How to Buy a Home Using a VA Home Loan
With a VA home loan, servicemembers can borrow money from a civilian lending source, such as a bank, credit union or mortgage company. These loans differ from conventional loans in that:
- the VA guarantees the lending source payment of the loan, if you default
- the fees you have to pay at closing are reduced
- the amount of your down payment is often reduced
- you may be able to qualify to borrow more money, enabling you to buy a larger home
- you may qualify for a lower interest rate
- you don't have to buy private mortgage insurance
Besides purchasing a home, condominium, townhouse or manufactured home, you can also use a VA home loan to:
- refinance a current VA home loan for a lower interest rate or to take out equity
- build a new home
- remodel, or repair an existing home
A VA home loan is capped at $417,000, meaning this is the maximum amount you can finance. If you refinance, the maximum equity you can pull-out is $144,000.
Veterans. To see if you qualify for a VA home loan, you must fill out VA Form 26-1880, Certificate of Eligibility Request and send it to your VA Regional Processing Center along with a copy of your DD-214 service record, or equivalent proof of service.
Current servicemembers. If you are either on active duty or in the Selected Reserves, you need to submit a statement of service letter from your command verifying your service dates, along with the VA Form 26-1880.
Veterans, active duty, National Guard and Reserve, along with military spouses, may qualify for the certificate. When you served, along with the amount of time you served, establishes your eligibility. Generally speaking, military service falls into seven categories:
Wartime: You serve (or served) at least 90 days during the time periods below, on active duty and can't have a dishonorable discharge:
- WWII - September 16, 1940 to July 25, 1947
- Korean - June 27, 1950 to January 31, 1955
- Vietnam - August 5, 1964 to May 7, 1975
- Gulf War - August 2, 1990 to an undetermined date
Peacetime. You must have served at least 181 continuous active duty days during one of the below periods, and not have a dishonorable discharge:
- July 26, 1947 to June 26, 1950
- February 1, 1955 to August 4, 1964
- May 8, 1975 to September 7, 1980 (enlisted)
- May 8, 1975 to October 16, 1981 (officer)
Service after September 7, 1980 (enlisted) or October 16, 1981 (officer). To qualify, you must:
- complete 24 months of continuous active duty or
- if called up for active duty, serve the full period of the call-up of not less than 181 days and
- discharge under conditions other than dishonorable
Served at least 181 days of active duty and discharged under the authority of a U.S. Code:
- with a hardship
- as an early out
- with a service-connected disability and receiving compensation
Served less than 181 days of active duty and discharged due to:
- an involuntary reduction in force
- certain medical conditions
- a service-connected disability
- the convenience of the Government
- on active duty--eligible after 181 days
- in the Selected Reserves--eligible after six years of service
A spouse of a servicemember who:
- is missing in action
- is a prisoner of war
- died either while serving or as a result of a service-connected disability
Complete the first step to securing your VA loan by submitting a Certificate of Eligibility Request. Getting an approved certificate does not guarantee VA home loan approval--it just means you meet the service requirements to continue with the process.
Once you receive your approved Certificate of Eligibility, you can start the VA home loan application process of:
- finding a VA approved lender
- pre-qualifying for a loan
- selecting your home
- drawing up the purchase contract
- getting the property appraised by the VA and
- finalizing the loan
Before you start the home buying process, secure a copy of your credit report from any of the major credit report bureaus:
Once you have your credit report, carefully look it over for errors. If you find anything that needs to be corrected, contact the company responsible for the errors. Having a clean credit report beforeyou start shopping for a home loan can save you time, money, and frustration.
Finding a VA Approved Lender
To ensure you get the best loan, shop around. You might have a favorite lender, and that may be the one you end up with, but get at least three quotes. Using the same credit report and information, ask about interest rates, points, loan types, down payment, closing costs, monthly mortgage payment, etc.
Pre-qualifying for a Loan
Based on your income and assets, pre-qualifying for a VA loan gives you an idea of how much money you can afford to borrow. That, in turn, gives you an idea of how much home you can financially afford. If you qualify to borrow $300,000, there isn't any point in looking at houses costing significantly more--nor does it mean you have spend the full amount.
