What is a VA Loan?
A VA loan refers to a mortgage loan provided to veterans, service members, reservists, and select surviving spouses of military members. The U.S. Government introduced VA loans in 1944 to help veterans and returning service members to purchase homes without requiring an excellent credit history or a down payment, as is common with other types of loans.
VA loans are provided by banks, mortgage companies, and other private lenders. Although VA loans are not offered by the government, the fact they are guaranteed by a government agency makes them less risky compared to other loan types. While borrowers can get a VA loan without making a down payment, they are required to meet specific requirements for accessing credit from lending institutions.
The U.S. Department of Veteran Affairs sets the rules for members who qualify for the loans and offers minimum requirements under which mortgage loans can be provided to qualified veterans.
- A VA loan refers to a mortgage loan provided to veterans, service members, and surviving spouses through the U.S. Department of Veterans Affairs.
- VA loans are provided by private lenders.
- The U.S. government provides a guarantee for VA loans through the US Department for Veteran Affairs.
Eligibility Requirements for VA Loans
Veterans and service members who want to access the VA home loans are required to meet certain requirements. The requirements fall in the following categories:
- Be an active duty service member or a veteran, honorably discharged.
- Service members must have served 90 consecutive days of duty during wartime or 181 days of duty during peacetime.
- Members must have served six years or more in the National Guard or Reserve service.
- Surviving spouses of service members who died in active service.
Veterans and service members applying for a VA home loan are required to obtain a VA Certificate of Eligibility (COE) through the eBenefits portal or through a specific lender. When applying for the COE, veterans are required to provide DD Form 214, while service members are required to provide a signed statement of service.
The statement of service should include the member’s full name, date of birth, social security number, date when they started active duty, any lost time, and the name of the command where they are assigned. National Guard, Reserve members, and surviving spouses have different eligibility requirements from veterans and active service members, and the requirements are available on the VA’s eBenefits portal.
How a VA Loan Works
VA home loans are provided to veterans and active service members to help them purchase homes. When applying for the VA loan, qualified applicants are required to submit a certificate of eligibility to the lender. The loan applicant must also meet the lender’s requirements, even though the requirements are less rigid than the requirements for conventional loans.
During the loan application process, borrowers receive an entitlement, which is the amount guaranteed on each loan. Most VA lenders loan up to four times the amount of an individual’s entitlement. The VA loans are different from the regular mortgage loans offered by lenders since they do not require a down payment.
The U.S. Department of Veterans Affairs guarantees the loans to allow qualified individuals to purchase, build, or repair a home for occupancy. It means that the government agency will repay a portion of the loan repayments to the lender if the borrower defaults on the loan obligations or the mortgaged property faces foreclosure.
The guarantee provided by the government provides an incentive to private lenders to extend credit to veterans at better terms than conventional loans. The lenders provide 100% financing on the value of a home, and beneficiaries can choose to reuse the awarded loan and assign it to another individual who qualifies for the VA loan.
Types of VA Loans for Veterans
Veterans, service members, and surviving spouses can access the following types of VA loans:
1. Purchase loans
Purchase loans are provided to veterans to buy or build homes at comprehensive interest rates. Most often, loan applicants are not required to make a down payment or pay mortgage insurance.
2. Cash-out refinance loans
Cash-out refinance loans allow veterans and active service members to borrow loans against home equity. The option offers a new mortgage that is of a higher value than the existing mortgage. The borrower can also use the new mortgage to pay off debt, purchase a new home, or finance home improvement.
3. Interest rate reduction refinance loan
The interest rate reduction refinance loan helps borrowers refinance their current VA loan to obtain a lower interest rate. Borrowers can also take the loan to convert an existing adjustable-rate mortgage into a fixed-rate mortgage.
4. Adapted housing grants
Adapted housing grants are provided to help veterans and active service members with permanent and service-connected disability to purchase or build a house that is adaptive to their disability. They can also use the loan to modify their existing homes to make it adaptive to their disability.
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