Your clients will turn to you for advice on all things related to buying and selling real estate. Here’s what real estate agents need to understand about VA loans. We’ll answer the question, “What is a VA loan?” and discuss basic eligibility requirements and conditions for this type of loan. This article will also discuss the types of VA loans and the advantages and disadvantages of the program.
This article is a must-read for real estate agents and brokers serving U.S. servicemembers, veterans, and their families.
Related Article: Homebuyer’s Loan Guide: 7 Types of Mortgage Home Loans
Understanding VA Loans
The term “VA loans” refers to a home loan program offered by the Department of Veterans Affairs (VA) to servicemembers, veterans, and their families.
The U.S. Congress created the VA home loan program in 1944. At that time, the maximum loan guarantee was $2,000. The program’s objective was “to ease the economic and sociological problems” of the men and women who served in the military during World War II. The program was very popular. Between the end of World War II and 1966, one-fifth of all single-family residences built were financed by the VA home loan program.
How VA Loans Work
VA home loans are mortgage loans guaranteed by the VA. They are available to veterans, active-duty service members, and certain members of the National Guard and Reserves. VA loans typically offer competitive interest rates, do not require a down payment or private mortgage insurance (PMI), and have more lenient credit requirements than conventional loans. To qualify, borrowers must meet specific service requirements and obtain a Certificate of Eligibility (COE) from the VA. Private lenders, such as banks and mortgage companies, provide these loans, with the VA guaranteeing a portion of the loan.
How to Buy a Home with a VA Loan
Here are the basic steps to purchase a home with a VA loan.
Step 1: Pre-qualify
A VA lender will look at the individual’s income, credit rating, and Certificate of Eligibility to determine how much they can borrow.
Step 2: Get pre-approved
Mortgage lenders will verify the servicemember’s or veteran’s income and other financial information to determine how much they can afford to borrow and will issue a pre-approval letter.
Step 3: Make an offer
As their real estate agent, you will help the buyer submit an offer for a property that interests them.
Step 4: Get a VA appraisal
VA loans require a specific type of appraisal. The appraisal will confirm that the house price is fair market value. The home also must meet the Minimum Property Requirements outlined by the VA.
Step 5: Close on the property
The VA loan will close after underwriters evaluate the buyer’s financial information.
Eligibility Requirements for VA Loans
Eligibility requirements for VA loans are somewhat complicated, as participants in the program must meet the minimum active-duty service requirement based on when they served. Guide veterans and their family members to visit the Department of Veterans Affairs website to see if they are eligible for a VA loan.
In addition to meeting the service requirements for a VA loan, they must also meet standards for credit and income and plan to live in the home they’re buying with the loan.
VA Loan Limits and Conditions
If your buyer client is an eligible veteran, service member, or survivor with “full entitlement,” they won’t have to pay a down payment on loans over $144,000. However, your client’s credit history, income, and assets will limit the loan amount.
Some of your buyer clients may have used the VA loan benefit before and have an active VA loan they’re still paying back. This may mean they have “remaining entitlement” and may have to make a partial down payment.
Learn more about loan limits and conditions by visiting this page of the VA’s website.
Types of VA Loans for Veterans
There are different types of VA loans. Here’s a brief overview of four different types.
1. Purchase loan
The term “purchase loan” is sometimes used for the loan type described in this article’s previous sections. It’s used to help obtain a primary residence.
2. Native American Direct Loan (NADL) program
The Native American Direct Loan program is eligible for Native American Veterans or non–Native American Veterans married to a Native American. In addition, the client must meet all of the following requirements:
- The client’s tribal government has an agreement (or Memorandum of Understanding) detailing how the program will work on its trust lands.
- The client has a valid VA home loan Certificate of Eligibility.
- The client meets credit standards and has proof that they make enough money to cover the mortgage payments and other costs of owning a home.
- The client will live in the home that the loan program will help buy, build, or improve.
For more information about the NADL program, visit this website.
3. Interest Rate Reduction Refinance Loan (IRRRL)
Clients with an existing VA-backed home loan may apply for an interest rate reduction refinance loan (IRRRL). This loan will allow your client to replace their current loan with a new one under different terms.
