VA Loans 101: What Are VA Loans and How Do They Work?

What are VA Loans and How Do They Work?

A VA loan is a mortgage provided through a private lender, like OVM Financial, but is insured by the United States Department of Veteran Affairs. VA Loans are offered to active military personnel, veterans, and eligible surviving spouses of military members to help their homeownership dreams come true.

In 2019 alone, the VA guaranteed almost 625,000 loans for military members and veterans. Read along to learn more about who is eligible for a VA Loan and the many benefits this type of loan offers.

Download our Ultimate Guide to VA Loans eBook here.

Are you eligible for a VA loan?

As we mentioned above, active military members, veterans, and surviving, un-remarried spouses of military members may be eligible for this type of loan. However, it’s essential to take a closer look at the eligibility standards set by the Veterans Association because minimum requirements reference active duty and service time.

The VA website breaks down the minimum eligibility requirements by war and peacetime period, but if you’re an active military member, you’re considered eligible after 90 days of continuous active duty. Keep in mind that eligibility requirements, VA home loan rules, and other criteria are subject to policy changes, so be sure to check for any recent developments.

In addition to meeting the minimum standards, you must also have a valid Certificate of Eligibility (COE). You can apply for this certificate online, by mail, or through OVM.

Keep in mind that if you are currently on active duty, you will have to obtain a new COE and reestablish your eligibility after you’re discharged or released.

Benefits of a VA loan

1. No Down Payment

Unlike a conventional loan or an FHA loan, which typically requires at least 3.5-5% for a down payment, VA loan can come with as little as zero down. This means that you don’t have to spend months or years saving to fulfill a down payment requirement.

2. No Need to Pay Private Mortgage Insurance (PMI)

Another benefit of a VA loan is that there is no PMI requirement. With conventional or FHA loans, borrowers need to pay PMI monthly if they are making a down payment of less than 20%. Those obtaining a VA loan can waive this requirement.

3. The Option to Refinance

If you already own a home, you can refinance under a VA loan as well. If you see a lower interest rate available or just want to lower your monthly payment consider exploring this option. The VA also offers cash-out refinances, which allows you to borrow more than your remaining mortgage balance to take care of other financial needs like debt consolidation or home improvements.

4. Lower Credit Requirements

Because the VA backs the loans, a lender is more likely to consider applicants who may have a more nontraditional credit history. OVM typically looks for a credit score of at least 640.

5. Lower Interest Rates

VA loan interest rates are typically lower than conventional loan rates. The VA guarantees a portion of the loan, and as a result, lenders can offer more favorable terms to their potential VA borrowers.

6. No Brokerage or Commission Fees

The VA does not allow veteran purchasers to pay brokerage and commission fees. This is one less cost that borrowers will have to pay upfront or out-of-pocket when obtaining this loan.

7. You Can Use More Than One VA Loan At Once

Veterans can use second-tier (bonus) entitlement to obtain more than one VA Loan. Second-tier entitlement is the amount remaining after the veteran uses their basic entitlement. Take a look at the examples included in this document to gain a better understanding of how the VA calculates basic and second-tier entitlement. There are several scenarios where the use of multiple VA loans may come in handy.

Fees Associated with VA loans

VA borrowers can expect to pay a funding fee that is dependent upon your service and type of loan. There may be an option to either pay the funding fee upfront or to add it to the balance of the loan. However, you must pay by one of these methods upon closing.

Just like with a conventional loan, VA loans will come with the standard closing costs that include those appraisal fees, the VA funding fee, and taxes. The purchaser, seller, or both parties can contribute to the payment of these costs.

While this may sound a bit confusing, our OVM Loan Officers will walk you through this and make sure you are well prepared and informed.

The Bottom Line

A VA loan is an incredible option with multiple benefits for current servicemen and women or veterans. As always, we’re here to answer any questions you have and help guide you through the process! Give us a call or start your application today.