MMA loans

The Different Types of VA Loans

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Getting a down payment on a home can be a daunting task for first-time home buyers. However, it is possible for veterans, military personnel and their families to purchase a home without the need for a down payment, thanks to VA loans.

“Most lenders require insurance if you don’t put down 20%,” says Lacey Langford, Air Force veteran, blogger and host of military money show. “With a VA loan, you can’t deposit money and you don’t need to pay for that mortgage insurance, although there are other fees you should be aware of,” she adds. .

VA loans aren’t just for buying a new home. It is also possible to refinance or get a renovation loan to pay for home renovations.

Here’s what you need to know about the different types of VA loans available and what to consider before getting one.

What is a VA loan?

A VA loan is a mortgage backed by the US Department of Veterans Affairs. VA loans aren’t actually issued by the federal government, says Doug Nordman, a U.S. Navy veteran and author of “The Military Guide to Financial Independence and Retirement.” Instead, VA guarantees that it will pay your lender up to 25% of loan amount if you are unable to repay the loan. It’s a way to reduce risk for approved lenders and encourage them to lend to military and veterans.

“One of the main benefits of the VA loan is that borrowers can get a mortgage without a down payment,” Nordman says. “Plus, it’s possible to fund closing costs under this arrangement, all without having to pay for mortgage insurance,” he adds.

For those who cannot afford the amount of down payment required by conventional mortgages or even FHA loans, a VA loan may be a good alternative. Also, with a conventional mortgage, you are usually required to pay private mortgage insurance when you deposit less than 20%. A VA loan can get rid of this expense.

In contrast, Nordman points out that there are often stricter requirements for VA loans. The home must meet certain inspection and appraisal criteria that might not be required with a conventional mortgage. As a result, the closing time may be longer, which may be a problem for some sellers.

“While the VA loan is often a good deal for buyers, sellers may decline an offer contingent on obtaining a VA loan,” he says. “In a seller’s market, buyers using a VA loan might not even receive a counteroffer.”

Who qualifies for a VA loan?

Because VA loans are issued by private lenders, not the federal government, lenders can set their own requirements in addition to those set by VA. For example, even though VA loans do not require a down payment and there are no minimum credit requirements, your individual lender may have additional criteria.

“Not all lenders will approve you for a zero down payment or if you have bad credit,” Langford says. “You also need to be aware that if you don’t have a down payment, you’ll have to pay higher finance charges,” she adds.

Apart from this, however, the main requirement is to obtain a Certificate of Eligibility (COE) from the Department of Veterans Affairs. To obtain a COE, you generally must have been on active duty for at least 90 days at some point in your military career or have served at least six years in the selected reserve or national guard. Eligible surviving spouses of service members may also be eligible to receive a COE.

You can use your COE more than once, according to Langford. However, you must repay your first loan or you can only borrow up to the amount you have repaid.

What types of VA loans are available?

There are different types of VA loans, and which one you should get depends on where you are in your homeownership journey. With a VA loan, all you need is a current COE that you can show your approved lender.

All VA loans have finance charges, which are set based on the type of loan you get as well as the amount you set aside. The number of times you have used your COE is another factor that influences your funding costs. Some borrowers, such as people with disabilities or Purple Heart recipients, may be able to get a finance fee waiver.

Here’s what you need to know about the different types of VA loans.

VA purchase loan

The VA purchase loan is designed to purchase an existing home. In general, these loans are intended for the purchase of a principal residence. It is possible to buy a property with up to four units, for example, if you want to rent out the other units. You only need to live in one of the units for it to be considered your principal residence.

“VA purchase loans are great for first-time home buyers,” Nordman says. “The VA’s guarantee to the lender means buyers might still be able to qualify for a larger mortgage, even if they have lower credit scores,” he says.

VA Cash-Out Refinancing

If you’ve built up equity in your home and want cash right away, refinancing may be one way to go. Nordman suggests using a VA cash-out refinance to refinance a loan that might have a higher interest rate, or using it to withdraw 100% of the equity you’ve accumulated.

Whether you can use your COE for a cash refinance depends on whether you’ve used it in the past. If you are refinancing a VA loan, you may only be able to cash out an amount equal to what you have already repaid. However, if you got a conventional mortgage or other loan on your home and want to use a VA cash refinance, you should be able to take full advantage of your COE.

VA IRRRL (refinance loan with interest rate reduction)

IRRRL offers a streamlined process for refinancing your existing VA loan. If you’re hoping for a lower interest rate or monthly payment, an IRRRL may be a good choice. Plus, Nordman points out, if you qualify for a finance fee waiver, you can essentially refinance your VA loan at no cost.

On top of that, Nordman says, if you can certify that the residence in question was your primary residence, you may qualify for IRRRL even if you don’t currently live in the property.

“This is especially helpful for active duty military families who have moved to a new duty station but still own the property and want to take advantage of lower interest rates,” he said. declared.

VA loan for home renovation and improvement

A VA home improvement loan can provide you with a way to secure a home that may not meet the strict standards required for a VA purchase loan.

“A portion of the loan is used to bring the home up to those standards after purchase, but it also requires the homeowner to use VA-approved contractors and additional VA appraisals for post-renovation value,” Nordman says. “The loan can only be used to bring the existing house up to standard, not for luxury or adding a new structure,” he adds.

For renovations to an existing home, Nordman recommends looking at other loan products offered by your lender. Instead of using a VA loan to make the improvements, it is possible to use a more conventional home improvement loan, then, once the improvements are complete and the house has a higher value, use a VA withdrawal refi to repay everything.

What type of loan is right for you

When deciding which type of VA loan is right for you, it’s important to understand how each works and understand how it fits your situation. Nordman recommends sitting down with a mortgage broker who knows the VA lender’s handbook to help you determine what’s best for your situation.

Pro tip

If you have access to a military base, speak to someone at the Family Support Center for an objective review of VA loans and information on how to qualify.

Plus, Langford points out, a VA loan might not be the right choice for you. Depending on where you live and your income level, you may be able to get a USDA loan with no down payment and avoid some of the requirements of a VA loan. An FHA loan can also be a good alternative to a VA loan, Langford says, because it’s often easier to get. However, it can be more expensive because you need at least 3.5% down payment and you will have to pay for mortgage insurance. It is worth considering all your options carefully and researching the best rate before committing to any loan product or lender.

“Compare other mortgage options,” says Langford. “Sometimes the VA loan can be the best deal, but it’s not always the cheapest.”