Members of the armed forces, or veterans of the armed forces, may apply for a VA loan when purchasing a home. A VA loan means that the Department of Veteran Affairs agrees to pay up to a specific amount to the lender if you default on your home loan payments. VA loans do not give you discounts on home values, and are not payable to you or the seller; these loans are simply a guarantee to your lender that should you default on payments, the VA will pick up a portion of the tab. The loans can make the opportunity to fund your home mortgage loan more appealing to lenders. However, there are a few drawbacks for sellers where a VA loan is concerned, including longer processing times, and the potential that the seller will be held responsible for a portion or all of the closing costs.
What is Entitlement?
When the VA guarantees a portion of your home mortgage loan, that’s called an entitlement. VA loans often provide opportunity for 100 percent financing with zero percent down. Recipients of VA loans are not responsible for Private Mortgage Insurance, and may experience no penalties for pre-payment or early pay-off of the loan. VA loans also bring competitive interest rates, as well as seller-paid closing costs. Although processing may take longer than a traditional loan, VA loans often have fewer requirements from applicants prior to approval. Banks appreciate VA loans because it’s a guarantee from the Federal government that your loan will be at least partially backed should you default. Additionally, the VA provides free financial counseling for veterans. But it’s not all peaches and cream. While VA loans offer a lot of advantages, there are also disadvantages to consider.
VA loans do not remove the responsibility of the buyer to have good credit prior to approval.
What About Pre-Qualifications?
Although laws regarding VA loans have recently been modified, VA loans assigned prior to March of 1988 can be assumed by the new buyer with no pre-qualification. What this means for you is that if the new buyer defaults on the loan, you may still be held responsible for the balance. Although VA loans are processed at a much faster rate today than they were in the past, some sellers may hesitate to work with buyers with VA loans because of the amount of processing, and because of the likelihood that the seller will end up paying some or all of the closing costs.
The responsibility for closing costs could create inflexibility in the seller’s willingness to negotiate the cost of the home. Furthermore, if you do default on the loan, causing the VA to pay their guaranteed portion to the bank, the VA is within their legal rights to pursue you for repayment.
What is a Certificate of Eligibility?
Before applying for a VA loan through your bank, you must first obtain a Certificate of Eligibility, a VA issued document verifying your eligibility to apply for a VA home loan. There are strict regulations determining who is or who is not qualified for a VA loan, including types of service, dates of service, length of service, and discharge status.
You are able to apply your VA home loan to your personal residence within the United States or its territories. It can be a detached home, townhouse, condo, new construction, manufactured, or existing home. However, the VA loan comes with fees that can be paid at closing. They can be incorporated into your loan, or reduced with a down payment. While 100 percent financing with no down payment is a viable option, making a down payment may reduce loan fees.
The Benefits of a VA Loan
These loans nullify private mortgage insurance. They eliminate down payments. They have lesser qualifications. Active and retired members of the armed forces can purchase a home that otherwise wouldn’t have been possible.
Being educated about VA loans and the options and opportunities made possible through VA loans could give you an edge on the home-buying process. Contact the Asten Realty Team today at 703-887-3142 with any additional questions you may have, or to learn about other potential programs designed to assist active or retired military personnel with the purchase of a home.