To be eligible, your client must meet the following basic requirements:
- They must already have a VA-backed home loan.
- They must be able to certify that they currently live in or used to live in the home covered by the loan.
4. Cash-out refinance loan
A VA-backed cash-out refinance loan lets buyers replace their current loan with a new one under different terms. It also allows homeowners to take cash out of their home equity or refinance a non-VA loan into a VA-backed loan.
Considerations and Limitations for a VA Loan
Your client needs to be aware of the limitations and considerations of VA loans.
1. The property must be used as a primary residence.
VA loans cannot be used for investment properties or vacation homes. Borrowers must occupy the home within a reasonable time after closing, usually within 60 days, and intend to use it as their primary residence for at least one year.
2. Only certain types of properties are eligible for VA loans.
Eligible properties include:
- Single-family homes
- Condos (must be VA-approved)
- Multi-unit properties (up to four units, with the borrower living in one unit)
- Manufactured homes (with restrictions)
3. The home must meet Minimum Property Requirements (MPRs).
The home must meet MPRs set by the VA, ensuring it is safe, sanitary, and structurally sound. This includes adequate heating, roofing, and electrical systems, among other standards.
4. The home must undergo a VA appraisal.
The appraisal will determine its market value and ensure it meets MPRs.
Advantages of VA Loans
A VA loan is a benefit to U.S. Veterans. Here are the advantages of VA loans.
1. No down payment
Qualified borrowers can purchase a home without making a down payment, making homeownership more accessible for veterans.
2. No private mortgage insurance (PMI) required
Conventional loans require borrowers to obtain private mortgage insurance if a buyer puts less than 20% down on a home. VA loans do not require PMI, which reduces the monthly mortgage costs.
3. Lower interest rates
VA loans often have lower interest rates compared to conventional loans.
4. Flexibility in qualifying requirements
More lenient credit and income requirements make it easier for servicemembers or veterans to qualify.
5. Limits on closing costs
The VA limits the amount of closing costs lenders can charge.
6. Foreclosure protection
The VA offers assistance to help borrowers avoid foreclosure.
Potential Disadvantages of VA Loans
Your buyer needs to be aware of two disadvantages of VA loans.
1. Funding fee
VA loans require a funding fee, which can be a significant upfront cost. Although this fee can be financed into the loan, it still adds to the overall loan balance.
2. Appraisal process
The VA appraisal process can be stringent, potentially causing delays if the property fails to meet the VA’s Minimum Property Requirements (MPRs).
A real estate agent must have in-depth knowledge of the industry. This includes understanding the different loan options available for buyer clients. Don’t worry. You aren’t expected to learn this information on your own. By taking pre-licensing courses through Colibri Real Estate School, you’ll learn everything you need to know to best serve your clients (and pass your state’s real estate licensing exam). Colibri (formerly Real Estate Express) is well-known for offering quality, affordable, at-your-own-pace online real estate for pre-licensing and continuing education. Simply purchase a state-specific course package today to get started with the licensing process.
Key Takeaways
- A VA loan is a mortgage loan guaranteed by the Department of Veterans Affairs (VA) for servicemembers, veterans, and their families. It offers competitive interest rates and no down payment or private mortgage insurance (PMI).
- To qualify, borrowers must meet specific service requirements, obtain a Certificate of Eligibility (COE), and plan to use the property as their primary residence.
- The VA offers various loan types, including purchase loans, Native American Direct Loans (NADL), Interest Rate Reduction Refinance Loans (IRRRL), and cash-out refinance loans.
- VA loans offer benefits such as no down payment, no PMI, lower interest rates, and flexible qualifying requirements. However, they require a funding fee and have stringent appraisal processes.
Source:
Jowers, Karen. “VA Loan History 101: From World War II to Today’s Benefit.” Army Times, August 19, 2022. https://www.armytimes.com/home-hq/va-loan-center/2017/12/14/va-loan-history-101-from-world-war-ii-to-todays-benefit/.
