VA Loans

A VA loan is a mortgage loan program for service members, veterans, or surviving spouses of veterans by the U.S Department of Veteran Affairs (VA). Such loans are available at low-interest rates with little or no down payment to help these individuals purchase, build, refurnish, improve a house, or refinance.

A VA loan provides service members or veterans a reward and recognition for their services to the nation. In addition, such a loan guarantees the private lenders (banks, mortgage firms, or credit unions) of recovering costs in case of a foreclosure. However, such a loan facility's foremost requirements are eligibility and proof of income for covering the mortgage payments.

• VA loans are mortgage loans provided to service members, veterans, and their surviving spouses guaranteed by the U.S Department of Veteran Affairs (VA).
• These loans offer very low and competitive interest rates with no or little down payment obligations. 
• An eligible individual can avail of these loans to purchase, build, improve, refurbish a house or add energy efficiency features such as solar panels in their house.
• These loans also do not require private mortgage insurance or PMI. The promise of the VA to recoup these loans in case of foreclosure reinforces the lender's trust and assurance. 

A VA loan is a sovereign-backed home credit guarantee entitled to servicemembers, veterans, and their eligible and surviving spouses. The loan program derives its name from the United States Department of Veteran Affairs as it sets the guidelines, eligibility, terms, and guarantees for the loan. For instance, a surviving spouse shall not be eligible for this loan if they have remarried.

However, it is important to note that the VA does not provide funding for the mortgage. It is the qualified financial institutions or private lenders that fund these loans. They help supply these home loans to the veterans to secure home ownership without any down payments. Simultaneously, VA backing this credit program provides trust and assurance to lenders of repayment in case of foreclosure or otherwise. It is what defines sovereign backing of loans.

A VA loan funding fee applies to individuals applying for credit to repair, maintain, purchase, or build a home. It is also available for eligible individuals to refinance their mortgage. A funding fee is applicable as it reduces the burden of sanctioning these loans on U.S taxpayers. Thus, the exact funding fee depends on the loan amount, which may range between 1.4% - 3.6%. It's a one-time fee payable by the buyer or the seller. 

This funding fee applies to the processing of these loans. It increases when an eligible borrower applies for a VA loan more than once and when the down payment is less than 5% during the second or the third time. However, there are exceptions for some eligible individuals in paying the funding fees. For instance, some veterans who suffered disability during their service and now receive VA compensation stand exempted from paying this fee.

After understanding the VA home loans, let us look at the other types that one can avail of for mortgage purposes.

1. Mortgage Loan – Under this type of loan assistance, one can purchase, build, improve, refurbish, or install environment-friendly features for their homes. Here, homeowners have the backing of the VA, which guarantees the lender retrieves the credit costs and amount in case of foreclosure.
2. Cash-out Refinance Loan – A VA loan refinance available to those eligible individuals who want to replace their ongoing loan with a new one and better terms. In this case, an individual can cash out their home equity or refinance a non-VA home credit. A borrower may use this cash to pay any debt, or fees, furnish or improve their house or cater to other needs.
3. Interest Rate Reduction Refinance loan – Under such a VA loan refinance, an eligible veteran, service member, or their surviving spouse can reduce monthly mortgage payments on an existing mortgage. They can also opt for such a refinance to stabilize their payments. However, in this case, an existing VA loan is necessary. For instance, an individual shall live in a house backed by such a loan. 
4. Native American Direct Loan (NADL) – In case a veteran or their spouse is Native American, and they fulfill other VA loan eligibility criteria, they can purchase, build or improve a home on federal territory. They can also apply for a refinance of a current NADL loan to reduce their interest rate payments or apply for a NADL more than once. The current VA loan interest rate in the case of NADL begins from 5.25%.

Some prominent features associated with the utility of VA loans are, 

1. There is no obligation on the borrower to make a down payment, and it depends on the lender when the loan amount exceeds the price of the property or house.
2. There is no limit to the amount of home loan that one is eligible for. But they should be fully eligible for home loan benefits provided by the United States Department of Veteran Affairs. 
3. A VA loan interest rate is competitive and low. However, the borrower has to provide the lender with an eligibility certificate from the VA to avail of these.
4. There is no need for private mortgage insurance or PMI. The VA is the guarantor of these mortgages that gains the lender's trust. Additionally, PMI costs would increase the eligible individuals' monthly payments and further burden them. 
5. VA provides eligible individuals with assistance in payments or helps them avoid defaulting on payments. 
6. No penalties are applicable if the borrower decides to repay the loan before the due date.   
7. Under this loan, the closing costs are also fewer than other conventional mortgage loans. Closing cost is a separate cost from the price of a property. It is like an overhead cost that both buyer and seller might incur. For example, surveying or appraisal fees.
8. The seller can also pay VA loan closing costs. 
9. VA loan eligibility criteria under NADL or purchase loans allow eligible individuals to avail of such credit more than once or refinance an existing one. 

This article is a guide to What is VA loan and its meaning. Here, we explain its types, eligibility, benefits, interest rate, refinance, and closing costs. You can also go through our recommended articles on corporate finance –

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