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Understanding VA Loans: What They Are, How They Work, and Why You Want One

If you qualify for VA loans, make sure you understand them and if they are the best option for you.

By Dennis McKonkiePublished 4 years ago 3 min read
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Buying a home is challenging. Not only do you have to find the right house, but you also have to secure financing to pay for the home in the first place. While traditional mortgages are a great option, they’re not the only ones available. VA home loans provide a great alternative to qualified veterans and current military members, but before you can decide on the right way to finance your home purchase, you need to understand how VA loans work. Here’s what you need to know.

What VA Loans Are

VA loans are home loans meant specifically for qualified veterans and current military members. They’re backed by the Department of Veterans Affairs and provide a low-cost and low-interest alternative to traditional mortgages.

The Qualifications

To qualify for a VA loan, you’ll need to have served in the military for at least 90 days and not be dishonorably discharged from the military. This is the case for both active-duty military members and veterans. If you meet the qualifications, you’ll be able to receive a Certificate of Eligibility (C.O.E.) which proves to lenders that you’re allowed to apply.

You can get the certificate online through the VA’s eBenefits page.

How VA Loans Work

VA loans function a lot like traditional mortgages. They’re issued by banks and VA-approved home loan companies and the application process is similar to that of traditional mortgages. You’ll need to provide them with proof of income and may be asked to include your credit score as well as any other financial documentation the lender requests.

Ultimately, it’s up to the lender to decide if they want to issue you a VA loan. However, since the VA backs a portion of the loan, most banks are willing to approve borrowers that might not otherwise qualify for a mortgage.

This means if you have a lower credit score or don’t have a lot of money saved up to buy the home of your dreams, you may still be able to get a loan.

Why Choose a VA Loan

Just because you qualify for a VA loan doesn’t mean you absolutely have to use it to buy a house. If you’d rather use a traditional mortgage, you’re free to do so. However, there are a number of benefits that are unique to VA home loans.

VA loan rates are typically lower than those of conventional mortgages. The lower the interest rate is, the less money you’ll end up paying over the life of the loan. In the end, it could save you thousands of dollars.

Low loan rates are just the beginning, though. When you finance a home with a standard mortgage, you’re expected to provide a down payment to secure the loan. In most cases, this comes to about 20 percent of the home’s sale price. If you don’t have that money, you’ll need to purchase private mortgage insurance (PMI) to receive the loan. PMI is an additional monthly expense that can make your payments significantly higher.

VA loans allow you to finance the full purchase price of the home without a down payment and you won’t need to buy PMI, either.

Restrictions on VA Loans

Unfortunately, the VA does have some rather strict restrictions on how you can use the loans. You must purchase a home that’s in good, livable condition. This means it must satisfy the following:

  • Safe and adequate electricity
  • Solid roof and walls
  • Fair asking price
  • Adequate heating
  • Functioning plumbing

If the home doesn’t satisfy those standards, you’ll need to find a different property.

You must also plan to use the house as a primary residence. If you or your spouse are looking to buy the house as an investment property or plan to live in it temporarily, you’ll need to use a different financing option. That said, you can use the loan to buy a multi-family home and rent out the remaining units provided you live in one as your primary residence.

Taking out a VA loan is a great way to buy a house without dealing with the hassle of a conventional mortgage.

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