Why VA loans may be the best pathway to homeownership for veterans

VA loans are popular primarily because they don’t require a down payment in most cases and they also don’t require mortgage insurance. Yet many people are unaware that they may qualify for a VA loan and that they can borrow more with these loans than they might realize.

We asked Chris Birk, vice president of mortgage insight and director of education at Veterans United Home Loans in Columbia, Mo., to provide us with some tips for prospective VA loan borrowers:

· Veterans and active duty military are eligible. There are a lot of misconceptions about VA loan eligibility. A common one is that this benefit is open only to those no longer serving. But active duty military also have access to VA loans.

Generally, a veteran or service member is eligible if they have served: Ninety consecutive days on active duty during wartime; 181 consecutive days on active duty during peacetime; or six years in the National Guard or Reserve.

Only the VA can make a final determination about eligibility. Many veterans can verify their eligibility in seconds using the VA’s eBenefits portal. But you don’t need to obtain your Certificate of Eligibility, as the formal document is known, to start the VA loan process. That’s something lenders will often get for veterans during the early stages.

· This is not a one-time benefit. Another common and especially devastating misconception is that VA loans are a one-time benefit. The reality is this is something veterans have earned for life. You can reuse this benefit over and over again and it’s even possible to have more than one active VA loan at the same time.

· VA loans have a combination of benefits that’s tough to beat. Since its creation as part of the original GI Bill of Rights, the signature benefit of this program is the ability to purchase without a down payment. That alone has helped expand access to homeownership for generations of veterans and military families. But VA loans also have more flexible credit guidelines and the industry’s lowest average fixed rates, and they don’t come with any kind of mortgage insurance. They’re also a model of safety and stability. Despite about 8 in 10 VA buyers purchase with $0 down, VA loans have had the lowest foreclosure rate on the market for most of the past decade, according to data from the Mortgage Bankers Association.

· For most buyers, there are no loan limits. Legislation that took effect at the start of this year eliminated the VA’s loan limits for most buyers. For years, these county-level limits helped to mark the threshold above which a $0 down mortgage program required a down payment. Before January, most veterans buying above their county loan limit needed to put down a quarter of the difference between the purchase price and the limit. For example, a veteran buying a $750,000 house in a county with a $650,000 loan limit would have needed a $25,000 down payment. Putting down $25,000 on a $750,000 house is still a pretty good deal. But these limits did present challenges for some veterans, particularly in more expensive housing markets. Veterans always had to meet ability-to-repay guidelines and otherwise show they could afford the mortgage. It was more a question of liquidity and cash on hand to cover those down payments. Now, most VA buyers can borrow as much as a lender is willing to extend, all without the need for a down payment.

· Some lenders know VA loans better than others. Shopping around is a good idea no matter the type of home loan. But it can be particularly important for a more specialized product like VA loans. About 1,400 lenders made at least one VA loan this fiscal year, but only a relative few specialize in them. Every buyer’s situation is different, but that expertise can make a difference when it comes to things like identifying properties that are a good fit for the VA appraisal process or navigating eligibility questions. Comparing rates, terms and fees is essential, too. Lenders set their own interest rates, not the government, and costs and fees can vary. The good news is that on average VA loans have the lowest rate and origination fees of all loan types, according to an analysis of HMDA data from Polygon Research.

· Veterans have two VA refinance options. The VA has both a simple, streamline refinance loan along with a cash-out option. The streamline product, known as an Interest Rate Reduction Refinance Loan (IRRRL), is open only to veterans with current VA loans. It’s a low- or no-cost refinance that exists solely to get veterans into lower-rate loans or out of adjustable-rate mortgages. Any qualified veteran can use the cash-out option, regardless of the type of loan they currently have. Veterans without VA loans don’t have to tap into their home equity to use the cash-out option, either. That’s just the only way to refinance a non-VA loan into one.