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What Type of VA Loans Are There for Veterans?
Buying a home is a big step toward living the American Dream for veterans who are going back to civilian life. But a home is a big purchase that almost always requires a home loan. Veterans can get this done with the help of a VA loan or VA mortgage.
Four kinds of VA loans
- NADL stands for the Native American Direct Loan Program.
- Purchase Loan Backed by the VA
- Refinance Loan with Cash Out
- Refinancing a loan to get a lower interest rate (IRRRL)
The Department of Veterans Affairs (VA) of the United States offers many services and benefits to veterans. The VA loan is one of the most helpful perks. These mortgages are either offered directly by the VA or by third parties like banks and other lending or financial institutions. The VA backs these loans from third-party lenders, which makes it easier for Veterans to get them. Most veterans won't get a VA loan directly anymore. Instead, they'll get a VA-backed loan from a mortgage lender other than the VA.
VA Direct Loans vs. Loans Backed by the VA
The VA gives out and takes care of a VA direct loan. VA loans don't need a down payment, but they may have higher fees than loans from a bank in some situations. Still, the costs up front are low because these fees can be added to the total amount owed.
VA loans can be used to buy a home or more than one home, refinance, or even make changes to a property that already exists. Note, though, that recent changes to the requirements mean that service members or veterans with certain disabilities can only get VA direct loans.
A loan that is backed by or guaranteed by the VA is one that is given and taken care of by a financial institution other than the VA. The VA backs or guarantees a part of the loan. This is called VA entitlement, and it makes the lender more likely to give a loan to someone who might not normally qualify.
Most of the time, a VA loan entitlement is around $36,000 or 25% of the loan, up to the conforming limit, which is a large $548,250 in most U.S. counties. About 90% of VA-backed loans, like the VA direct loan, do not require a down payment. In some cases, the lender might have more requirements for the borrower to meet. The borrower will have to ask the lender what those requirements are.
This type of mortgage loan is similar to the FHA loan, which is available to people who are not in the military and want to buy a new primary residence. The U.S. Federal Housing Administration backs different types of FHA loans. This protects the mortgage lender by insuring them against a total loss if the borrower stops paying.
Homebuyers can also make a smaller down payment, which makes it easier for them to qualify for this type of loan. There are still things you have to do, like have a good credit score and show proof that you make enough money. In a similar way, a USDA loan is a loan with a very low interest rate and no down payment at all. However, you can only get one in certain parts of the country.
Even though a veteran can look for a conventional loan from a private lender or even an FHA loan or USDA loan, the VA home loan is usually a much better choice. The VA loan program lets veterans buy their main home with no down payment and a VA funding fee that is usually less than the closing costs charged by a private lender or a lender.
For example, the VA funding fee is usually between 1.4% and 3.6%, while the loan origination fee for a conventional mortgage can be anywhere from 1% to 6% or even as high as 8%.
Four kinds of VA loans
There are several kinds of VA loans for veterans. Getting the right loan depends on your situation, your credit score, your income, and the lender's rules.
1. Program for Native American Direct Loans (NADL)
You can get a Native American Direct Loan if you are a Veteran and a Native American or if your spouse is a Native American (NADL). With this type of VA home loan, the borrower can buy, build, remodel, or add on to a home on federal trust land, which is usually a Native American reservation.
Native Americans can also use a NADL to refinance a property if they meet the requirements. To get the NADL, you must also meet some other requirements. Your tribe must have a Memorandum of Understanding with the VA that says how the loan program can be used on tribal lands. You must have a Certificate of Eligibility that is still valid (COE). You have to show that you have enough money to make your monthly payments and pay for other costs that come with housing. Last, you must be the person who will live in the house.
2. Purchase Loan Backed by the VA
A VA purchase loan is a loan from a bank that is backed by the VA. You can get this type of loan if you have a valid COE, meet the lender's credit and income requirements, and will live in the home.
