If you are a qualifying military member who meets the minimum time-in-service requirements, a veteran who has met them, or a qualifying surviving spouse of a veteran who died as a result of military service, the VA home loan option is an important benefit.
But what does the VA home loan program offer? There are VA mortgages available to buy, build, or refinance homes using a VA loan which comes with no-money-down options and no private mortgage insurance.
VA mortgages do require the payment of a VA loan funding fee, but this fee is waived for loan applicants who receive or are eligible to receive VA compensation for service-connected medical conditions.
In short, the VA mortgage loan is a very useful economic benefit whether you are a first-time home buyer or have owned property before.
How VA Home Loans Work
The VA loan program requires the applicant (or the applicant’s spouse in the case of eligible surviving spouses) to meet a minimum time in service to be eligible.
Being eligible for the VA home loan benefit does not equal VA loan approval. Borrowers must also meet credit requirements of the lender in the same way that any home loan application works.
VA mortgage loans can be used to buy and or buy and rehab a home, or refinance, refi, and rehab a home. In all cases, VA forward mortgages require a credit check and appraisal. Most VA refinance loans require a credit check and appraisal except for VA Interest Rate Reduction Refinance Loans (see below).
The VA guarantees the mortgage once the loan is approved. The Department of Veterans Affairs does not lend the money to the borrower, that is done through a participating lender. VA loan interest rates are negotiated between the lender and borrower; the VA does not set or regulate VA loan interest rates.
For most VA home loan and refinance loans, the option to include extra funds for approved energy-saving improvements is possible under the VA Energy Efficient Mortgage (VA EEM) option.
The borrower and lender will work together to determine the nature and cost of the improvements and the borrower may be required to work with an approved energy consultant to determine the actual savings of the upgrades or improvements paid for under the VA EEM.
All VA loans have an occupancy requirement. Borrowers cannot buy or refinance investment properties with a VA mortgage loan.
VA Loan Options: New Purchase Loans / “Forward Mortgages”
VA loans are available to purchase homes up to four units; existing construction homes, condos, mobile and manufactured housing, modular homes and other properties can be purchased as long as they are taxable as “real property” and are permanently affixed to an approved foundation.
VA Loan Options: VA Construction Loans
VA home loans are also available to build or assemble a home on land purchased for that purpose as part of the VA loan or on land the borrower already owns. VA mortgage loans are not available for unimproved land without a plan to build.
VA construction loan options include something known as a VA one-time close construction loan which combines the traditional two loans and two closing dates into a single mortgage loan for both the construction of the home and the mortgage itself.
VA One-Time Close mortgages may have higher lender requirements for credit scores and certain restrictions on property types, again, depending on the lender. But these loans can be a big advantage for those who want a house built to suit rather than buying an existing property.
VA Loan Options: VA Loans For Farm Homes
VA loans are technically available for “farm residences” but the loan is only guaranteed for the residential portion of the land and valuation of the commercial portions of the property is not permitted.
VA Loan Options: VA Mobile Home Loans
VA loans permit the purchase of a mobile home and the land the home will be placed upon with a permanent foundation. VA loans cannot be used for recreational vehicles (RVs) or houseboats; these cannot be legally classified as real property or affixed to a permanent foundation and do not qualify for VA loan financing.
The specific types of property you may purchase with a VA loan may vary depending on the lender. Not all participating VA lenders offer all available VA loan products.
VA Refinance Loan Options: Cash-Out, Interest Rate Reduction Refinance Loans
VA home loans can be used to refinance an existing mortgage. For VA cash-out refinance loans, the mortgage to be refinanced does NOT have to be a VA home loan; conventional, USDA, FHA and other mortgages may be refinanced with a VA mortgage loan. For VA IRRRLs (see below) the borrower must be refinancing an existing VA mortgage.
VA Interest Rate Reduction Refinance Loans (VA IRRRL)
VA refinance loans called Interest Rate Reduction Refinancing Loans (VA IRRRLs) can be used to refinance into a lower mortgage payment and/or interest rate, out of an adjustable rate mortgage (ARM loans), and into shorter loan terms.
In general, the VA IRRRL is required to provide some tangible benefit to the borrower such as those listed here, and no cash back is permitted on this transaction. There is in most cases no VA-required appraisal or credit check with these refinance loans, but lender standards may apply and your lender may require one or both depending on circumstances. Certain VA IRRRLs may feature a VA-required credit check in cases where add-ons to the loan increase the monthly payment by a certain percentage.
VA IRRRLs To Refinance A Delinquent VA Loan
If a VA borrower falls behind on mortgage loan payments, the VA loan program has a refinance loan option to help the borrower catch up on the delinquency and avoid foreclosure.
The VA Lender’s Handbook states of these loans, “Any IRRRL made to refinance a loan that will be 30 days or more past due as of the date of closing, must be submitted for prior approval” to the Department of Veterans Affairs.
In such cases, the lender must determine that the causes of the delinquent payments have been resolved and that the borrower is willing to continue making monthly mortgage loan payments based on the refinanced loan.
VA Cash-Out Refinance Loans
VA refi options include the ability to pull cash out of the home using a VA Cash-Out Refinance Loan. These refinance loans require a new appraisal and credit check and can be used to refinance an existing mortgage (FHA, VA, conventional, etc) assuming the borrower financially qualifies.
VA cash-out refinance loans must pay off the existing mortgage first before giving cash back to the borrower. The amount of cash out will depend on the newly appraised value of the home, how many mortgage payments the borrower has made to date, and whether the borrower chooses to finance certain costs associated with the loan where applicable.
VA cash-out refinance loans like all VA refinance mortgages, are for principal residences only and the borrower must certify that he or she has been using the property as their home address prior to application time.
Other VA Refinance Loans
The VA official site has a list of other VA refinance loans that are possible, including:
- Construction loans.
- Installment land sale contracts.
- Loans assumed at interest rates higher than a proposed refinance.
The rules on these types of loans state that the mortgage “may not exceed the lesser of:
- The VA reasonable value plus the VA funding fee, or,
- The sum of the outstanding balance of the loan to be refinanced plus allowable closing costs (including the funding fee) and discounts.
- The cost of energy efficiency improvements can also be added to the loan.
There are no additional guidelines in the VA Lender’s Handbook (VA Pamphlet 26-7) addressing these loans; lender standards and requirements will apply. Participating VA lenders may offer all, some, or none of these loans.
How To Apply For A VA Home Loan
Potential VA loan applicants need to apply for a Certificate of Eligibility for the VA loan benefit if they have not already-this can be done with the help of a participating lender or borrowers can apply at the VA eBenefits official site. Then it is a matter of house hunting, selecting a home to purchase, and filling out the VA loan paperwork with the participating VA lender of the borrower’s choice.