The VA loan process with the Department of Veteran Affairs

The VA loan process with the Department of Veteran Affairs.

Who is eligible for the VA loan?

If you're currently serving on active duty and you've been on active duty for longer than 90 continuous days, then you're immediately eligible for the VA loan benefit. If you've served in the National Guards or Reserves for six years, you are eligible. If you're the surviving spouse of a veteran who has passed away, you might also be eligible. Go on the VA's website to determine your own eligibility if you think your circumstances are unique.

What is the VA loan?

The VA loan is the government guaranteeing your loan should you default on your mortgage with a private lender up to 25% of the home value. What does that mean? The government is not giving you a loan. You still have to partner with a private bank to secure a mortgage. What the government is doing is they are promising the private bank that if you get foreclosed on, if you stop paying your mortgage and you lose your home, they will cover 25% of the home value in the foreclosure process.

What does all that mean? Once again, if you buy a $200,000 home and then for whatever reason you can't pay your mortgage and you lose your home, then the government is going to cut the private bank a check for $50,000. If you had a conventional mortgage and you stopped paying it and you get foreclosed on, you would lose the equity in the home and then the bank has to take possession of the home. Banks don't want to do this, by the way, but if they have to, they will. What they recover is the equity that you put as a down payment.

Why is a VA LOAN great?

Now, the VA loan is zero money down for a down payment. So it's the federal government basically guaranteeing these private lenders the equity of up to 25%. Once again, this makes you a less risky borrower. Banks are going to talk to you and treat you like you're somebody coming to them with a 25% down payment on a home.

So here's the breakdown and the facts. Once again, no money down is required. You can put money down if you'd like. It would lower your monthly payments and how much you would pay over the lifetime of the loan. You also don't need private mortgage insurance. This can cost you 80 to $100 a month, so you're saving $1,000 a year for the life of the loan. What private mortgage insurance is, is for people who don't have that 20% down payment. They have to pay this to cover the costs of other people ... It's an insurance policy ... So other people who default on their mortgage.

There is no limit on the loan amounts with the VA. Now, if you want to buy a $4 million home in Hollywood Hills, you still have to meet the income requirement. So the VA doesn't have a loan limit, but a private bank, your mortgage lender might. So it's a little bit complicated there. There also is easier loan qualifications because the bank is treating you like somebody coming with a 25% down payment, your creditworthiness and credit history can be easier for you to qualify for the loan. Additionally, you should be getting favorable lending terms. Now, I'm going to put a caution there. We're going to come back to this. You should be getting favorable lending terms. Then finally, you can get help from the VA should you become in financial trouble. If you fall behind on your mortgage payments, you can call the VA. They can work with you and your mortgage lender to assist you.

The next thing that you need to know is that the VA loan is for your primary residence. This should be a house that you're living in. So you can't use the VA loan for rental properties. However, it can be a duplex, a triplex, or a fourplex. As long as you're living in one of the units, you can rent out the others.

Additionally, the VA is going to want to inspect and assess the home because they want to make sure that it's a safe and fairly priced home for you, the buyer. The VA can also require sellers to fix something that's wrong before you move in. Otherwise, the seller might have to reduce the home price for you to factor in those repairs. Additionally, if you want, you can partner with a private contractor for renovations prior to moving in. So maybe the septic tank needs to be replaced or you want to redo the kitchen. You can partner with a contractor and roll that into your VA loan amount.

VA Loan Downsides

So what are the downsides of the VA loan? Well, the biggest one is the funding fee, and this is what everyone talks about. So there is a one-time fee you have to pay, which basically supports the whole program. Disabled veterans are exempt, Purple Heart recipients are exempt, and surviving spouses are exempt. Once again, check the VA website if your situation is unique.

How will you pay this fee?

Well, you can either pay the full fee at your closing costs or you can include the fee into your loan amount and finance it over time, once again, guaranteeing that this truly is zero money down for you.

How much is the fee?

How much is the VA Fee? it depends on if this is your first time using the VA loan or if it's a subsequent time. It also depends on how much money you're putting down. So if it's zero money down, that would be less than 5%, the VA funding fee is going to be 2.3%. Now, if you have 10% or more, but not the full 20, then it's going to be 1.4. If you have more than 20% for a down payment, then you might actually be better off with just a conventional loan. The strength of the VA loan really is ... I mean, there are protections, but people do it for that zero money down or less than 20% down to avoid PMI.

If you're buying a $200,000 home, 2.3% of that is $4,600. What does that cost you over the life of the loan? Well, if your mortgage amount is 200,000, interest rate, 2.5%, 30-year fixed-rate mortgage, then over the life of the loan, 284,000. If you roll that VA fee into the mortgage amount, it gets you up to 291,000, so only a difference of $6,543. Over a 30-year period, you're barely going to feel that.

VA Loan Process

Now, in the VA loan process, you're going to eventually reach the point of closing costs. The VA requires that the seller must pay these closing costs, sometimes called seller's concessions, so the commission for the real estate professionals, the brokerage fee, the buyer broker fee, and a termite inspection. However, the concessions cannot exceed 4%. Other fees you might be incurred, are all negotiable with the seller. You can definitely work with your realtor to see if you have to cover these or if the seller has to cover these.

