13 Oct The 9 Best VA Loan Types of Sep, 2023
As one of the biggest benefits of VA loans, there is no down payment required. In addition to the 0% down payment, some VA programs also allow veterans to finance the remodeling of their homes, take equity out of their homes, and purchase more than one home simultaneously.
VA mortgages are also available without a credit score requirement or private mortgage insurance (PMI), saving the borrower thousands of dollars over the life of the loan.
Several VA loan types are available to veterans. Depending on the one chosen, it may be used for refinancing or purchasing a second property, whether a second home or a new primary residence.
In this article, we’ll cover everything you need to know about the different VA loan types.
Check out our compilation of the most frequently asked questions readers ask about VA loans.
Different VA Loan Types
The Veterans Administration offers some of the most flexible home loan programs and is available for both veterans, active-duty military personnel, and their families, if eligible.
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Understanding the different types of VA loans available will help you choose the one that best fits your situation.
1. VA Purchase Loans
You can qualify for a VA-backed purchase loan if you meet the following requirements.
- Have a Certificate of Eligibility.
- Meet the lender’s requirements, including standards concerning credit, income, and other factors.
- Reside in the house they are purchasing.
Benefits of a VA Purchase Loan
- The buyer does not have to make a down payment as long as the home’s sale price does not exceed its appraised value (the value determined after an appraiser reviews the property).
- The terms and interest rates offered by the loan company are considerably better than those offered by private banks, mortgage companies, or credit unions (also known as lenders).
- The vast majority of areas do not require down payments, so you will be able to borrow up to the conforming loan limit set by Fannie Mae/Freddie Mac and even more in some of the more expensive areas. In some cases, you may be able to borrow more than this amount, depending on how much you choose to put down.
- It is unnecessary to pay private mortgage insurance (PMI) or mortgage insurance premiums (MIP).
- As a result of these benefits, there will be less money to spend at closing.
- If you pay off the loan before the end of the period, it will not have any consequences.
- Get a VA-backed loan to buy your first home.
- If you decide to sell your home or refinance it, you may be able to use the VA benefits again.
- A buyer can take over a seller’s existing mortgage.
Qualified Borrower Loan Uses
Once a person qualifies for a VA-backed purchase loan, they can use the loan to:
- Purchase a single-family home with four or more units.
- Purchase a condominium in a VA-approved development.
- Invest in a house that needs remodeling.
- Buy a manufactured home or a lot.
- Build a new home.
- Change your home’s energy efficiency by adding new features (such as solar power).
Here’s everything you should know about VA loan assumption.
2. VA Refinance Loans
VA-backed cash-out refinance loans give you the ability to replace the mortgage that you currently have with a loan that is structured differently. You may qualify for a VA-backed cash-out refinance loan if you are looking to access the equity in your home or refinance your existing non-VA loan into a VA-backed loan.
VA loans provide you with the following advantages:
- As a homeowner, you have the opportunity to use the equity in your home to pay off debt, pay for school, make home improvements, or for other purposes.
- It is possible to refinance a non-VA loan into a VA-backed loan.
When you choose a VA Purchase Loan that does not require a down payment, you must consider the conforming loan limits. However, there is the option of requiring a down payment, so the loan amount can exceed this.
However, closing costs should be considered when refinancing a home, as they can total thousands of dollars. When you apply for a loan, you need to know how your new loan amount relates to the value of your home. You can ask your lender for advice regarding the costs and benefits of refinancing, but you should make sure you fully understand all the details before signing anything.
3. Fixed-Rate VA Loan
Mortgages with fixed rates are one of the two main types of mortgage. Unlike variable-rate mortgages, fixed-rate mortgages have a fixed rate of interest that doesn’t change for the entire mortgage duration.
Calculate the costs of your mortgage loan easily with our VA loan calculator.
4. Adjustable-Rate VA Loan
The VA adjustable-rate mortgage (ARM) is more complicated than the standard fixed-rate mortgage, and it comes with a variable interest rate. An ARM loan will have an interest rate that is lower than the market rate, which will increase (or decrease) over time. This loan type could have a higher interest rate if held for an extended period than a fixed-rate loan.
Unlike a variable rate mortgage, ARMs start with a fixed interest rate that remains the same for a fixed period, after which it adjusts periodically. A fixed-rate period can vary quite a bit based on the financial situation of the company. We have seen months and even years of fixed rates.
There is a reset of interest rates in adjustable-rate loans after the initial period, which means that the new rate will be determined based on market conditions.
5. VA Jumbo Loan
Any VA loan that exceeds the conventional loan limit is generally defined as a VA jumbo loan. Veterans’ loans are not typically restricted in the amount they can borrow. But factors like conforming loan limits, down payment needed, credit history, income, and other things will come into play.
6. Cash-Out Refinance Loan
A refinance loan offered by the VA converts equity into cash. A loan of this nature can be used to pay off debt, make home improvements, and pay off liens at closing.