Selecting Your Home
Now the real fun begins--hunting for a home. You can begin looking by using three sources:
- Online. Most real estate Websites include a search feature where you can type in specific criteria, such as square footage, number of bedrooms/baths, price range, location, etc. and you get a list of homes meeting your criteria.
- Newspapers and Real Estate Guides. Usually found outside retail stores, these free real estate guides can be used to check out what's currently available in your area. Once you identify some homes you would like to see, call the listing agent and set up a showing;
- Real Estate Agents. Real estate agents can identify properties you might like as well as set up appointments for you to check out potential homes.
Generally, doing some online searches and thumbing through a guide or two before contacting an agent works best.
Drawing up the Purchase Contract
The purchase contract is an agreement between the buyer and seller. Once you decide on home you'd like to buy and the price you'd like to offer, your real-estate agent will draw up a contract. If you don't understand something in the contract, stop your agent and ask him/her to explain. Once you are comfortable with everything, initial, sign and date the contract as directed by your agent. Your agent will then present your offer, and the seller who will do one of three things:
- Accept your offer.
- Counter-offer with a price between your offer and the listing price. (At this point, the ball will be back in your court and you can accept the counter-offer, offer a new counter-offer, or decline.)
- Decline your offer and not counter-offer.
Getting the Property Appraised by the VA
Because the value of your home must be at least as high as your buying price, your home must be inspected by a VA-approved appraiser before signing the final paperwork. Normally, the lender takes care of requesting the appraisal, as it's in the lender's best interest to ensure the VA approves your loan.
Keep in mind an appraisal is not a home inspection. An appraisal only guarantees the value of the home and not the condition. As the buyer, it's your responsibility to pay for a home inspection, if you want one. Getting a home inspection gives you peace of mind by knowing the condition of the foundation, electrical, plumbing, heating/AC, appliances, roof, etc.
Finalizing the Loan
If the value of the home comes in at more than the purchase price, and the lender qualifies you for the loan based on your disclosed financial information, the lender can approve the loan. At a predetermined time, the closing will take place. The closing officially transfers the responsibility of the property from the seller to you, the buyer. This process is taken care of by either a closing agent or a title company. Even with a VA-approved loan, closing costs can be considerable, so talk to your lender and closing agent beforehand to prevent surprises.
Loans usually come in two varieties, fixed rate and adjustable rate mortgage (ARM). With a fixed rate mortgage, your interest rate stays the same over the life of the loan. In a rising interest-rate economy, this is a good choice.
With an ARM, the interest rate fluctuates over the life of the loan, so in a falling rate economy, an ARM could be a good choice. With a VA-approved ARM, the interest rate can't rise over 1% per year, nor can it rise more than five times over the life of the loan.
If the rate increases are spread out over the life of the loan, an ARM can be a good deal, however, if the rate increases happen five years in a row, you may be stuck paying the higher interest rate over the rest of the life of the loan. The best advice for homebuyers is to shop around and do your homework.
Besides building, buying, remodeling or refinancing, you can also use a VA loan to:
- buy a manufactured home with or without a lot
- buy or improve a manufactured home lot
- install solar heating or cooling systems (or make other energy use improvements)
- buy up to a four-unit rental income property, provided you live in one of the units
Can I purchase a home in a foreign country?
No, the home must be located within the United States or its territories.
Can I take out a loan for a second or vacation home?
No, not unless you plan to make it your permanent residence.
As a veteran, I purchased a home with my spouse using a VA loan. Now we are divorced. Can I get my entitlement back?
Yes, only if your spouse pays off the loan or if your spouse is a veteran and uses his/her entitlement to take over the loan.
If I've already used my entitlement, can I use it again?
Yes, in a couple of ways:
- If your current home was financed with a VA loan, paid off, and still under your ownership, you can get an additional one-time entitlement.
- If you have a VA home loan, sell the home and pay off the loan, your entitlement can be re-established. You can use this scenario as many times as you like.
What is the advantage of a VA home loan?
By using a VA home loan, you:
- don't have to make a large down payment
- don't have to buy private mortgage insurance
- avoid many associated closing cost fees
- can refinance a non-VA loan
A VA home loan is just one benefit from your military service. No matter if you are looking to buy your first home or you're fifth, using a VA mortgage loan can save you thousands of dollars in interest rates, closing costs, and mortgage insurance over the life of a VA home loan.