If you’re looking for a home mortgage loan with great terms and conditions, a VA loan may be just what you need. VA stands for Veteran Affairs, and a VA loan is a type of home mortgage loan available to active military members, veterans, and their spouses.
However, not everyone can qualify for this type of home loan, and there are some important drawbacks to consider. Read on to find out what a VA loan is, how it works, and what you need to do to apply for one, or contact our partners at Inspire Home Loans® for more information.
Who Is Eligible for a VA Loan?
You’re eligible to apply for a VA loan if you are:
- An active military member
- A veteran
- A surviving spouse of a deceased military member
- A National Guard member with at least 90 days of active service. At least 30 of these days must be consecutive.
What Are the Benefits of a VA Loan?
VA loans have a number of perks, including:
- No down payment
- No mortgage insurance premium
- Potentially lower interest rate than other loan types
- Potentially higher minimum credit score and more flexible debt-to-income requirements
- Veterans with a military-related disability may have the funding fee waived
- Protections for homeowners who are struggling to make monthly payments
If you qualify as a first-time home buyer, you might be eligible for additional benefits. These are:
- Down payment assistance
- A cash grant that can cover all or some of your down payment or closing costs
- Financial assistance with closing costs
- Tax credit or tax deductions
- A home buyer education course
How Does a VA Loan Work?
To clarify, the VA doesn’t offer home loans but it does guarantee a percentage of each of these loans. This enables banks and other private lenders to offer favorable terms and conditions that you wouldn’t get from other loans.
What Steps Are Involved in Applying for a VA Loan?
- Apply for a certificate of eligibility from the VA website
- Find lenders that offer VA loans and compare terms and conditions
- Once you find a lender you want to work with, fill out an application to get prequalified for a loan
Prequalification involves a credit check to estimate how much you can borrow. Pre-approval requires more documentation and a formal commitment from the lender.
When you apply for prequalification, a lender will run a credit check and let you know how much you’ll likely be able to borrow. You’ll also be notified if there are things you need to do in order to obtain a loan for the sum of your choice. Some lenders may require you to pay off other debts in order to raise your debt-to-income ratio and/or credit score. Others may ask you to provide a down payment to offset a lower credit score or high debt-to-income ratio.
You’ll probably want to apply for prequalification even before you start house hunting. If looking to purchase a resale home, sellers may not consider your offer unless you are prequalified, which puts you in an inferior position if you are bidding against other parties.
Once you have found the home you want to buy and the seller has accepted your offer, you’ll inform your lender and begin the process of obtaining final approval on a loan so that you can close on your home.
Along the way, your lender will likely require additional financial paperwork, such as pay stubs and W2s. Other steps include:
- Purchasing home insurance for your new home. Your lender will tell you what policy requirements you need to meet. Your policy effective date is the date of closing.
- Setting a date for closing. Ask the lender for a list of everything that must be provided in advance to ensure there are no delays.
How Can a VA Loan be Used as Part of a Wealth-Building Strategy?
Now that we’ve answered the question, “What is a VA loan?”, it’s time to explore what you can do with one.
VA loans are for primary residences only. You and/or your co-buyer will need to move in 60 days after closing, and you’ll need to live in the home for 12 months. Even so, there are several great ways to use VA loans to build wealth.
- You can rent the home out if you receive permanent change of station orders. You’re free to choose long-term renters or put the home up on sites such as Vrbo or Airbnb (if your neighborhood allows owners to offer short-term rentals). In such a scenario, you could even take out another VA loan to purchase a new residence.
- If you purchase a home with some extra space, you can rent out a room or two. You don’t need to wait until your minimum occupancy period is up or you receive permanent change of station orders as you’re still using the house as a primary residence.
- Fix and flip. Use a VA loan to purchase a primary residence that needs repairs, and then resell the home once you fulfill the occupancy requirements. A fixer-upper home often costs less than homes that are in perfect condition.
What’s more, you don’t have to spend a lot on repairs in order to turn a profit. Repainting the inside and outside of the house, adding new lighting fixtures to the kitchen and deck, and putting in a steel front door are simple yet effective ways to add to your home’s value.
What Are the Potential Challenges or Limitations of Using a VA Loan?
- Borrowers who can’t afford a down payment are required to pay a one-time funding fee, paid upfront in cash or rolled into your loan. This fee can be anywhere from 1% to 3% of the entire loan.
- Not all lenders offer VA loans. This limits the number of potential lenders you can work with.
- There are occupancy requirements. You can’t use a VA loan to buy an investment property.
Summary
VA loans offer great benefits, but you don’t want to automatically pick this type of loan just because you’re eligible. There are many other types of home loans you can consider, such as:
- Conventional Mortgage
- FHA Home Loan
- USDA Home Loan
Terms and conditions for these loans vary depending on your financial situation and geographic location. Our affiliate lender Inspire Home Loans® can help you weigh up your options so you can get the loan that best meets your needs. We offer personalized assistance to meet the needs of military members and veterans of all ages and walks of life—and you don’t need to commit to buy one of our homes beforehand!