What are the lenders going to do?

These are the private banks that you're actually getting your mortgage from. They are going to check your credit, and your credit doesn't have to be the best, but if you don't make payments on your credit cards or your car loan or you're in collection or default already, then you're probably not going to get approved by a mortgage lender, even with the VA loan giving favorable terms. But lenders can be flexible if your credit isn't the best. But once again, you must qualify for the loan by proof of income. You might also have to show your debt-to-income ratio. So these are all factors that will go into what the bank will approve you for, for a mortgage.

Now, I need to give you a strong warning and a strong caution that people you talk to trying to help you with a VA loan might not have your best interest at heart. Yes, these are people who might have served. They might be veterans themselves or they might have family members who are veterans, but that doesn't mean anything. You should always look at the numbers. You should always do your own math to determine if you're getting a good rate and a good loan. When VA loan partners are telling you, "We are VA recommended," that is a lie. The VA is a government service, a government website. They do not recommend any private lenders. The VA will never recommend somebody. If they also say, "We are VA loan experts," well, that doesn't mean anything. Any bank, any private bank, can process a VA loan. So just because they do a lot of VA loans doesn't mean it's worth the additional cost if they're not giving you a favorable rate.

So ideally, you should be rate shopping. You should go to several lenders, several banks, and you should tell them, "Hey, I want to do VA loan. What can I get approved for?" Ask for a competitive rate quote. This is their job. This is what they do all day, every day, so you shouldn't feel uncomfortable speaking to them. So with lenders, you're going to want to talk to several during this whole process.

If you go to two different banks, they're going to give you two different interest rates. It doesn't matter if you have the same credit history, same income amount, or same VA loan. One bank might give you an interest rate of 2.5% on your mortgage, another bank might give you 2.9. Well, what is the difference over the life of the loan of a 2.5 versus 2.9? It was $15,000. I know going into banks can be intimidating and uncomfortable. Maybe that first bank representative that you spoke to made you feel good about yourself, but for $15,000 just go into a second or third bank. Tell them what you're doing, and ask for a competitive rate quote. You will be surprised at what you get and it might save you a lot of money.

VA Loan Process Step By Step

Step one

proving eligibility with the VA. If you're serving on active duty, you're going to have to get a statement of service from your commander. Talk to your leadership, and tell them what you're doing. They can give you a form with your name, social security number, when you joined the service, and how long you've been in service because once again, 90 days is a requirement. For veterans, you're going to need your DD214 and a certificate of eligibility. Google how to do this, and you can get this on the VA's website.

Step two

is to get a pre-approval letter from your mortgage lender. After you've been pre-approved, your bank will give you a letter saying what your buying power is and communicating that you are a serious buyer when you go talk to realtors. Realtors want to know, are you actually going to be able to put in an offer on this house? Just because you have that pre-approval letter from one bank doesn't mean you can't get a second one or the third one from other banks. You have not committed to anything at this point. So just having that letter doesn't commit you to buy or working with that mortgage lender.

Step three

You can actually start house hunting, and you can meet with real estate agents. Their services are going to be free. They're trying to sell you homes, so they want you to show up and tour houses. You can also attend open houses. It's just a good process to see as many homes as you can. I know you don't want to feel like you're wasting anyone's time or feel like you're wasting your time, but knowing what you don't want in a home is just as important as knowing what you do want. Ideally, you're going to be living in this place for a long time, if not the rest of your life, so definitely try to see as many houses as you can.

Step four

Make an offer on the home, and this is a complicated process. It all depends on what local market you're in, but when you make the offer with the real estate agent, you're going to want to negotiate the closing costs before you sign anything. The VA has their requirements of what should be covered by the seller. Everything else on that list, this is the point where you need to talk about it with the realtor and say, "What are we as the buyer covering, and what is the seller covering?"

Once you have an offer accepted, you are officially under contract. It can still fall apart at this process, but you're pretty well set on buying this house at this part. This leads to the underwriting process where the VA is going to have to send one of their local affiliates or local contractors out to appraise the home. They're going to make sure that the home is safe, sound, and sanitary. They're also going to make sure that the home is fair value. They don't want to guarantee a home that, for example, is $100,000 overpriced. So the VA has to basically approve it at this point. But if everything is as it should be, you should be good.

It's at this point in the process that you're going to be waiting the longest amount of time. There's going to be a lot of texting back and forth between the realtor or the realtor's associates. It's important that whenever you get an email or a text, always respond as soon as possible. There's a sequence of events occurring with the realtor, and if they're held up by you as the buyer or by the seller for any reason, they basically just pause the process.

So if you're trying to get into this home as quickly as possible, be prompt with your responses so that you can help the realtor close out the property.

Step five

Closing out the property. You're going to be signing a lot of documents. Lots and lots of documents, but congratulations. At this point, you should be a homeowner.