For US military veterans and their spouses, the benefits of being able to use a VA loan program to purchase, refinance, and even streamline refinance their homes are well known. After all, VA financing makes up over 10% of the mortgage market. Since the creation of the VA loan guarantee program, VA loans have paved the road to homeownership for generations of vets and their families. The road isn’t always smooth though, so I want to present the basics of entitlement, eligibility, and helpful info to make navigating and understanding the VA loan process easier.
Understanding Your Entitlement
As World War II veterans began returning home, the Servicemen’s Readjustment Act of 1944 established the first VA loan guarantee program. It was geared towards encouraging homeownership among military veterans by helping to ensure that lenders would want to grant them loans. This was accomplished through a loan guarantee — where the VA insures a portion of the loan against default.
Your individual entitlement is the dollar amount that the VA will insure or guarantee. There are actually two types of entitlement that make up the total figure:
- Basic entitlement — Basic entitlement is set by the VA (currently at $36,000 x 4 = $144,000).
- Bonus entitlement — Your bonus entitlement actually depends on the county you live in, and what the loan limits are there. For most counties, bonus entitlement is equal to $85,087.50 x 4 = $340,350.
(The entitlement amounts are multiplied by four because the VA insures up to 25% of the loan amount, so entitlement x 4 equals the VA loan limit for insurability.)
When the property is sold or the mortgage is paid off, your entitlement is restored for future use. This way, veterans are able to buy and sell primary homes — all under VA loan programs. In the event that your current home doesn’t sell before you purchase another property, your entitlement may only be partially restored. This could lead to a higher down payment requirement from your lender.
Since VA loans are assumable, meaning they’re able to be transferred along with the property to the buyer, your entitlement would be at least partially tied up in the home until the loan is refinanced or paid off. There are also cases where your entitlement may not be restored: specifically in the event of a default (foreclosure, deed in lieu, or short sale).
Documenting Your Eligibility
Part of the loan process includes confirming your military status and eligibility to use a VA loan. There are two documents that are key to this step; your DD-214 and your Certificate of Eligibility.
DD form 214 or Certificate of Release or Discharge from Active Duty is issued by the U.S. Department of Defence upon your retirement, separation, or discharge from active duty. If you served in the National Guard, there are separate forms: NGB-22 and NGB-23. Surviving spouses will need to obtain a VA form 26-1817 in addition to the DD-214 form for their spouse.
The process for obtaining a replacement copy of your DD-214 was best summed up by a veteran and loan officer I know: “Do not lose this. It will take an act of God and Congress to get another one.” Thankfully technology has made it incrementally easier, and you can now request service records here.
Most VA lenders are able to request a Certificate of Eligibility on your behalf as part of the loan process, but you can expedite this by requesting your own as soon as you know you’re going to refinance or purchase a home — they’re not lender specific.
Ensuring a Smooth Loan Process
The best way to ensure that your VA loan process goes smoothly is to work with an experienced lender who’s committed to keeping you well-informed, and being prepared for the work ahead:
- Choosing a VA lender — Some lenders have a direct endorsement from the VA, meaning that they have the ability to originate, underwrite, and endorse mortgages for the VA, all in-house. Other lenders will send complete loan packages to the VA for underwriting. In either case, it’s important to choose an experienced lender, but for speed and efficiency, having everything under one roof is an advantage.
- Getting a VA appraisal — VA appraisals can only be completed by an approved VA appraiser. There are unique property requirements for VA loans that are assessed as part of the appraisal process. These Minimum Property Requirements (MPRs) all have to do with ensuring the safety and habitability of the home, so any issues that are discovered during the appraisal process will have to be addressed before the loan can close.
- Getting a pest inspection — In most states, and for most VA loan transactions, you’ll be required to get a pest inspection done. This is specifically to check for termites and other wood-destroying pests and ensure that they haven’t caused irreparable damage to the home. Get this taken care of early on in the process in case any remediation is needed, that way it won’t come as a last-minute surprise. The tricky thing about VA pest inspections is who is allowed to pay for them. In all but a few states, VA homebuyers aren’t allowed to pay for the inspection — leaving it for the sellers to cover.
- Getting your loan approval — VA loans have the reputation for taking longer and requiring a more strict underwriting process than other loan types. This is mostly unfounded, but it does still cause some sellers to scrutinize VA purchase loan pre-approvals more closely. To keep the loan process moving quickly, make sure your financial documents are easily accessible, and respond to requests from your lender as quickly as possible.
Other Unique Features of VA Loans
There are lots of nuances and features of VA loans that you may not have been aware of, but might find useful as you consider VA loan options:
- Your proximity to a military base could make a difference. If you’re active duty personnel, lenders may have a maximum distance (typically 30 miles) or commute time (1 hour) that your home can be away from the base where you’re stationed.
- Your residual income also matters. In addition to calculating your debt to income ratio, VA lenders have to make sure that you have enough disposable income left over each month after expenses. The requirements are based on the size of your family as well as the region of the country you live in.
- You can reduce the percentage of your funding fee by making a down payment. While one of the best-known features of VA loans is the zero down payment requirement, if you make a down payment of as little as 5%, you can save on your funding fee. For example, on your first time use, you would reduce the funding fee from 2.15% to 1.5% with a 5% down payment, and to 1.25% with a 10% down payment.
- You may be exempt from the funding fee completely. If you have earned a 10% or greater designation of service related disability from the VA, then you are eligible for an exemption when it comes to paying the funding fee. This also extends to veterans who have retired and are receiving a pension in lieu of disability.
- You could also be eligible for benefits as the surviving spouse of a veteran who gave their life in the line of duty or as a result of injuries received in the line of duty, as long as you haven’t remarried.
Taking advantage of the many benefits offered by VA loan programs, from favorable interest rates to 100% financing, can be as simple and straightforward as any other type of home loan. How smooth the process will be for you comes down to how quickly and efficiently you can demonstrate to your lender (through your application and supporting documentation) that you meet VA qualifying criteria when it comes to your income, assets, and credit. Then, the property will have to pass muster as well, via the appraisal process. Ultimately, whether you’re buying a home, refinancing to take cash out of your equity, or streamlining your existing VA loan to a lower interest rate, getting a VA loan doesn’t have to be an ordeal as long as you’re well prepared.