You can consider refinancing a non-VA loan into a VA loan using a Cash-Out Refinance Loan. The VA will guarantee loans of up to 100 percent of the value of your home.
To be eligible, you must be:
- Reserve and National Guard Members (called to active duty)
- Active-Duty Servicemembers
- Current Reserve and Guard Members (after six years of creditable service)
- Certain surviving spouses
As part of the eligibility requirements, veterans/service members must have served the required length of service and have been discharged in a manner other than dishonorable. Veteran homeowners, their spouses, or their dependent children should be able to certify that the property is occupied before applying for a VA home loan.
7. VA Streamline Refinance Loan
More often than not, streamlined refinances are used to refinance a loan. Existing VA loan holders looking to save money and receive lower interest rates can use Interest Rate Reduction Refinance Loans (IRRRL) as an excellent choice.
You could benefit from an IRRRL if:
- You want to lower your interest rate or your monthly mortgage payment.
- You want to switch from an adjustable or variable interest rate loan (a loan that has an interest rate that varies over time) to one with a fixed interest rate (a loan that has an interest rate that remains the same for as long as the loan is outstanding).
You may be able to borrow up to the Fannie Mae/Freddie Mac conforming loan limit in most areas—and possibly even more in some high-cost areas. If you want to make a down payment along with this amount, you can borrow more if you wish.
You must keep the closing costs in mind when refinancing your mortgage since they can add up quite quickly. The amount of money you will save every month by refinancing can be estimated by dividing your closing costs by the amount you expect to save each month. It is up to your lender to advise you on the costs and benefits of the transaction, but you should make sure to understand what you’re getting into.
8. Native American Direct Loan (NADL) Program
It is possible for Native American Direct Loans (NADL) to help you obtain a loan for the purchase, construction, or improvement of a home on federal trust lands if you are a veteran and either you or your spouse is Native American. You may also be able to refinance an existing loan at a reduced interest rate to lower the monthly payment.
Native American Veterans or non-Native American Veterans married to Native American Veterans can apply for a NADL. Upon signing the MOU, the tribal government will include details regarding how the program will operate on the trust lands.
The following requirements must be met to be eligible to be a part of the program:
- An applicant for a VA home loan must possess a valid Certificate of Eligibility (COE).
- They also must meet specific credit requirements.
- Their income must be sufficient to cover the mortgage they are applying for.
- A NADL may only be used to purchase, construct, or improve the applicant’s primary residence.
9. VA Renovation and Home Improvement Loans
To qualify for a VA renovation loan, you need to meet the same guidelines and requirements as standard VA loans.
VA renovation loans are similar to purchase-only VA loans. They provide borrowers with no down payment, no mortgage insurance, and relatively low interest rates compared to other types of loans.
You’ll need to take additional steps to obtain approval for your proposed improvements since you’re receiving funds for repairs. An appraisal by a VA-approved contractor will be conducted after the work is completed.
VA Home Loan Types: Which Is Right for Me?
Most often, the VA loan that best fits your needs will be determined by your eligibility, your circumstances, as well as your present and future financial situation. The VA loan program offers you a wide range of benefits, so you will be getting advantages such as the following, no matter which option you choose:
- No downpayment.
- No PMI.
- Lower interest rate.
- Affordable closing costs.
How Does a VA Direct Home Loan Work?
The VA backs your mortgage, so their role is important in the mortgage process, along with your lender. In many cases (such as NADLs), the terms offered by a direct lender are much better than those of a private lender (such as a private bank, mortgage company, or credit union).
How Does a VA-Backed Home Loan Work?
There is always a portion of the loan guaranteed by the VA whenever you obtain a VA-backed mortgage from a private lender. If you default on your VA-backed home loan, the lender may be able to recover some or all of their losses. Since there is less risk involved on the lender’s part, you may receive better loan terms, such as no downpayment.
To offer VA-backed home loans, lenders must adhere to VA guidelines. Borrowers must have a good credit score and a recent house appraisal (a professional estimate of the value of your home). The VA may have additional requirements to be met before a loan is approved as well.
Special Features and Benefits Unique to VA Loans
One important benefit of VA loans is that you may be able to buy more quickly than usual if facing foreclosure or bankruptcy.
In most cases, after a significant credit event such as bankruptcy or foreclosure, you can usually apply for a new loan three to four years later. However, the Veterans Affairs program typically requires what is known as an overseas service of two years.
Mortgage Insurance Is Not Required
Both conventional and FHA loan programs must obtain mortgage insurance to protect the lender in case of default. Instead, the VA charges a flat rate of 2.15% if no down payment is made.
Buying a Second Home With No Money Down
Reassignments on short notice are common among military personnel. As a result, there may not be enough time for you to sell your house if you have to move beforehand. You may also be able to keep the property and rent it rather than selling it at a loss due to the decline in property values in your neighborhood.
The veteran can qualify for “second-tier eligibility,” which will allow them to finance a new home with no money down and without paying off their existing VA loan.
