What is a VA Loan?
A VA loan is a $0-down mortgage option issued by private lenders and partially backed, or guaranteed, by the Department of Veterans Affairs (VA). Eligible borrowers can use a VA loan to purchase a property as their primary residence or refinance an existing mortgage.
How Does a VA Loan Work?
VA loans work a bit differently than conventional mortgages. The Department of Veterans Affairs (VA) does not make or originate loans, but backs a portion of each loan against default. This backing, or guarantee, is what gives private lenders the confidence to extend $0 down financing and advantageous rates and terms.
However, from a process perspective, VA loans work fairly similar to most other mortgage options, but with a few caveats. A typical VA loan process works something like this:
1. Get Pre-Approved: Find a VA lender and get Pre-Approved to get an estimate of how much house you can afford based on your income, credit, entitlement and other financial factors. Pre-Approval is an important first step to make sure you can afford the Homes that you are looking at.
2. Put in an Offer:
When you and your Realtor find the perfect VA loan approved home, it’s time to craft an offer and negotiation a contract with the seller. It’s important to find a Va Realtor who is Savvy, and you trust that also knows the ins and outs of VA loans.
3. Inspections:
Once you have an Accepted offer, It is now your time to make sure you get everything Inspected. The most common Inspections on a home are: Home Inspection, Roof Inspection, and Pest Inspection. With a VA Loan it is a Requirement to make sure that the house does not have any Termites. The Va Loan requires that the home be Safe, Sound, and Sanitary.
4. Go Through the VA Appraisal and Underwriting:
Once under contract, your lender will order an Appraisal of the property. The VA appraisal is not a home inspection, but a VA requirement to ensure the property meets fair market value and the VA's Minimum property Requirements.
Around the same time underwriters will evaluate your income, financial and related documents along with the appraisal once it’s finalized. If everything checks out, you’ll be issued a clear to close and move on to your loan closing.
5. Closing:
You’ll sign all kinds of legal documents and paperwork at your loan closing and get the keys to your new home.
8 Things Most Borrowers Don’t Know About VA Loans
While how the VA loan works can be summed up in a handful of steps, there are many things about VA mortgages that potential borrowers and agents don’t often know.
1. They’re reusable: You can use your full VA entitlement over and over again as long as you pay off the loan each time. But you may be able to obtain another VA loan even if you've lost one to a foreclosure or currently have another VA Loan.
2. They’re only for certain types of homes: If you're planning to buy a working farm, a downtown deli or a fixer-upper, the VA loan may not be for you. It's mainly designed for properties that are in Move-In ready Condition. Including single-family homes, condos, modular housing, some multi-unit properties and more.
3. They’re for primary residences only: VA loans are for primary residences, although you can use this benefit to buy a duplex or another multiunit property, provided you live in one of the units.
4. They’re not issued by the VA: The VA isn’t in the business of issuing home loans. Instead, the agency provides a guaranty on each qualified mortgage loan.
5. They’re available despite foreclosure or bankruptcy: Service members with a history of bankruptcy, or foreclosure can still receive a VA loan.
6. They don’t have mortgage insurance: Mortgage insurance is a monthly fee you pay with other programs when you're not putting at least 20 percent down. The VA's guaranty makes it so that the Veteran does not have to pay for this insurance premium, helping borrowers save even more money each month.
7. They come with a mandatory fee, unless the veteran has a Service-connected Disability: There is the VA Funding Fee. This fee helps the VA keep the program going and is required on both purchase and refinance loans. You can put it into your loan so you don't need to pay it out of pocket at closing.
8. There's no limit to how much you can borrow: With the VA loan benefit, qualified veterans can borrow as much as a lender is willing to give them, all without the need for a down payment. You might hear of VA Loan Limits, lenders and the VA use these county-level limits to determine what kind of down payment might be needed for Veterans without their full VA loan entitlement. If you have your full entitlement you do not need to worry about these at all.
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