How a VA Loan Works
The VA Loan Program was designed to make it easy and affordable for veterans to own their own home.
The Veteran's Administration does not lend money directly to prospective borrowers. In order to get a VA Loan, borrowers have to apply to a lender, such as a bank or a savings and loan, or work with a mortgage company, like Freedomstar Financial, to secure the best rate and terms.
The biggest difference between a VA Mortgage and a Conventional Mortgage is that VA Loans are backed by the Federal Government. This federal guarantee provides downside protection to the lender and usually covers about 25% of the loan amount. That means that the lending institution can offer VA Loans at competitive rates with no down payment to borrowers that do not have great credit. Unlike conventional loans, VA Loans carry less risk to the institution.
The guaranteed portion of the loan is called the entitlement. Every veteran and/or active duty service member is given an entitlement for service. A veteran can borrow up to $417,000 with no down payment. The money to make the loan comes from the lender.
In 2005, the VA effectively raised the amount that a veteran could borrow for a home to $417,000 (and even higher in areas with a high cost of living such as California, Hawaii, Guam and the US Virgin Islands). Loans that are higher than $417,000 are commonly referred to as VA Jumbo Loans. For example, in parts of California the VA Loan Limit can be as high as $987,500.
There are advantages and disadvantages to a VA Guaranteed Loan.
The advantages are:
No down payment.
Easier to qualify for a VA Loan than a comparable conventional loan.
Lower closing costs.
No monthly mortgage insurance or PMI (private mortgage insurance).
Loan is assumable by other veterans.
Easier to refinance a VA Loan than a conventional loan through the VA Streamline Program (VA IRRRL).
The disadvantages are:
Funding Fee. In order to guarantee the loan, the VA charges a Funding Fee (typically 2% for new VA Loans and 0.5% when you refinance a VA Loan). The funding fee is rolled into the loan amount. If you make a down payment on a new VA Loan, the funding fee is reduced. Vets with service-related disabilities are exempt from the VA funding fee.
Minimum Property Standards. VA requires that the property meets certain minimum standards at the time of appraisal. If the property does not meet those standards, and if the owner refuses to make required repairs, the buyer must either pay for the repairs himself, switch to conventional financing, or find another property.
If you have questions about how a VA loan works, contact the professionals at Freedomstar Financial at 888-659-0033. We work with lenders that offer many different programs, and can help you get the mortgage that is right for you - it doesn't necessarily have to be a VA loan.