You Can Renovate Your Home With Zero Equity
You might not have the funds to make the necessary repairs on a property you purchased without a down payment. Or, you may also be purchasing a property that requires some work to meet VA requirements.
VA renovation loans allow you to borrow up to 100% of the property’s “after-improved” value, so you don’t have to use a personal loan or credit card to carry out the renovations.
Veterans With Disabilities May Be Exempt From Paying the Funding Fees
In recognition that many veterans suffer from disabilities related to their military service, the VA is taking steps to assist them with their disability claims. If your disability rating is confirmed, the VA may remove the financing charge on your mortgage, alleviating possible financial difficulties.
There Is the Possibility of Transferring a Loan to Another Individual
A low interest rate on your mortgage may persuade a new buyer to purchase your house. Transferring a VA loan to another individual is one of the great benefits. However, if you are not a veteran yourself, you will not be able to apply for another VA loan.
Additional Documentation Needed to Qualify for a VA Loan
VA loans can only be obtained with documentation that proves the applicant’s eligibility for the loan. Here is the documentation you may need to qualify:
- DD214: When you retire, separate, or are discharged from the military, you should receive a DD Form 214 from the US Department of Defense. You will receive a VA loan eligibility certificate based on this information.
- To see if you’re eligible, you’ll need a form NGB-22 or a retirement points summary if you are a retired military reservist or a retired National Guard veteran. You will not receive a DD-214 since that form is only given to people who have served.
- The COE: This document will tell you how much your home loan benefit is, as well as if you qualify for a financing fee waiver. You may be able to obtain your COE electronically from the VA. If that doesn’t work, you’ll need to fill out the form and send it to your local VA office.
- Continuance of service letter: If you are serving in the armed forces, you have to submit a letter from your commander explaining your service to prove your eligibility.
- Proof of service-related disability: Lenders will ask you to fill out VA form 26-8937 to determine the amount of your disability benefits.
- When you retire, you should get paperwork from the VA in the form of a retirement award letter. This Information will be used to determine the amount of your monthly benefit and certify that it will last for life.
- Paystubs/W2s: If you’re employed, you’ll need to submit a month’s worth of pay stubs, and if you’re self-employed, you’ll need two years’ worth of tax returns.
- The lender needs to know how long you will be on active duty to ensure your income will continue. The statement of service should include this information.
- Proof of your current housing allowance/quarters (if you are on active duty): You will probably find this information on your pay stub, but because some of these allowances may be used as income on a VA loan, make sure you include any information on your quarters’ benefits.
Comparing VA Loans to Other Loan Programs
|VA Loans||FHA Loans||Conventional loan|
|Requirements for down payments||0%||A down payment of 3.5% is required.||3% down payment is required; to avoid paying private mortgage insurance(PMI), a 20% down payment is required.|
|The minimum credit score was investigated.||It is an official rule that there is none. However, lenders do have the right to set a minimum requirement.||There is a minimum credit score of 580 with a down payment of 3.5%; and 500 with a down payment of 10%.
Some lenders set higher minimums than others.
|A minimum credit score of 620 is required, but a higher score is needed for the best rates and terms.|
|Upfront Fees||0%||Mortgage insurance premiums (MIPs) are 1.75% upfront and can be considered when determining the loan amount.||There is no PMI upfront for a down payment of less than 20%, but there are fees monthly.|
|Mortgage Insurance||None||The annual interest rate for the vast majority of home buyers is 0.85%. However, it can range from 0.45% to 1.05%||Currently, the interest rate on loans is 0.35% per month and represents a fraction of the existing balance|
|What you need to know||The program is available to active-duty military personnel, surviving spouses, and veterans.||It is not only open to low-income or first-time home buyers.||Once a borrower’s balance drops to 80 percent of the home’s value, they may be able to cancel the mortgage insurance.|
|The best option for you may depend on your financial situation.||Military and veteran families will benefit most from this plan.||Those with low credit scores and high debt-to-income ratios will find this plan ideal.||Those who have an excellent credit history or a good credit history.|
Disadvantages of VA Loans
Veterans’ loans are considered to be among the best loans available. Unfortunately, these VA loan types will still have disadvantages, including the following.
VA Funding Fee
Although VA loans do not require mortgage insurance, an additional fee known as a funding fee is associated with them. A borrower who defaults on a loan will also be charged a fee, and the federal government will cover the costs associated with the foreclosure procedure.
Depending on the amount of your down payment and your first VA loan, the VA funding fee may range from 1.4% to 3.6% which can be paid either upfront or as part of the loan.
Only Primary Residences Are Eligible for Purchase Loans
A VA loan cannot be used to purchase an investment property or a vacation home, and the VA does not approve some other properties.
An appraiser the VA approves will evaluate your intended purchase to determine its value and whether or not it meets the VA’s minimum property requirements. Be aware that some fixer-upper property might not meet all of these requirements.
More information about the Department of Veteran Affairs can be obtained by calling 877-827-3702 from 8:00 a.m. until 6:00 p.m. Eastern Time.