A Complete Breakdown of the VA Loan to Clear Up Confusion

What Is the VA Loan?

There are many types of loans out there that people can take out to buy a home. But specifically, I’d like to dive into the VA loan, a great benefit for service members and veterans. It is also one of the most misunderstood. Here is a brief overview of the VA loan.

History of the VA Loan

The VA loan was created in 1944 as part of the Servicemen’s Readjustment Act. The intent was to ensure service members who had been away at war could buy a home. You may be eligible for a VA home loan if you meet one or more of the following conditions:

You serve 90 consecutive days of active service during wartime
You serve 181 days of active service during peacetime
You rack up more than six years of service in the National Guard or Reserves, or 90 days on active duty during wartime
You’re the spouse (who hasn’t remarried) of a service member who died either in the line of duty or as a result of a service-related disability
You’re the spouse of a service member that is in a missing-in-action or a prisoner-of-war

There are other stipulations too, such as the need to have received a “general” discharge or better.

Certificate of Eligibility

The first step in getting a VA home loan is to apply for a Certificate of Eligibility (COE). For veterans, this will require a copy of your Discharge or Separation Documents (DD Form 214). For active-duty service members, this will require a statement of service signed by your commander (or by direction) and other personally identifiable information.

For current or former members of the National Guard or Reserves, you will need the above paperwork, plus some additional documentation to verify the amount of time you have served. Luckily, our service members are used to lots of paperwork. You can get your Certificate of Eligibility online through the eBenefits portal.

Obtaining Financing

There are three ways to obtain financing:

A veteran may obtain financing on their own.
A veteran and their spouse can obtain financing jointly. (This is a useful strategy if the non-veteran has a better credit history, which is commonly the case.)
Two or more veterans can obtain financing jointly.

What is really crazy about this last opportunity is that you can actually purchase more than four units if done correctly. VA Pamphlet 26-7, Revised, states that “if a property is to be owned by two or more eligible veterans, it may consist of four family units and one business unit, plus one additional unit for each veteran participating in the ownership.”

Credit Requirements

The VA loan does not have any requirement for a minimum credit score. However, most lenders will have their own minimum credit score requirements. As with any lending opportunities, higher credit scores mean better lending terms.

Not an Investment Loan

The VA home loan is a primary residence mortgage. Sorry, everyone, the VA loan was not intended to be used for investment properties. That being said, there are definitely ways for you to invest with the VA loan.

Don’t do anything illegal, and definitely do not commit mortgage fraud. I would hate to see this benefit go away because service members were abusing it. You must intend to occupy the property as your primary residence for a reasonable amount of time, generally assumed to be one year.

Military Exceptions

You may be asking, “But what if I get orders?” Don’t worry, the VA home loan is a benefit, and it isn’t out to get you! If you get permanent change of station (PCS) orders to move, you may do so without penalty.

If you bought a house in North Carolina because you were in receipt of orders to get stationed there in two months, and then those orders changed…you’re safe! There are countless other situations that can arise, but you must intend to occupy the home for a reasonable amount of time when you purchase it.

VA Loan Limits

I was going to write a detailed paragraph here about the loan limits and how they vary around the country…but, effective Jan. 1, 2020, the VA loan limits will cease to exist!

We will have to wait and see what lenders do with this going forward (how debt-to-income requirements may change, what limits may be placed on the loan from lenders, etc.) Either way, this is a huge step for the VA loan, and I’m excited to see what opportunities this opens for us!

The Funding Fee

This funding fee is a downside to the VA loan, but isn’t that bad. The funding fee for active duty is 2.15 percent of the purchase price for your first VA loan and 3.3 percent for subsequent VA loans.

On a $200,000 property, this fee is only $5,020! When added to the loan, this equates to roughly $25.10/month added to your payment.

In my opinion, paying $12.55/month for every $100,000 in loan amount is absolutely worth not paying the 20 percent down payment required by conventional mortgages. The funding fee is also waived for any veteran with a disability rating of at least 10 percent.

Private Mortgage Insurance

There is no PMI on a VA loan!

What Can You Use the VA Loan for?

Buying a home, including townhouse or condominium unit in VA-approved project
Building a home
Buying a manufactured home or modular home
Buying a multi-unit property, up to four units
Simultaneously purchasing and improving a home with energy-efficient upgrades
Refinancing an existing home loan up to 100 percent of the home’s value
The VA renovation loan allows you to wrap renovation costs into the home purchase mortgage

Minimum Property Requirements

The Department of Veteran Affairs has a list of Minimum Property Requirements (MPRs) that a home must meet in order to qualify for a VA loan. Inspectors are looking for major issues to ensure the house meets safety, sanitation, and structural integrity requirements.

This includes heat and/or air-conditioning (where necessary), electricity, kitchen function, plumbing, etc.

Some other requirements are:

The home must provide enough space to live, cook, and sleep in.
Properties need clean drinking water, a water heater, and working sewage systems.
The roof must be in good condition and meet the “reasonable future utility” requirement, which is generally a minimum amount of time it should have left before needing to be replaced.
Attics and crawl spaces require adequate ventilation to prevent mold.
Properties must be accessible from the street via an all-weather driveway.
You can’t buy a termite-mound or carpenter beehive to live in (sorry).

Ultimately, the home needs to be inhabitable and safe for your family to own. These rules are in place to protect service members and military families! Condominiums and Condominium Property Regimes (CPRs), must be VA-approved in order to qualify.

What Are the Loopholes?

These are several exceptions—not an exclusive list—to the above requirements, but you will need to articulate these to your inspector/appraiser in order to ensure they work with you.

You can purchase a property with unpermitted improvements, but that area does not count toward the value of the property, and you must sign a hold-harmless letter.
Leasehold estates, common in Hawaii, can be purchased as well. In order to qualify, the lease term must exceed the length of the mortgage by 14 years.
The VA renovation loan allows you to purchase a “fixer-upper” property.

Energy-Efficient Upgrades

There is a VA Energy-Efficient Mortgage (EEM) home loan option. This program allows the homebuyer to add up to $6,000 to the loan for energy-efficient upgrades. This can be done either at purchase or refinance.

The determining factor for approval is if the amount of money saved monthly by these upgrades is greater than the amount of money it will add to your mortgage payment.

For example, if you pay $6,000 for these energy-efficient upgrades, that is roughly $30/month added to your mortgage payment. If the upgrades are estimated to save you $60/month on utilities, then you meet the requirements for this program!

Bottom Line for Minimum Property Requirements

The VA loan is designed to help veterans and their families purchase safe, sanitary, and structurally sound properties. However, there are a lot of intricacies that will depend on your lender, but the Department of Veteran Affairs is not overly strict on lending criteria.

Take Advantage of It!

By now I hope you realize how wonderful the VA loan can be. It is one of the greatest benefits available to veterans, and you should take full advantage of it.

Please note: I am not a licensed lender. This information is my understanding from a lot of reading.

Anything I missed or you’d like to add about the VA loan?

Please share with a comment below!

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.