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How VA Loans Work - Your Questions Answered

How does a VA home loan work?


Banks, mortgage companies and other private lenders have the ability to loan money towards the purchase of a home for VA loan benefit qualified individuals. Eligible parties are veterans of the United States Armed Services, and have served active duty during war or peacetime. A portion of a VA loan is guaranteed by the government to be paid in the event that the purchaser is unable to fulfill the loan. 


How can I qualify for a VA loan?


First you must fill out a request for a Certificate of Eligibility, and you must provide proof of military service. Once a Certificate of Eligibility is obtained, your lender will approve your loan based on your credit score and determined ability to repay your mortgage. Based on the requested loan amount, you will receive your set entitlement amount. Most lenders commonly offer VA loan programs, and you can request your Certificate of Eligibility directly through them. 


What is an entitlement?


Your entitlement is basically a monetary amount guaranteed by the government. This is not paid directly to you, nor is it given to your lenders in cash. An entitlement amount is what the government guarantees the lenders they will pay in the event that you cannot repay your mortgage. Currently, for loan amounts under $144,000, the entitlement is $36,000. For loan amounts between $144,000 and $240,000, the entitlement is $60,000. 


What if I need a loan for more than $240,000?


The government does not put a cap on the amount of money you can borrow using a VA loan. However, because private lenders sell the loans on a secondary market, where currently the cap is $240,000, it may be impossible to take out a loan for more than that amount. If you're considering purchasing a home for more than $240,000, it may be best to use a conventional loan.


I have bad credit, or I've declared bankruptcy. Can I still get a VA loan?


VA loans are subject to the same terms as conventional loans, as they are provided by private lenders. The necessary income requirements and credit status still apply. While sometimes it may be easier to get a VA loan than a traditional loan, if you've declared bankruptcy within the last 2 years and have not reestablished your credit, your chances of getting a VA loan are about the same as any other loan. Determination of mortgage eligibility is still made based on the criteria that lenders set forth.


Why would I want a VA loan as opposed to a conventional loan?


Well, one of the biggest selling points for VA loans is that there are usually no down payments required. While you do pay a funding fee if you don't make a down payment, this is financed in with your mortgage, making the purchase of a house easier and more accessible to people who may not be able to get one otherwise. Also, you pay no PMI (private mortgage insurance) with a VA loan. On a modest conventional loan of $126,000, PMI can run as much as $65 a month for the first 3 to 5 years. This adds up to a substantial savings. In addition, VA loans put limitations on buyer's closing costs, so most of the fees traditionally paid by the buyer are now the seller's responsibility. VA loans also come with competitive interest rates, and carry no penalties if the loan is paid early.


What can I purchase with my VA loan?


VA loans can be used to purchase a house, townhouse, or condominium that you intend to occupy. These can be existing dwellings, or you can use it to build your own home. You can refinance your current loan using a VA loan if you are eligible. As well, VA loans may be used to make qualified improvements, such as insulation, storm windows or doors, or energy-efficient related features.


What are the negatives of a VA loan?


Because a VA loan is really very similar to a traditional loan, barring the no down payment requirements and no PMI payments, the negatives to a VA loan are typically the same as any conventional loan. However, it may be difficult to find a seller who will work with a VA loan, due to the reputation of VA loans being slow to process. However, in recent times, this has not been the case with VA loans. They are typically just as easy and quick to receive as any other loan. The downside to a VA loan may be that because you, the buyer, are not allowed to pay certain closing cost fees that you would traditionally pay, the seller then becomes responsible. This can translate into a non-negotiable asking price for the house. However, this trade-off relates to little difference in the end, since you're not responsible for fees you'd otherwise pay.

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