The VA Guaranteed Loan: Discover the Ins and Outs

VA Guaranteed Loan

A VA guaranteed loan stands as a significant advantage for those who have served in the military, allowing for the acquisition of a mortgage without the need for a down payment and at highly competitive interest rates.

Understanding VA Guaranteed Home Loans Guaranteed by the Department of Veterans Affairs (VA), these home loans are made accessible to qualified active-duty service members, members of the National Guard, reservists, veterans, and eligible surviving spouses through lenders that adhere to VA guidelines. The majority of VA loans issued annually are guaranteed home loans.

The role of the VA in guaranteeing these loans is to assure the lender that should the borrower fail to meet their payment obligations, the VA will cover the lender for the amount of the veteran’s entitlement. This assurance allows the lender to offer the loan based on the VA’s criteria concerning credit scores, debt-to-income ratios, and the occupancy status of the property, among other factors.

Do VA Loans Come Directly From the Agency? 

While the vast majority of VA loans are guaranteed, meaning they are initiated by lenders and backed by the VA rather than issued directly by the VA itself, there exists a unique direct loan program. This program is specifically for Native Americans who have served.

The Native American Direct Loan (NADL) program provides eligible Native American service members, veterans, and their spouses with the opportunity to secure a loan directly from the VA without a down payment. This program boasts attractive features such as low interest rates starting at 2.5% (as of May 2023) and favorable closing costs for those buying homes on tribal trust land.

It’s important to note that these direct loans are exclusively available through the VA, meaning no external lender can facilitate this type of loan. The distinction between direct and guaranteed VA loans is crucial for understanding the options available.

Understanding the Functioning of VA Guaranteed Loans 

A VA guaranteed loan is essentially a loan supported by the VA but initiated by private lenders, such as Rocket Mortgage®. Provided you fulfill certain criteria set by these lenders and/or the VA, this type of loan can be utilized for both acquiring a new home and refinancing existing mortgages. The common uses of VA loans include:

Home Purchase: VA loans are applicable for buying various types of properties including single-family homes, multi-family properties (up to four units), condos, manufactured homes, or for building a new residence. However, availability of these options varies by lender. For instance, Rocket Mortgage requires that construction be fully completed to finance a new build.

VA Streamline Refinancing: Known also as the Interest Rate Reduction Refinance Loan (IRRRL), this refinancing option is designed for current VA loan recipients looking to reduce their interest rates or adjust their mortgage terms with minimal paperwork. Often, no property appraisal is required.

Rate/Term Refinance: This traditional refinancing method serves the same purpose as the VA streamline but is intended for those transitioning from different types of loans, such as conventional or FHA loans, to a VA loan. This could be an option if acquiring a VA loan was delayed due to meeting service qualifications.

VA Cash-Out Refinance: Unique among loan options, the VA loan allows homeowners to liquidate up to 100% of their home equity into cash. Requirements for this process vary across lenders. For example, a minimum FICO® Score of 620 is needed at Rocket Mortgage, unless you’re willing to maintain at least 10% equity in your home.

Qualifying for a VA Home Loan Guarantee: 

Understanding the Criteria To be eligible for a VA loan, you’ll need to navigate two main areas of qualification: meeting the minimum service requirements set by the military and adhering to financial criteria specified by lenders. Each lender may have its own set of financial prerequisites.

What sets VA loans apart are the specific service duration requirements.

For active-duty service members, eligibility is secured with at least 90 consecutive days of service. Veterans, members of the National Guard, or reservists will find that eligibility depends on their service period. For service prior to August 2, 1990, the VA provides a detailed eligibility guide.

Veterans qualify under the active-duty criterion if they have:

• Served for a continuous 24 months,
• Completed a full service period (minimum 90 days) when called to active duty,
• Served at least 90 days and were discharged due to hardship or force reduction,
• Been discharged before completing 90 days due to a service-related disability.

National Guard members and reservists must also serve 90 days on active duty to meet the requirements.

Eligibility extends to surviving spouses under certain conditions:

• The veteran is missing in action or a prisoner of war,
• The veteran passed away during service or from a service-related disability without the spouse remarrying,
• The veteran died during service or from a service-related disability without the spouse remarrying before the age of 57 or before December 16, 2003,
• The veteran was totally disabled and then passed away, though their death wasn’t necessarily caused by the disability, under specific circumstances.
• If remarriage occurred before December 16, 2003, but after turning 57, eligibility for a home loan requires having obtained a Certificate of Eligibility (COE) before December 15, 2004.

Apart from these service or surviving spouse criteria, meeting the lender’s guidelines is essential for loan approval. Rocket Mortgage, for instance, outlines the following requirements:

• A minimum FICO® Score of 580, though scores of 620 and above offer more flexibility regarding debt-to-income (DTI) ratios and credit scores.
• DTI limits vary; for scores between 580 – 619, no more than 38% of monthly income should go towards housing payments, and total monthly debt payments shouldn’t exceed 45% of monthly income.

Regardless of the lender, certain standards apply universally:

• The loan must be for purchasing a single-family home or a multi-family property with up to four units.
• The property must serve as your primary residence.

The Advantages and Disadvantages of VA Home Loan Guarantees 

For many borrowers, the advantages of a VA loan significantly surpass any potential drawbacks.

Advantages 

No down payment requirement: Generally, VA loans don’t require a down payment, except in cases of reduced entitlement due to factors like foreclosure. 

Lower interest rates: VA loans are designed to benefit service members, offering some of the most competitive interest rates based on eligibility. 

100% cash-out refinance: Unique among loan options, VA loans allow borrowers to turn all their home equity into cash, provided they meet the qualifications.

Disadvantages 

Funding fee: The funding fee varies between 1.25% and 3.3% of the loan amount, depending on the down payment size and whether it’s the first or subsequent use of a VA loan. This fee is lower, at 0.5%, for VA Streamline refinancing. The fee can be included in the loan or paid at closing. Exemptions are available for those with VA disability, surviving spouses, or those who have received a Purple Heart and returned to active duty. 

VA appraisal standards: While sometimes considered rigorous, the VA’s health and safety appraisal standards are in place for the buyer’s protection. These standards are comparable to those applied to conventional loans. 

Restriction to primary residences: VA loans cannot be used for purchasing vacation homes or investment properties.

Applying for a VA Guaranteed Home Loan 

Securing a VA loan requires working with a VA-approved lender, such as Rocket Mortgage. The application process involves completing an application form and providing necessary documentation.

Essential Documentation 

Key documents for a VA loan include the Certificate of Eligibility (COE), which verifies your service duration eligibility. This can be obtained online through the VA or through lenders that can expedite the process, like Rocket Mortgage.

It’s also important to have documentation related to VA disability or if you’re currently serving after receiving a Purple Heart, as this may exempt you from the funding fee. Disability income is considered when qualifying for the loan.

The lender will request standard financial documents similar to any other loan application, including W-2s, 1099s, tax returns, pay stubs, and bank statements, among others. This information helps assess your income, assets, liabilities, and property ownership.

Summary 

VA guaranteed loans, originated by third-party lenders and backed by the VA, constitute a significant portion of VA home loans. These loans offer major benefits, such as no required down payment and competitive interest rates, for those who meet service requirements, have been discharged due to service-connected injuries, or are eligible surviving spouses. Applications for VA loans can be submitted online or by contacting a Home Loan Expert.