The Ins and Outs of VA Loans: What You Need to Know

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How Does a VA Loan Work?

A VA loan is a low-cost mortgage available exclusively to certain U.S. service members, veterans, and surviving spouses through the U.S. Department of Veterans Affairs (VA). These loans are provided by private lenders but are backed by the VA, which insures a portion of the lender’s loss if the borrower defaults. This backing allows for lower interest rates and down payment requirements compared to conventional mortgages.

VA loans are notable for their 0% down payment requirement, making homeownership more accessible. According to the VA, 90% of their traditional purchase loans are made without any money down. However, homeowners can choose to make an optional down payment to reduce fees and increase equity.

To apply for a VA loan, you must first obtain documentation proving your eligibility. Once prequalified with a lender, you can start shopping for a home. After making an offer, a VA-approved appraiser will estimate the home’s value and ensure it meets the VA’s minimum property requirements.

Common Types of VA Loans

VA loans come in several forms, including:

• Home purchase loan (for buying or building a home)
• Interest rate reduction refinance loans (IRRRLs)
• VA-backed cash-out refinance loans
• Native American direct loan
• Manufactured home loan
• VA direct loan

Common VA Loan Fees

VA loans have unique fees, along with some of the same ones found with other mortgages. It’s important to be aware of these fees to properly calculate if a VA loan is your best deal.

Funding Fees

Most VA loan recipients must pay a “funding fee,” a one-time payment calculated as a percentage of the purchase value. This fee helps offset the cost of VA benefits to U.S. taxpayers. The fee varies depending on factors such as the nature of your service, whether you make a down payment, and whether you’re using your VA entitlement for the first time or applying it to a new loan after paying off your initial one.

Origination Fees

In addition to the VA funding fee, lenders may also charge their own origination fee, often around 1% of the total loan amount.

Closing Costs

VA loans come with closing costs, which can vary by lender. However, VA loans limit some closing costs to the seller to aid affordability. In addition to an origination fee, a buyer’s costs often include:

• VA funding fee
• VA appraisal fee
• State, local, and real estate taxes
• Loan discount points
• Title insurance
• Recording fee

How to Qualify for a VA Loan

Ready to get started? Follow these steps to buy a home with a VA loan.

1. Ensure Eligibility

Review the VA’s requirements and your service record (or that of your spouse) to make sure you meet eligibility criteria.

2. Get Proof of Eligibility

Obtain a Certificate of Eligibility (COE) as proof to the lender that you’re a VA loan candidate. You can get this online at the VA’s eBenefits website, through a VA lender, or by submitting a COE request by mail.

3. Find Lenders

Not all lenders offer VA loans, so if you need help finding one, contact the VA Regional Loan Center in your area.

4. Get Prequalified

It’s wise to get prequalified for your loan before viewing homes. This process indicates how much you can borrow, so you’re considering properties in your price range. Getting prequalified also shows sellers that you’re a serious buyer.

5. Start Looking for Eligible Properties

Find a real estate agent and start the fun part! Keep in mind that VA loans are limited to primary residences and single-family homes up to four units, a VA-approved condo project, or a manufactured home or lot.

Pros and Cons of a VA Loan

If you’re trying to decide whether to use a VA loan, here are some benefits and drawbacks to consider.

Pros of VA Loans

• Zero down payment: VA loans require no down payment unless you want to borrow a high amount or reduce your funding fee.
• Competitive rates and fees: VA loans don’t charge private mortgage insurance (PMI) and often have lower interest rates and closing costs.
• Lower credit scores OK: Lenders typically have less restrictive credit requirements for VA loans.
• Multiple uses: You can apply for another VA loan if you pay off your first one, as long as it’s for your primary home.

Cons of VA Loans

• Funding fees: VA funding fees can be a burden, especially in pricey areas.
• Property restrictions: VA loans are only for specific types of primary residences and require a VA-approved appraisal.
• Minimal equity: Requiring 0% down means borrowing a larger amount and starting with no equity, which can be risky if the home loses value.
• Seller bias: Some sellers may reject offers with VA loans due to misconceptions about closing costs.

The Bottom Line

VA loans require certain hoops to jump through and fees not found with other mortgages, but they provide incredible value to buyers who can’t afford a down payment. It can be worth comparing your VA loan offer to other loan types to ensure you get the best deal overall. If you check your credit report and it’s in good shape, and you don’t mind putting some money down, you might get approved for a conventional mortgage with a similar interest rate and potentially fewer fees. But if you have minimal cash available to put down upfront, a VA loan could be a lifesaver.

For any mortgage service needs, call O1ne Mortgage at 213-732-3074. We’re here to help you navigate the process and find the best loan options for your situation.

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