What to Know About VA Loans

November 10,2021
Trying to navigate the world of finances is intimidating under the best of circumstances, but securing a home loan can be particularly complex. However, if you’re an active member of the United States military or a veteran, a VA loan can both simplify the process and reward you for your service. Here’s what you need to know before applying for a VA loan.
What is a VA loan?
In order to understand VA loans, you need a base knowledge of mortgages. Investopedia’s Julia Kagan defines a mortgage as “a debt instrument, secured by the collateral of specified real estate property that the borrower is obliged to pay back with a predetermined set of payments.” In everyday terms, it’s a way to borrow money so you can purchase a new property.

What sets VA loans apart is that they are “partially backed, or guaranteed, by the Department of Veteran Affairs,” and frequently come with a $0 down payment and advantageous interest rates, according to Chris Birk from Veterans United. What that means in practice is that the VA is willing to assume responsibility for a fraction of your debt as a way of repaying you for your service. That is why your financial institution can afford to offer the $0 down payment and favorable rates.

What can you use a VA loan for?
While traditional mortgages and VA loans are similar or identical in most respects, a big difference is the type of purchase they can be applied to. If you go to your financial institution for a mortgage, you can use the money you receive to purchase multiple kinds of real estate, including houses, vacation homes, investment properties, and commercial locations for businesses. VA loans, on the other hand, only apply to primary residences, according to Birk. However, if you took out a standard mortgage on your home, you may be able to refinance through a VA loan and take advantage of the benefits that way.

How does the process work?
To secure a VA loan, obtain a Certificate of Eligibility, which proves that you are or were an active member of the military, and qualify for a loan. This is typically the point at which you’ll learn your entitlement, which Military.com defines as “the amount the Department of Veteran Affairs will guarantee on your VA loan.” In most cases, there are two types of entitlement: basic and bonus. The Ascent’s Maurie Backman states that basic entitlement means the VA will back 25 percent of the loan or up to $36,000, and bonus entitlement covers “up to 25% of the Federal Housing Finance Agency conforming loan limit minus the basic entitlement.” For most people, that amount is capped at $91,600.

The rest of the process is very similar to how you’d purchase a home with a traditional mortgage. First, go house hunting and find the home and location that’s right for your family. Then, once you’ve signed a purchase agreement, the lender can process your application and request a VA-certified home appraisal to make sure you’re not being charged an unreasonable amount for the property. Once that’s complete, all you have to do is close the deal and move in. 

If you’re an active member of the military or a veteran, VA loans are a great way to get the best deal on a new home for you and your family. If you have additional questions about the process, please contact a trusted financial advisor.
by CU Members

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