When we talk about mortgage loans, most buyers are familiar with terms like Fannie Mae and Freddie Mac, which refer to the most common types of conventional loans that are available to the majority of buyers. There are other government backed loans out there though, such as ones backed by the US Department of Agriculture (USDA loans, more common in rural areas), Federal Housing Administration (FHA), and the Veterans Administration. Today we are going to look at VA Loans, from the history of how they came about, to the specific features that make them different from other loans you can use when purchasing a home.
History of the VA Loan
The VA Home Loan project was originally signed into law by President Franklin Roosevelt in 1944, as a part of the larger Servicemen’s Readjustment Act (better known now as the GI Bill). The overall legislation included in the GI Bill was intended to help soldiers returning home from World War II, who had been out of the workforce for several years, and who likely had not been able to save the capital needed to build or purchase a home. With a government backed guarantee, a veteran could secure the money for a home, and because this guarantee would be an alternative to a cash bonus, it would be much less expensive to the government, enabling them to provide more help to veterans.
The availability of VA loans did not only help veterans who had not accrued the credit rating necessary to secure a conventional loan, but was also seen as an economic stimulus to the nation as a whole. The program helped the United States economy by providing an investment outlet for the large amounts of money that had became available after the easing of wartime restrictions.
The VA loan program was immediately popular, and between the end of World War II and 1966, 20% of all single family homes built were financed through the Veterans Administrations home loan program. To date, the program has financed the building of over 20 million homes.
Changes to the VA Loan Over Time
When the VA loan program was first initiated, buyers were limited to $2,000, and had to pay off their loans within 20 years. The benefit could also be used only once for each veteran, and they had to apply within five years of the end of World War II. Gradually changes were made that extended, and then removed many of these stipulations. VA loans could be refinanced, and could also be used for home improvements rather than simply to purchase a home. This was especially helpful when it came to adapting a home to be accessible for veterans who returned home with life changing injuries.
Beginning in the 1980s, the VA loan program was opened up to any active duty service member who had amassed at least 24 months of continuous active service. The following decade, the program was further extended to include members of the Reserves and National Guard, as long as they had served at least six years. By widening the pool of potential home owners who could apply for a VA loan, these changes mean that the loans are more important than ever, both for veterans seeking to build or purchase their first home, and for local economies which benefit from veterans’ increased spending power.
Benefits of Using a VA Loan
In their current form, VA loans offer numerous benefits over other conventional loans, for buyers who meet the standards to be eligible to use this service of the Veterans Administration. For example, with a VA loan, you are not required to offer a down payment, and there are no mortgage insurance requirements. This makes a VA loan a great option for first time home buyers who have not been able to save the higher and higher amount needed for a down payment in the current real estate climate.
When a VA loan is originated, borrowers are required to pay a funding fee. This one-time charge ranges, but can be for up to 3.3% of the loan amount. Exactly how much the fee will be depends on several factors, such as whether the loan is for a new purchase or for refinancing an existing loan. You can also lower your funding fee by paying a down payment, even though one is not required.
VA loans are incredibly helpful for buyers who do not have the highest credit scores. The Veterans Administration has no formal bar set for how high your credit score needs to be for approval, whereas conventional loans set the lower limit for credit scores at 620. The same is true for your debt to income ratio. While most conventional loans require your DTI to be below 36%, there is no set DTI for a VA loan.
You’ll Need a VA Appraisal
When you apply for any type of mortgage, the lender will usually require an appraisal to estimate the home’s value. When it comes to VA loans, this is also true, but you will need a specific VA-approved appraiser, and the process is a little bit different than with a conventional loan. Along with estimating the home’s market value, the VA-approved appraiser will check the home out thoroughly to make sure it meets minimum property requirements set by the Department of Veterans Affairs. The VA limits how much their approved appraisers can charge for their services, so you don’t need to worry that this specific appraisal will cost more than others.
What are the specific things the VA appraisal includes? Here is a list of the minimum property requirements:
- Square Footage: The appraisal will verify that there is enough space for in the home for living, sleeping, cooking and dining. And there must be adequate bathrooms relative to the size of the home.
- Location: The property must be safely accessible via a public or private street with an all-weather surface.
- Drainage: Water must drain away from the house (to avoid the risk of flooding).
- Electric Safety: The home must have electricity for lighting, and any visibly damaged or exposed electrical wires must be repaired.
- Water Supply: There must be a continuous supply of water that is safe to drink, hot water, and safe sewage disposal.
- Mechanical Systems: All systems must be deemed safe to operate.
- Roof: It must be verified that the roof is in good condition.
- Crawl Space (if applicable): If the home has a crawl space, it must be accessible and properly vented.
- Basements (if applicable): If the home has a basement, it must be dry and not have any obvious structural problems.
- Paint: If the home was built prior to 1978, any loose, cracked or peeling paint inside or outside must be repaired due to the possibility of lead contamination.
You may be thinking that these are obvious requirements that any home could meet. However, many fixer-uppers, foreclosures, and older homes that are being sold “as is” could fall short of one or more of these requirements. That means that a VA loan may not be the best financing option if you are buying a house that needs a lot of work. It is also important to keep in mind that while a VA appraisal will go far more in depth than a typical appraisal, it is not the same as a home inspection and cannot be substituted for one. It is still a good idea to have an inspection done on any home that you are considering purchasing.
If the VA appraisal comes in too low, this can throw a wrench in the homebuying process, because a VA loan cannot exceed the market value of the home as appraised.
Things to Consider
VA loans can only be used to purchase a primary residence, so you wouldn’t be able to use one to purchase an investment property. There is also a loan limit in effect for VA loans, meaning there is a maximum amount you are able to borrow. Currently the limit is $726,200 for a home in the majority of counties in the United States. However, there are a few high cost areas where the maximum is set much higher, at $1,089,300. If the house you are looking to purchase costs more than the loan limit, you will be required to supply a down payment that makes up the difference.
The property you are looking at to purchase must be a conventional family home to qualify for a VA loan. VA appraisers tend to dislike unique properties because of the complications they can create when trying to find recent comparable homes. In addition, your lender may have additional restrictions to certain unique homes including but not limited to: ranches, converted churches, and homes with special architectural features like domes.