How does a VA home loan work? With the promise of appealing terms, competitive interest rates, and no down payment, it’s easy to understand why prospective buyers would find VA home loans intriguing, but these mortgages aren’t for everyone. Would a VA loan be a smart option for you?
How Does a VA Home Loan Work?
How does a VA home loan work? To understand, it helps to have a clear picture of what a VA home loan is. Like a conventional mortgage, it is a loan where the property that is purchased is used as collateral to secure the financing. Unlike a conventional loan, a VA loan is backed in part by a guarantee from the U.S. Department of Veterans Affairs (VA). This guarantee reduces the risk incurred by lenders participating in the program, so borrowers enjoy more favorable terms.
VA loans are not available to every borrower. The VA’s home loan guaranty benefit is earned through military service. This means VA loans are options for service members, veterans, members of the National Guard and the Reserve, and surviving spouses who fulfill specific requirements set by the VA. If you believe that you are eligible for this benefit, you should look into securing a Certificate of Eligibility. This document confirms that you are eligible for a VA loan, and lenders require it before they will approve your loan.
Why would you need to show a lender verification that you’re eligible for a VA loan? As Investopedia reports, the VA does not actually lend money to those who qualify for VA home loans. While the VA sets rules for the program and provides a guarantee against default that benefits both lenders and borrowers, private lenders are the ones who originate the loans. Therefore, if you’re interested in using a VA loan to purchase a home, you’ll need to choose a private lender who participates in the VA’s program.
The VA’s Loan Guarantee
The VA’s home loan guaranty benefit has its limits. The basic entitlement available to a qualifying individual is $36,000. Most lenders will allow eligible borrowers who have sufficient income and credit to borrow up to four times that amount without requiring a down payment if the property meets the necessary criteria. It’s worth noting that this doesn’t restrict borrowers to loans of $144,000. If additional funding is required, borrowers may be able to make up the difference by making a down payment or by dipping into their second-tier entitlement.
When exploring the question how does a VA home loan work, don’t forget that borrowers aren’t the only ones who must meet eligibility requirements. The property being purchased must also fulfill certain standards. For starters, a VA home loan can only be used to buy a property that you intend to use as your primary residence. In addition, it must meet the VA’s Minimum Property Requirements. If being purchased with a VA loan, a property must satisfy the following criteria:
- The property must be a single, marketable piece of real estate composed of at least 75 percent residential space.
- The property must have a roof that is free of leaks. If attics or crawl spaces are present, they must be free of debris and large enough to make repairs of duct work, plumbing, and electrical systems feasible.
- The property must include space for living, cooking, dining, and sleeping and have at least one bathroom.
- The property must feature separate shutoffs for the water main, sewer, gas, and power systems.
- The property must have a mechanical system that is in good condition, protected, safe, and appropriately sized for the property.
- The property must be located on a site with proper drainage and a working connection to a septic or sewer system.
- The property must be structurally sound and free of hazards like mold, dry rot, fungus, decay, leaks, dampness, bad construction, poor craftsmanship, exposed wires, peeling paint, broken windows, evidence of continuing settlement, and termites or other pests.
Being eligible for a VA home loan does not automatically mean that a prospective borrower will be able to secure a mortgage. As Military.com makes clear, borrowers must demonstrate that they have the appropriate financial resources to qualify for the loans that they are seeking. While you won’t need a down payment, you will need to show that you have satisfactory credit and suitable income if you hope to secure a VA home loan.
If you have questions about financing the purchase of a home, how VA home loans work, the loan approval process, or what you can expect when buying a home, speaking with an experienced mortgage professional can be truly invaluable. Let us help you feel confident as you proceed with your journey to homeownership. Contact PrimeLending: Manhattan, Kansas today to arrange a consultation. Every year, we help thousands of veterans and active-duty members of the military buy or refinance their homes through the VA home loan program. With our assistance, you can take advantage of the many benefits of a VA loan while saving money due to our lack of lender fees. We offer 100% financing with competitive interest rates – no down payment or PMI required! To learn more, please give us a call at 785-560-3011 or contact us online. It’s our turn to serve you!