Here's a comprehensive look at VA Loans, including benefits, the types of loans, eligibility, how to apply, and more.
VA Loan = No Down Payment
The most significant benefit of a VA Loan is that it requires no down payment when purchasing the home.
There are obvious advantages to this benefit, not the least of which is that veterans and service members don't have to spend years saving for a lump-sum down payment.
By comparison, a conventional mortgage often requires a down payment of 5% of the home purchase price. For an FHA loan, the minimum down payment is 3.5%.
With a VA loan, service members can finance the total amount of the home's value without spending a dime on the down payment.
How is this possible? The main reason that most VA Loans don't require a down payment is that the federal government insures a quantity of every VA Loan closed by private lenders.
So, if you cannot make your mortgage payment, the federal government pays the lender for at least part of the loss.
While it's rare that borrowers have to make a down payment when applying for a VA Loan, it's required when an appraiser determines its market value is lower than the homebuyer's pay.
In that case, buyers may have to pay extra cash at closing to make up the difference. While it's not technically a "down payment," it is extra money you'll need at closing.
Are you a Hometown Hero? Find out your eligibility for the Hometown Heroes Loan Program in Okaloose County, Florida.
Types of VA Loans
You'll have several options from which to choose when applying for a VA loan. Determining what's suitable for you depends on various factors, including your credit score and income.
A financial institution offers a VA-backed purchase loan, typically requires no down payment, has favorable terms and interest rates, and has fewer closing costs.
Something else to consider is that purchase loans do not require private mortgage insurance - even if you don't make a down payment. In turn, this reduces the monthly payment amount.
There's also no penalty if you pay off a purchase loan early.
Native American veterans and veterans with a Native American spouse are eligible for a Native American Direct Loan. The main feature of a NADL Loan is that it allows borrowers to build, buy, renovate and expand homes on federal trust lands - typically found on Native American reservations.
The ability to refinance property is another feature of a NADL Loan. Stipulations include that you must be the intended occupant of the home and are financially secure enough to cover monthly payments and other costs.
A cash-out loan allows you to refinance your current loan by borrowing money against your home's equity. You can also use the funds for home renovations, college tuition, and to pay off other debts.
Refinancing allows you to pay off a conventional home loan or a previous VA loan. It's also a great way to reduce your current home loan's interest rate and monthly payment.
Interest Rate Reduction Refinance Loan
An IRRRL is a type of loan that allows you to pay off an existing VA-backed loan for a home in which you currently reside or where you used to live.
Another critical feature of an IRRL Loan is that it has a fixed interest rate (which remains the same for either the duration of the loan or part of it). Many mortgages have a variable rate that fluctuates throughout the life of the loan.
Here are the primary requirements if you wonder if you're eligible for a VA Loan:
You're active service includes 90 consecutive days served during wartime
You have 181 days of active service during peacetime
You've served at least six years in the National Guard or Reserves
- If you're the spouse of a service member who died in the line of duty or because of a service-related disability
If you don't meet the above requirements, you may still qualify depending on your discharge:
You were discharged for hardship - such as severe medical or financial problems within your family - or because of a reduction in force
Your discharge is related to a service-related disability or medical condition
- You have an early-out discharge - before completing 180 days of active service - while having served a minimum of 21 months during a two-year enlistment
VA Loans require a Certificate of Eligibility (COE) to verify that veterans meet the minimum service requirements. Lenders can usually check your COE through your birthdate and social security number.
Also, you may be eligible for a COE if you're the spouse of a veteran, spouse of a veteran who's missing in action, or spouse of a veteran who is a prisoner of war.
Note - The minimum active duty requirement for veterans depends on your service. Moreover, if you're an active service member who served for a minimum of 90 continuous days, you meet the active-duty requirement.
How To Apply For a VA Loan in Okaloosa County, Florida
The first step in applying for a VA Loan is obtaining a COE. As mentioned, a COE proves that you meet initial eligibility requirements.
It also tells you the amount of money the Department of Veterans Affairs will guarantee on your loan. In most cases, you can apply for a VA loan online.
Choose your lender
It pays to do your research and find an appropriate lender. Only lenders approved by the Department of Veterans Affairs can provide VA Loans.
It's worth noting that some lenders concentrate on VA Loans almost exclusively, making the loan process simpler and quicker.
Find your house
Perhaps the most enjoyable aspect of the VA loan process is going house-hunting. It helps to work with a real estate agent familiar with VA loans and can help maximize your benefits.
Once you choose your home, your next step is to sign a purchase agreement - a legally binding agreement that defines the terms of the transaction between the home buyer and seller, as well as the conditions of the sale.
Setting up an appraisal
After you've signed the purchase agreement, the next step is to have a home appraisal done by a certified professional to evaluate the home according to VA standards.
An appraiser inspects the home to determine if the amount you've agreed to pay corresponds with the home's current value. An appraisal doesn't replace a home inspection, which focuses on the property's overall condition, defects, and code violations.
Once an underwriter approves the VA loan, the final step is the closing, in which the seller legally transfers the property to you. Closing costs may be required.
An optional step in the loan process is pre-qualifying for your loan amount. Doing so can save you time and avoid potential surprises later in the process.
