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Veterans receive some valuable benefits as part of their service to their country. One key benefit is the ability to secure a VA loan, giving them a direct path to home ownership. This article will address some of the most common questions pertaining to VA loans and how they can help you purchase your dream home.   

What is a VA loan? 

A VA loan is a specialized mortgage loan that is guaranteed by the United States Department of Veterans Affairs (VA). First introduced as part of the GI Bill near the culmination of WWII in 1944, VA loans became a mainstay of the housing market in the proceeding decades.  

According to 2018 data, a total of 610,512 loans were guaranteed, amounting to $161 billion. Among all lenders, the average amount borrowed was just over $264,000.      

What are the advantages of a VA loan? 

The key advantage behind a VA loan is the flexibility and immediate purchasing power it provides to the borrower. The first thing to note is VA loans allow you to purchase a home without making a down payment—that’s huge. This means service members can finance 100% of the home’s value without a penny out of their pockets. No long-term savings plans required here—VA loans empower vets to purchase a home on their own terms at a time they feel is appropriate.  

Another major benefit associated with VA loans is they take private mortgage insurance (PMI) out of the equation. For anyone unfamiliar, PMI is a protection policy for lenders. There is inherent risk whenever you loan someone money; PMI is a form of insurance that protects lenders from buyers who may be unable to make their monthly mortgage and eventually default on their loan. For buyers, PMI is a fee that accompanies your monthly mortgage payment. To avoid PMI, traditional home buyers are generally on the hook for a 20% down payment at the point of purchase—potentially limiting their buying power. 

As VA loans are guaranteed by the US government, there is less risk for lenders. If the home buyer fails to make their monthly mortgage payments, lenders know the government will step in and pay 25 percent of the total loan. Aside from lowering your monthly payment, the altogether absence of PMI in conjunction with a VA loan ensures more of each mortgage payment is invested toward the principle loan balance.     

One more key benefit: VA loan applicants are shielded from certain closing costs. The VA places certain restrictions on what costs lenders can charge, potentially saving them thousands of dollars on their way into their new home–not a bad way to start the homeowner journey.    

What restrictions are there with a VA loan? 

No question—VA loans pack a lot of benefits, especially for first time home buyers. Although this type of loan grants significant buying power, there are a few restrictions to keep in mind. 

There are limits to how much you can borrow—the final amount is partly determined by where you live. Visit Military Benefits for 2020 estimates on how much you can potentially borrow.  

Another potential restriction is your income and credit. If you’re looking to borrow near the maximum allowed, you’ll need a solid credit rating and show you have enough regular income to pay off the loan.  

As with any loan, creditors take on a certain amount of risk whenever they lend money. The circumstances of your situation will impact what’s possible with a VA loan.   

Who is eligible for a VA loan? 

VA loans are available to American veterans, military members currently serving in the U.S. military, reservists and select surviving spouses. According to official policies, VA financing is NOT available to individuals solely based upon Active Duty for Training in the Reserves or National Guard.  

How much can you borrow with a VA loan? 

How much you can borrow under a VA loan is ultimately determined by your VA debt ratio. According to Military.com, “Your VA debt ratio is a number expressed as a percentage and is calculated by dividing certain debt obligations by your gross monthly income. If your monthly bills, including your mortgage payment add up to $2,000, and your gross income is $6,000 each month, your ratio is 2,000 divided by 6,000, or .30. The maximum VA debt ratio limit is 41 so in this example the ratio of 30 qualifies.”  

How do you apply for a VA loan? 

Start by requesting a Certificate of Eligibility and complete a VA Form 26-1880—you’ll need this to qualify. With a Certificate of Eligibility prepared, you can apply for a VA loan through any lender that participates in the VA home loan program.