A VA-backed purchase loan usually doesn't require a down payment or closing costs. It also usually has better terms and interest rates than loans for people who aren't veterans, and there's no penalty for paying it off early. With a purchase loan, the borrower can borrow up to the limits set by Freddie Mac and Fannie Mae. If the borrower makes a down payment, they can go over these limits.
Even though there is no down payment required, people who get a VA-backed purchase loan do not have to get private mortgage insurance (PMI). This lowers the monthly payment. You can use these loans to buy, build, or fix up a house, even if it has up to four units.
3. Refinance Loan with Cash-Out
You can borrow money against the value of your home with a cash-out refinance loan. You can use that money to pay off your current loan, make home improvements, pay for college, or whatever else you need.
If you have a valid COE and meet the lender's requirements for credit and income, the cash-out refi, or "cash-out refi" for short, can be a great way to pay off and consolidate other debts or even refinance your current home loan to lower your interest rate and monthly payment.
You can pay off your current conventional loan or a previous VA loan with a VA refinance. This kind of loan is similar to a home equity line of credit (HELOC), which is a service that banks offer to customers. With a HELOC, customers can use the equity in their home as collateral to get what is basically a personal loan.
4. Refinancing a loan to lower the interest rate (IRRRL)
With an IRRRL, you can refinance an existing VA-backed loan if you can show that you live in or used to live in the home you want to refinance.
Homeowners whose first mortgage had a variable rate (one that changes based on the prime rate) can save money and keep long-term costs stable by switching to an IRRRL with a fixed rate.
If you already have a second mortgage on the property, the lender will have to agree that the IRRRL will become your first mortgage. The IRRRL is also known as a VA streamline refinance, which is easier to get because it requires less paperwork.
There are a few specific requirements to be eligible for the VA IRRRL. Most of them have to do with the potential borrower's good behavior, like never being 30 days late on a payment in the last year. The VA IRRRL can only be used to refinance a main home, so it can't be used as a cash-out refi to pay for big expenses like college tuition.
How to Pick the Right VA Loan
Getting a Certificate of Eligibility is the first step to getting a VA loan (COE). You can fill out the COE application online or by mail. Whether you are a veteran, an active service member, a member of the National Guard or Reserve, or the surviving spouse of a veteran will determine what information you need for your application.
If you served in the military, you will have to show a copy of your discharge papers. If you are on active duty, your commander, personnel officer, or adjutant will need to sign a statement of service.
Active-duty service members who have served for at least 180 days in peacetime or 90 days in wartime can get a VA loan. In some cases, you may also need to give the VA lender a Leave and Earnings Statement, which is your pay stub. The lender will use this to figure out your financial situation.
Once you have your Certificate of Eligibility (COE), have decided what kind of VA loan you want, and have found a lender, you will need an appraiser to do a VA appraisal. The appraisal will figure out how much the home is worth on the market, but it won't be a building inspection. When buying a home, it's important to remember this difference. You'll also want to have the house inspected to make sure there aren't any major problems.
Getting approved by the VA lender is the next step if you are eligible for a VA loan. If you're buying a home, it's time for settlement once the lender has approved you and you've worked out the contract with the seller. Most of the time, the lender will help you find a company that can help with this part of the process.
If you want to use the VA loan to get cash out of your home or fix it up, the lender will give you the money once you are approved. If you have any questions about the VA loan process, you can always call your regional VA loan center at 877-827-3702 Monday through Friday from 8:00 AM to 6:00 PM EST.
How to Understand the Various Types of VA Loans
There are different kinds of VA loans, and each one is best for a certain kind of borrower. You can apply for the type of VA loan that best fits your needs based on your goals (buying, building, renovating, refinancing, etc.) and your financial situation.
Keep in mind that a conventional loan might have better terms in some situations, so you should shop around and compare the loans you can get. If you have questions, don't be afraid to contact the Department of Veterans Affairs or a VSO who is trained to help veterans get their benefits.