Pre-qualifying means giving complete details about your income, credit history, marital status, and more to your VA Loan professional. Pre-qualifying for the loan doesn't guarantee you'll qualify for it later.
Generally, getting approved for a VA loan and closing on the home takes 30 to 45 days.
Additional VA Loan Benefits
We've already discussed the primary benefit of VA Loans - no down payment - but there are other advantages, including:
No PMI - Homebuyers must pay for private mortgage insurance (PMI) unless they make a sizeable down payment (usually 20%). For example, the down payment on a $100,000 mortgage is $20,000. On the other hand, VA Loans require no mortgage insurance - another important cost-saving feature.
Favorable credit requirements - The credit scores required by conventional and FHA lenders can be tough to hit. With a VA Loan, lenders generally need a minimum credit score of 620, which is a lower threshold.
Lower interest rates - VA Loans have low average fixed interest rates - if not the lowest - on the market.
Easier credit score requirements - Minimum credit score requirements for VA Loans are usually lower than for conventional mortgages.
Lifetime benefit - Another key advantage of a VA Loan is that veterans can use the program more than once because it never expires. You don't always have to repay your existing VA loan to use the benefit again.
Less closing costs - The Veteran's Administration limits closing costs for veterans, while some of the costs are covered by other parties.
No prepayment penalty - Borrowers aren't penalized if they pay off a VA Loan before it matures. Lenders impose prepayment penalties for conventional loans because they miss out on future interest payments when the loan is paid off early.
- Loan assumability - This benefit means a purchaser can take over the home seller's existing mortgage. One of its significant advantages is that buyers can assume the seller's interest rate. Another is that there are no closing costs when the buyer takes over the loan.
The Federal Housing Finance Agency raised 2022 conforming loan limits on Department of Veteran Affairs-backed home loans. For most U.S. counties - including Okaloosa County, Florida - the loan limit is $647,200, nearly $100,000 higher than 2021.
The '22 increase compensates for rising home values; the median U.S. home value is over $400,000.
Loan limits represent the amount the Department of Veteran Affairs guarantees (the amount the VA pays the lender in case of loan default) but not the amount one can borrow. The VA backs the loan and can pay up to 25% of the amount in case of loan default.
Some veterans, service members, and survivors have full entitlement and don't have loan limits. You have full entitlement if one of the following is true:
You may have what is known as a remaining entitlement - which you can use to take out another VA loan - if you meet any of the following criteria:
You paid off a previous VA loan and still own the home
You have an active VA loan that you're paying back
You refinanced the VA loan into a conventional loan and still own the home
You had a compromise claim on a previous VA loan which you didn't repay in full
You avoided foreclosure by transferring your home's title to the bank that holds your title
- You had a foreclosure on a previous loan that you didn't pay back
If you have reduced VA entitlement, the amount you can borrow with no down payment is lower, and you're subject to a loan limit.
The VA Funding Fee
While VA Loans come with many benefits - such as those listed above - something else to consider is the VA funding fee.
The VA funding fee is paid to the Department of Veteran Affairs and supports the VA loan program.
The amount of the fee depends on your down payment. Yes, VA loans don't require a down payment, but veterans still must pay a funding fee of 2.3% of the loan amount if they put down less than 5% on the home purchase (when buying a home for the first time).
If you decide to make a down payment, the larger it is, the smaller the funding fee.
The VA funding fee is similar to private mortgage insurance in that payment is due when the buyer closes on the home. Like PMI, it protects the lender and the VA in case of mortgage default by the buyer.
The fee is either paid upfront as a closing cost, financed as part of the loan, or paid by the seller. You have the option to roll the fee into your mortgage loan.
The reason for funding fees is that the Department of Veterans Affairs guarantees VA Loans which, in turn, means that the lender is partially protected if the borrower defaults on the mortgage since the government insures the loan.
The fee also helps with other costs related to VA Loans while ensuring that the program remains viable.
VA funding fee exemptions
You may be eligible for a VA funding fee exemption if you're:
You may also be eligible for a VA funding fee refund if you were eligible for an exemption when you paid the fee. For example, you may have a pending disability claim approved after closing and after you've already paid the funding fee.
Things to Do in Okaloosa County, Florida
There's plenty to do in Okaloosa County if you're a veteran or active service member, including:
Henderson State Beach - Henderson State Beach features 30-foot white dunes, a great place to relax, and activities such as fishing, camping, and hiking.
The Boardwalk on Okaloosa Island - Located on the Gulf of Mexico, the Boardwalk features a variety of activities, including restaurants and beach-front shopping.
Horse Rides of Pensacola - There are plenty of opportunities for horse riding enthusiasts in Okaloosa County, not the least of which is Horse Rides of Pensacola.
Kiwi's Tiki Bar at Fort Walton Beach - Food, drink, and fun is always on the Kiwi's Tiki Bar menu.
- Crab Island - There are lots to do at Crab Island, from renting a pontoon to food and drink and jet skiing.
VA Loans are an excellent option for service members and veterans looking to buy a home. How the loan applies to you depends on various factors, but it has helped millions of military members to become homeowners.