The VA Loan: What Buyers and Agents Need to Know
by Becca Stewart - February 3rd, 2022
Homeownership has long been a pinnacle of the American Dream. The VA lending program helps military service members and veterans make that dream a reality. Here’s what homebuyers and real estate agents should know about the VA loan.
What is a VA Loan?
A VA loan refers to a mortgage program designed for service members, veterans, and certain military spouses. These mortgages are guaranteed by the U.S. Department of Veterans Affairs (hence the “VA”) but financed through private lenders.
The VA started this loan program back in 1944 to give service members returning from war an opportunity to purchase a home without a large down payment. Today, the program works in much the same way, helping military service members and their families buy a piece of the American Dream without worrying about down payments or less-than-perfect credit.
Who Qualifies for a VA Loan?
Active duty service members, National Guard, Reservists, retirees, and veterans are all eligible for VA benefits. However, there are some stipulations. You must meet at least one of the following requirements to qualify for a VA Loan:
Must have at least 90 consecutive days of service during wartime
Must have at least 181 consecutive days during peacetime
You have six years of service in the National Guard or Reserves (Guard or Reserve members who have active duty service time may qualify under the active duty time requirements)
You are the spouse of a service member who died in the line of duty or as the result of a service-related disability
You must also meet certain income and credit requirements to qualify for a loan.
Additionally, either the service member or a dependent must live in the home as a primary residence. You cannot purchase a rental property with a VA loan.
If you’re still unsure of your eligibility, contact an experienced VA loan officer for more information.
Advantages of the VA Loan
VA loans offer many advantages for homebuyers. With housing prices soaring – and housing inventory at all-time lows – buying a home is becoming more difficult. First-time homebuyers are facing the most significant challenges. Lenders usually want buyers to have a 20% down payment. First-time homebuyers are finding it increasingly difficult to save enough money for a down payment, especially as prices climb nationwide.
Buyers who do not have 20% down must pay private mortgage insurance (PMI). Borrowers must pay this PMI until the total equity in the home reaches 20%. While PMI does allow homebuyers to purchase a property without a large down payment, it’s costly. Typically, PMI runs about 0.5% to 2% of your loan balance.
With a VA loan, however, borrowers can purchase a home with $0 down and will not pay PMI, even with a small down payment. Not only does this eliminate the stress of saving for a substantial down payment, but it also saves hundreds or even thousands of dollars in insurance payments over the life of the loan.
Additionally, because the VA guarantees a portion of these loans, most lenders offer lower interest rates than with a conventional mortgage.
Zero down. No PMI. Lower interest rates. But that’s not all. VA loans typically have lower credit score requirements than conventional loans. Additionally, many lenders allow higher debt-to-income ratios and have more flexible rules regarding past bankruptcies, foreclosures, or short sales.
Are VA Loans Less Desirable for Sellers?
There’s no denying it’s a sellers’ market. With inventory low, sellers often receive several offers within days of listing. Unfortunately, government-backed loans have a bad (though undeserved) reputation. One survey from the National Association of Realtors found that 94% of agents say their sellers are more likely to accept a conventional offer over a government-backed offer.
Why do VA loans have a bad reputation? In the past, these loans could take longer to close, require more documentation and paperwork, and represent a more significant risk of the deal falling through. However, these issues are rarely a problem anymore. Today, VA loans might even be easier than conventional loans in some cases. Still, sellers and agents misunderstand VA loans. And in a red-hot market, that could mean offers with VA financing lose out.
There are several ways that VA buyers can make their offers stand out in this ultra-competitive market:
Have a down payment. Even though this isn’t required with a VA loan, it shows that you are more likely to go through with the purchase. Plus, you’ll save yourself some VA funding fees.
Offer more than the asking price. While you will need approval from your lender to offer more than the asking price, it’s a solid way to get the sellers’ attention.
Waive repairs or contingencies. Offer to not ask for any repairs under a specific dollar amount or unless necessary to secure the loan.
Offer appraisal gap coverage. This practice, once uncommon, is becoming more popular. You offer to cover the “gap” between the appraised price and the price you offered, should there be a discrepancy. The catch here is that appraisal gap payments are out of pocket and cannot be rolled into your loan.
Write a personal letter. Tug at the sellers’ heartstrings and tell them why you would love to call their house your home.
VA loans are typically the best option for military-associated homebuyers. However, speak with an agent who works with VA buyers regularly. An experienced real estate agent can tell you if sellers are accepting VA offers in your area and what to do if the market isn’t favorable.
The VA loan program makes it easier for military service members and veterans to purchase a home. VA loans are sometimes seen as less desirable by sellers, but many concerns about the program are outdated. As sellers, real estate agents, and lenders learn more about VA loans and their many benefits, veteran homebuyers will hopefully be more competitive in a multiple offer situation.
If you’re ready to purchase a home using a VA loan – or access a VA loan to refinance your existing mortgage – contact a reputable, experienced VA lender.