The Veterans Administration provides a home loan guaranty benefit and other housing-related benefits to servicemembers, veterans, and eligible surviving spouses. The loans can be used to buy, build, repair, retain, or renovate a home for your own occupancy.
The VA does not loan the money itself; rather, the loans are provided by private lenders, such as banks and mortgage firms. What the VA does is guarantee a portion of the loan, which lets the lender offer you more favorable terms. For instance, VA loans can let you buy a home with no money down (90% of VA-backed home loans do not have down payments). Also, you skip annual mortgage insurance payments.
In this article we cover VA-backed loans to buy a home. Other kinds of VA loans include interest rate reduction loans and cash-out refinance loans, which we'll cover another time.
VA-Backed Purchase Loans
Eligibility: Lenders rely on the VA's own standards as laid out in the Certificate of Eligibility (COE). Requirements can be met by veterans, servicemembers on active duty, and National Guard and Reserve members. Surviving spouses can qualify too. Second, a lender may impose its own requirements, such as limits for credit score and income. Third, you must live in the home you buy with the VA-backed purchase loan.
We mentioned no down payment or mortgage insurance. Two other great benefits of a VA-backed home loan are better terms and interest rates from banks, credit unions, and other lenders; and fewer closing costs. On the other hand, most lenders will charge a VA "origination fee," such as 1%, at the start of the loan process; this fee, like many others, is often negotiable.
Home Buying With a VA Loan
STEP 1: The first step to buying your home with a VA loan is to apply for your Certificate of Eligibility, or COE (link above). This is how you prove to lenders that you qualify for a VA-backed loan.
STEP 2: Review your finances. What's your monthly income? Your monthly expenses? Determine how much you want to spend on a mortgage. Going with a 15-year fixed-rate mortgage instead of a 30-year one will save you a lot of money in interest, and it doesn't mean paying twice as much per month like you might think. See in the table below how cutting the length of the loan in half (from 30 years to 15) means paying about a third more each month, not double.
STEP 3: Pick a lender. A lender matching service such as Lendgo can line you up with lenders who offer competitive rates and terms.
STEP 4: Pick a real estate agent using the recommendations of friends and family or online. Pay attention to sale signs posts on the lawns of homes in the neighborhood you'd like to live in. Expect to meet with several agents before choosing one. You'll want to look closely at any charges, fees, and commissions, and also your obligations.
STEP 5: Go home shopping! Now comes the fun part, walking through different homes for sale and imagining your life there. Consider what your commute time would be, the schools nearby, and other factors important to you and your family.
Watch this helpful video about working with an agent and lender: