VA Loans and How They Work
The VA loan is a home-mortgage option available to United States Veterans, Service Members and not remarried spouses. VA loans are issued by qualified lenders and guaranteed by the U.S. Department of Veterans Affairs (VA).
The VA loan started in 1944 through the original Servicemen's Readjustment Act, also known as the GI Bill of Rights. The GI Bill was signed into law by President Franklin D. Roosevelt and provided Veterans with a federally guaranteed home with no down payment.
Since the inception of the VA loan, more than 24 million Veterans have become homeowners through the VA loan.
Being a Veteran doesn't make a homebuyer automatically eligible for a home loan. Those interested must meet both the VA's military service requirements and your lender's credit and income requirements to be eligible.
The VA loan provides a handful of home financing options. Most popular is the home purchase loan, but there are also mortgage options for:
As previously mentioned, the VA doesn't lend any money but relies on mortgage companies to actually make the loans.
The VA's role is to provide a guaranty. Think of the guaranty as an insurance policy for the lender. The guaranty means the lender is protected against loss if you or a later owner fails to repay the loan. The guaranty replaces the protection the lender typically receives by requiring a down payment.
The VA loan guaranty is typically 25 percent of the loan amount.
A common misconception with the VA loan program is the amount of "red tape" involved. However, this isn't the case. VA loans work similarly to any other mortgage option.
Let's take a closer look at the basic steps involved when using a VA loan to purchase a home.
To start the VA loan process, contact a VA-approved lender either online or via phone. If you're unsure where to start, we have a list of the top VA lenders here.
A home loan specialist will ask basic questions about your financial history and homebuying goals to determine if a loan suits the borrower right now. Prequalification helps borrowers and lenders establish an immediate sense of eligibility and start building a foundation for the next stage, which is loan preapproval.
The main difference between prequalification and preapproval is typically the verification of information - meaning you need to obtain and submit documents proving things like service status, income, employment and cash reserves.
Preapproval makes sure the numbers add up and give you a precise idea of your purchasing power and what you can afford.
With the current state of technology, this takes less time than you think. Most lenders provide online portals and more accessible methods of getting you preapproved than even ten years ago.
Preapproval is one of the most important steps, as it gets you the preapproval letter. Including a preapproval letter with an offer often helps sweeten the deal, as the home seller sees you have financing lined up and can afford the home.
Once a borrower has a preapproval letter, it's time to find a real estate agent and look at homes. Some military buyers may want to seek out veteran-friendly real estate agents that better relate to military families' particulars and understand the VA loan program thoroughly.
It's a thrill for military borrowers to pick their home, but there's still some work to do.
In this step, you need to make an offer and agree on a price with the seller. In tight lending markets, it's often a good idea to include an offer letter to tell the seller about you and why you want the home. It's not always necessary, but it can be a nice touch if there are multiple offers on the table.
Before the loan closes, the VA lender orders an independent appraisal of the property. Along with assessing the property's value, the VA appraisal helps evaluate whether the property meets the VA's property condition standards.
If there are problems (e.g., water damage, termites, a leaky roof, etc.), they may need to be addressed before the loan process can move forward. Every situation is different.
An underwriter then closely combs through the entire VA loan package. The underwriter's job is to confirm all information and make sure all documentation is in place.
If anything is missing or is not on par with VA or lender guidelines, the underwriter requests what's needed to make it right. When the underwriter approves a VA loan, there are only a few things for the borrower to do: prepare for your closing day, when you'll sign a lot of final paperwork and get the keys to a new home.
† ICB Solutions is a division of Neighbors Bank, which is an affiliate of Mortgage Research Center, LLC dba Veterans United Home Loans.
