November is National Military Family month, and it also includes Veterans Day on Monday, November 11. One of the many benefits the US Government provides to past and present members of our armed forces, and qualifying surviving spouses, is backing their home loans. A VA loan is a mortgage product offered by many private mortgage lenders that gives borrowers a zero-down payment mortgage option. The Department of Veterans Affairs (VA) guarantees part of the loan which allows the private mortgage lender to provide the veteran with more welcoming mortgage terms which make homeownership for veterans more attainable.
The process of applying for and closing on a VA loan closely resembles that of other mortgage types. There are five main steps in the process of how a VA loan works:
1. Get prequalified
2. Provide loan documentation to your Mortgage Banker
3. Appraisal is ordered
4. Processing and Underwriting
5. Close on your loan
To start, VA mortgage loans give veterans the option of 100% financing, low loan fees, and typically lower than market interest rates. If the price for the home is equal to or lower than the appraised value, there is no money down required. A traditional conventional mortgage requires private mortgage insurance to be paid monthly and/or annually, whereas the VA loan fee, called the Funding Fee, is a one-time fee between 1.25% and 3.3% (as of October 2019) potentially saving the borrower thousands of dollars. What makes this Funding Fee different than conventional mortgage insurance is that these fees are a set amount based on your loan amount and eligibility status, don’t vary by lender, and can be rolled into the price of the loan. Lastly, VA loans have a long history of having the lowest interest rates on average than any other mortgage loan type which saves the borrower even more money.
If you are a first-time homebuyer or have never used your VA home loan benefits, then a purchase loan may be best for you. It allows past and present military members, and surviving spouses to purchase a home with no down payment required. Second is the cash-out refinance option. Need to pay off credit debt? Make home improvements? In some cases, the VA cash-out refi allows you to get up to 100% of your home’s value, whereas other programs may limit you to less. Next up is the VA IRRRL, which stands for interest rate reduction refinance loan. If you are interested in lowering the interest rate on your existing VA loan for lower house payments, this may be the loan for you. More about IRRRLs below.
What is an IRRRL, or interest rate reduction refinance loan?
An IRRRL is a type of VA loan that allows veterans that already have a VA-backed mortgage loan to refinance their existing loan to get a lower rate, or to change from a VA ARM (adjustable rate mortgage) loan to a fixed rate loan. In that case, the interest rate may increase but will provide a fixed monthly payment rather than fluctuating. IRRRLs may be done with no money out of the veteran’s pockets and with no appraisal.
Can I use my VA loan benefit more than once?
Yes! A life-long benefit for service to our country is that VA loan benefits can be reused. In order to restore your VA loan entitlement, you must sell the property secured by the VA loan and pay off the loan. Another option is for your loan to be assumed by another veteran and he or she uses their veteran entitlement. There are some special cases where entitlement may be restored when the loan is paid off but the property is not sold. VA will determine the eligibility in these cases.
What are the requirements to be eligible for a VA loan?
Most veterans, active duty, reserve, and National Guard members are able to apply for a VA home loan. If you serve 90 days of consecutive service during wartime, 181 days of service during peacetime, have been an active member of the National Guard or Reserves for at least six years, or were married to a service member who has passed away or is listed as MIA or a POW, you may qualify for a Certificate of Eligibility. Obtaining your COE doesn’t mean you qualify for a VA mortgage loan; this means you are able to apply for a VA-backed mortgage loan. You must meet the lender requirements such as credit score and affordability.
As previously mentioned, some spouses of veterans may have VA home loan eligibility. This includes surviving spouses that are unmarried or have remarried, in certain circumstances, as well as spouses of active-duty members who are listed as MIA or a POW for at least 90 days. Non-veteran spouses can also have their name added to the title of the property. The easiest way to accomplish this is through filing a quitclaim deed. Contact your local Mortgage Banker for information on adding non-veteran spouses to the property’s title, and how it may affect the VA guarantee on the loan.
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