If you’re an active-duty service member or a veteran seeking a mortgage, you may have heard about the VA loan program.
Backed by the U.S. Department of Veteran Affairs, this mortgage program offers a range of benefits to eligible borrowers, including the ability to purchase a home with little or no money down. Below, CNBC Select provides an overview of VA loans and guides you through the process of determining whether one might be the right financing option for you.
What we’ll cover
What is a VA loan?
VA direct loans are a type of mortgage loan funded and provided by the Department of Veteran Affairs (VA). A VA-backed loan is issued by private lenders such as banks and mortgage companies, but guaranteed by the VA. When we say that a federal agency has guaranteed a loan, we mean that the agency promises to cover some or all of the lender’s losses if the borrower defaults.
Much like conventional loans, FHA loans and other mortgage options, VA loans can be used to buy a primary residence, refinance an existing mortgage, or make home improvements. Here are some of the common types of loans available under the program:
- VA Purchase Mortgage: Allows eligible borrowers to purchase a home with no minimum down payment and no private mortgage insurance requirement.
- VA Cash-out Refinance: Allows eligible borrowers to refinance their current mortgage loan for a larger amount than they currently own and receive the difference in cash.
- VA Streamline Refinance (also known as an Interest Rate Reduction Refinance Loan): Allows eligible borrowers to refinance an existing VA loan with a new one to reduce their monthly mortgage payment, shorten their loan term, or receive a lower interest rate.
- VA Rehab and Renovation Loan: Allows eligible borrowers to finance both the purchase price of a home and certain renovations for it within a single package.
- Native American Direct Loan: Allows eligible Native American Veterans and their spouses to purchase, build, or improve homes on federal trust land.
How do you apply for a VA loan?
If you’re interested in applying for a VA loan, you can follow these steps to get started:
- Determine your eligibility: Check if you meet the eligibility requirements by reviewing the guidelines on the VA website.
- Obtain a Certificate of Eligibility: If you are eligible, you will need to obtain a Certificate of Eligibility from the VA. You can get one after applying online through a portal, by mail, or through a VA-approved lender.
- Find a VA-approved lender: Look for a lender that is approved by the VA to originate loans. CNBC Select gathered some of the best lenders that offer a VA loan. Navy Federal Credit Union — one of the lenders on that list — offers term lengths that range from 10 to 30 years. PenFed Credit Union, which is another solid contender, offers a VA loan option without lender fees.
PenFed Credit Union Mortgage
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Annual Percentage Rate (APR)
Apply online for personalized rates; fixed-rate and adjustable-rate mortgages included
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Types of loans
Conventional loan, VA loan, FHA loan, Jumbo loan and adjustable-rate mortgage (ARM)
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Terms
Not disclosed
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Credit needed
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Minimum down payment
3.5% if moving forward with an FHA loan
- Complete the loan application: The lender will guide you through the application process and help you gather the necessary documents, including ones for income and employment verification, credit reports and bank statements.
- Wait for the loan approval: Once you submit your application, the lender will review it and determine if you meet the credit and income requirements. They will also order an appraisal of the property to determine its value.
On average, the VA loan approval process takes 53 days to close, according to a 2021 report from ICE Mortgage Technology.
Why choose a VA loan?
The VA guarantee provides a layer of security in the event the borrower defaults. This allows lenders to offer mortgages to people they might otherwise consider too risky, such as those with a limited credit history or a lower credit score.
VA loans also make it easier for military personnel and their families to access credit at more favorable terms. Borrowing other types of home loans can be expensive. FHA loans require a minimum down payment of at least 3.5% and conventional loans typically require a minimum of 5%. Plus, home loans typically come with private mortgage insurance if the down payment is less than 20%.
By opting for a VA loan, borrowers can save thousands of dollars on upfront costs. One of the most significant benefits is that VA loans typically require no down payment or private mortgage insurance. Additionally, they offer competitive interest rates and reduced closing costs.
These benefits can be especially appealing if you’re still paying off other debts or need to keep as much money on hand as possible for potential home renovations or an emergency fund. Just make sure to keep any money you’re saving for a short-term goal in a high-yield savings account where it can grow off the earned interest. The Western Alliance Bank Savings Account currently provides a high APY with a minimum deposit of just $1, and UFB Premier Savings also offers a competitive rate with no fees (with the possible exception of an overdraft fee).
Western Alliance Bank Savings Account
Western Alliance Bank is a Member FDIC.
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Annual Percentage Yield (APY)
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Minimum balance
$1 minimum deposit
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Monthly fee
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Maximum transactions
Up to 6 transactions each month
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Excessive transactions fee
The bank may charge fees for non-sufficient funds
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Overdraft fee
The bank may charge fees for overdrafts
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Offer checking account?
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Offer ATM card?
Terms apply.
Who is eligible for a VA loan?
Only qualified U.S. veterans, active-duty military personnel, and some surviving spouses can receive VA loans. To be eligible, you must meet the minimum service requirement and not have received a dishonorable discharge. You’ll also want to double-check with each lender for any additional eligibility guidelines.
Service members must serve for at least 90 continuous days, while veterans must meet minimum requirements that change depending on when they served (the same holds true for National Guard and Reserve members). The VA website lists the conditions for different periods.
Even if you don’t meet the minimum requirements, you may still be eligible if you were discharged for certain reasons, such as medical conditions or a disability connected to your military service.
Spouses qualify for VA loans if they are married to a veteran or service member who meets the eligibility criteria. Surviving spouses of veterans who died in the line of duty or because of a service-related injury may be eligible as well.
Credit and income requirements vary by lender. The VA does not have a minimum credit score requirement, but lenders usually look for a credit score of at least 620 and proof of stable income, according to Veterans United.
Before the property can be purchased with this type of loan, it must meet specific usage requirements, including being a primary residence and passing a VA appraisal.
What are the drawbacks of a VA loan?
Taking out a VA loan usually also requires you to pay a funding fee, which is a one-time charge from the VA to offset the cost of the program. It can range from 1.25% to 3.3% of the loan amount, depending on factors like whether it is the borrower’s first VA loan, according to the department website.
A major benefit of the VA loan program is being able to buy a home without making a down payment or paying for out-of-pocket expenses like closing costs. This can be a great option for those who do not have significant savings.
Borrowers can choose between paying the VA funding fee upfront or rolling it into their monthly mortgage payments. If you choose to roll the fee into your monthly payments, you’ll wind up needing a larger budget to cover all your expenses for the month.
It makes sense to pay the fee upfront if you can, but borrowers should weigh both of these options with their lender.
Another aspect of the program to consider is that the home appraisal process can be more rigorous for VA loans than those for other types. The VA requires that an approved appraiser conduct a thorough check of the property to determine its value and ensure that it meets the VA’s minimum property standards.
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Bottom line
Eligible veterans or service members looking to purchase a home or refinance an existing mortgage should explore VA loan options. They offer a variety of benefits, such as a smaller down payment and no private mortgage insurance requirement. That makes them particularly beneficial for those who are looking for a more accessible path to homeownership.
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Editorial Note: Opinions, analyses, reviews or recommendations expressed in this article are those of the Select editorial staff’s alone, and have not been reviewed, approved or otherwise endorsed by any third party.
Source: cnbc.com