:

VA loans require a maximum 41% DTI ratio, but the borrower can still qualify for this type of loan if they have enough residual income.

Credit score:

According to the VA guidelines, there is no minimum credit score for obtaining a VA loan. However, the credit score requirements may vary from lender to lender. For instance, some lenders have set a minimum of 620 credit score requirements.

Employment history:

Most VA loan providers prefer a stable income with at least a two-year job history. However, some lenders might offer loans to recently retired or discharged veterans.

Occupancy:

With VA loans, the borrower can buy only those homes where they intend to live. These homes are ‘primary residences’ and are mostly bought by the borrowers to live. VA loans don’t allow the purchase of investment properties or second homes.

Types of VA Loans

The Department of Veteran Affairs offers various types of VA mortgages, which are as follows:

VA Home Purchase Loans:

Home purchase loans allow Veterans to purchase homes at affordable terms and interest rates. While other loans require down payments and mortgage insurance, VA loans allow borrowers to purchase homes without down payments or PMI.

VA Cash-Out Refinance Loans:

VA cash-out refinance loans allow borrowers to get loans against home equity. With these loans, the borrowers can get cash from their home’s equity for home improvements, school funds, or paying off debts. Qualified veterans can obtain loans of up to 90% of their home’s value.

VA IRRRL:

VA Interest Rate Reduction Loans help borrowers get lower interest rates by refinancing current VA loans. With the help of these loans, qualified borrowers can convert adjustable-rate mortgages to fixed-rate mortgages or refinance a current fixed-rate mortgage at a lower interest rate.

Native American Direct Loan (NADL):

Native American Direct Loan allows veterans to buy, renovate, build, or expand their homes that are part of a Native American Reservation. These federal trust lands are available with reductions in interest rates.

VA Energy-Efficient Loans:

With VA energy-efficient loans, the borrowers can get a loan of up to $6,000 value for going green. Going green has many benefits and is mainly used for saving on utility bills.

VA Loans vs FHA Loans

VA loans and FHA loans are both popular choices for home buyers. However, sometimes it gets difficult for the veterans to choose one. Both programs have their own benefits, and in the end, it depends on personal requirements too. Following are the main differences between the VA loans and FHA loans:

The VA loans require a 0% down payment, while there is a fixed down payment of usually 3.5% with FHA loans.
VA loans require a credit score of 620 or higher, and FHA loans are available for those with a credit score of 580 or higher. The credit requirements also depend on the lender.
VA loans have a funding fee that is normally 3.3% to 3.6% of the total loan amount. On the other hand, FHA loans have no funding fee.
There is no mortgage insurance premium in VA loans, but there is an upfront and yearly fee (insurance premium around 1.75%) with the FHA loans.
The interest rates offered by VA Loans are more favorable than those offered by FHA loans.
The loan limit for qualified veterans is mostly $670,200, but it also depends on the housing society. FHA loan limits are more strict, they allow the borrower to get a loan of up to $420,680.
The maximum DTI ratio required by VA loans is none, but mostly 41% is the standard. The DTI ratio required by FHA loans is up to 50%.
Both FHA and VA loans offer streamlined financing and easy refinancing options as compared to conventional loans.

VA Loan Examples

Example 1: Let’s take an example of a veteran who wants to purchase a home that has a price of $350,000. The person is an army officer who has a stable income and a fair credit score of 650. The only thing he’s worried about is the down payment, as he doesn’t have any savings to pay the amount. Plus, his credit score isn’t good enough to qualify for a conventional loan. Fortunately, he has the option of VA loans that allow him to purchase that home with no credit requirements and no down payments. Following are the details of this loan:

Home price: $350,000
Down payment: 0%
Loan term: 15 years
Interest rate: 6.750%
VA funding fee: $45
Taxes: $350
Principal and interest: $3,124 per month

Example 2: Person A is a discharged veteran, and he has to purchase a property for $200,000. He has two options to purchase the loan, which include an FHA loan and a VA loan. The borrower has a credit score of 680, which makes him eligible for both types of government-backed loans. Following is a comparison of both types of loans:

FHA Loan:

Home price: $200,000
Down payment: 4.38% ($8,750)
Loan term: 30 years
Interest rate: 7%
Home insurance: $40/month
Property tax: $162/month
Monthly estimated payment: $1,612

VA Loan:

Home price: $200,000
Down payment: 0
Loan term: 30 years
Interest rate: 7%
Home insurance: $40/month
Property tax: $162/month
VA funding fee: $13/month
Monthly estimated payment: $1,571

After comparing both loans, person A decided to go for the VA loan as it is cheaper than the FHA loan. Though there is a VA funding fee involved per month, it is not too much. The biggest benefit person A gets with the VA loan is that he doesn’t have to pay the down payment fee, which is $8,750 for an FHA loan.

VA Loans Frequently Asked Questions

How to Get a VA Loan?

VA loans are available from private lenders who have certificates of eligibility from the Department of Veteran Affairs. The following are the steps for obtaining a VA loan:

Find a VA-approved lender
Collect financial documents
Find the home to purchase and request an appraisal
Review final conditions and get the closing disclosure
Sign the closing documents and get the property title

Who Created the VA Loan Program?

The VA Loan program was created by the U.S. government in 1944 to help veterans, military families, and service members achieve the dream of home ownership. The government helps qualified veterans buy homes with zero down payments because of their service to the country. The program has helped millions of veterans purchase and refinance homes.

What are the VA-Approved Properties?

According to the Department of Veteran Affairs, the homes purchased through VA loans should be safe and sanitary. With these loans, one can purchase manufactured homes attached to the land, one-to-four-unit homes, VA-approved condominium units, modular homes, and planned unit developments. Following are the VA minimum property requirements:

Each housing unit must have enough space for living, sleeping, cooking, and sanitary facilities
The drainage system should direct water away from the house
If the home is located in a rural area, there should be private access to it
Safe and healthy drinking water must be available from the local authority

What are the Drawbacks of VA loans?

VA loans are very beneficial, but for military personnel and their family members only. Besides that, there are strict appraisal requirements, and the appraisal costs are higher than FHA loans or conventional loans. Another main disadvantage of a VA loan is that the borrower can’t buy an investment property or a second home.

What to Know for the Real Estate Exam

VA loans are designed to help veterans, military service members, and their family members buy homes. These loans are the most cost-effective ones as they require zero down payment, no private mortgage insurance, and minimal credit requirements.

A good real estate agent that identifies and determines the needs of military buyers is very important. If you’re preparing for a real estate exam, you must know the importance of understanding VA loans and how they work. A good agent will help military buyers identify homes that are best suited for VA loans and also assist the borrowers in negotiating a contract that results in huge cost savings. If you want to learn about more real estate terms, visit our Real estate flashcard app.