The VA Loan Process

Purchasing your next home through the VA is very similar to funding through any other loan program. However, there are some minor differences, such as documents and records required to submit your loan. The purpose of this article is to take the VA buying process, break it down, and provide advice that will hopefully simplify the journey towards financing a new home.

  1. Find Out if You are Eligible to Receive the VA Home Loan. Find a real estate agent to work with, preferably one who is used to working with homebuyers who use the VA loan. See the article titled “VA Loan Eligibility” to learn about additional requirements necessary to see if you qualify for a home loan through the VA.
  2. Find a Lender. Similar to choosing a real estate agent, you’re going to want to find a lender who not only participates in the VA program, but who is knowledgeable about the process. This would be a good place to “pre-qualify” for your loan, or see how big a loan you can afford. Take discount points, closing costs, and other fees into account, and shop around before you choose a lender so you can find interest rates that fit comfortably into your budget.
  3. Obtain Your COE. Personally, I think a veteran should do this as soon as they decide that they want to fund through the VA. Your COE outlines your VA benefits and verifies whether you meet the requirements necessary to receive a VA loan. I believe this should be done before you actually get the process started simply because sometimes it takes a while for the VA to send you your COE. If you find that it’s taking more than two weeks to receive your COE, contact your state senator and request that he contacts the VA and intercedes on your half in order to speed up the process.
  4. Find a Property that You Wish to Buy, and Sign a Purchase and Sales Agreement. This is the fun part! Work with your real estate agent to find a home and negotiate a sales contract. Make sure that the contract includes a “VA Option Clause.” Here’s an example: “It is expressly agreed that, notwithstanding any other provisions of this contract, the purchaser shall not incur any penalty by forfeiture of earnest money or otherwise be obligated to complete the purchase of the property described herein, if the contract purchase price or cost exceeds the reasonable VALUE OF THE PROPERTY established by the Department of Veterans Affairs. The purchaser shall, however, have the privilege and option of proceeding with the consummation of this contract without regard to the amount of the reasonable value established by the Department of Veterans Affairs.” You may also want to include a clause that allows you to escape the contract without penalty in the event that you do not get approved for the VA loan.
  5. Apply for the VA Loan. Work with your lender to find out which documents and records are required, and fill out a loan application. Typically, the lender will request items such as your COE, DD-214, the purchase and sales agreement, driver’s license, pay stubs, W-2, federal tax returns, and bank statements.
  6. Loan Processing: At this point, the lender looks at all of the documents that you have sent them and they order a VA Appraisal. The appraiser will send your lender an appraisal review, and from there the lender will determine whether the loan should be approved or denied.
  7. Closing: Congratulations, your loan was approved! The lender will assign a title company or an attorney to conduct the closing. The individual delegated to perform the closing will determine a date and time for the property to be transferred.

Financing a new home can be a stressful and overwhelming process. However, the process only goes as quickly as you make it. Be sure to have your COE and your DD-214, along with other lender-specific documents ready to send to your lender as soon as possible so that your loan application is submitted quickly. I hope this article made the whole process seem a little less daunting, and that your experience with the VA is a pleasant one!

Explaining the Funding Fee

Explaining the Funding Fee

As I’ve mentioned before, while the VA Home Loan is a great asset for veterans looking to buy their own home, it also has its quirks. All loans have fees attached to them, but the VA Loan is the only program with a funding fee. Typically, all veterans who use the VA Home Loan benefit have to pay a funding fee. However, there are some exceptions, as well as other fees that should be taken into account when you’re budgeting your money to purchase a new home.

The VA implemented the funding fee as part of the Home Loan Guaranty program in order to reduce the cost of the program to taxpayers. Now before you think of it as a hassle, it’s important to know that your funding fee contributes back to the loan program to assist other veterans who use the VA Home Loan. Additionally, the funding fee is just a small price to pay when you aren’t required to make a down payment or pay for monthly mortgage insurance. The fee is a percentage of the loan, and it varies depending on the type of loan and your military category, whether you’ve made a down payment, and whether it’s your first time funding through the VA, or you’re a subsequent loan user. The funding fee for second time users who do not make a down payment is slightly higher, as is the funding fee for reserve and National Guard veterans. You have the options to pay the funding fee in cash or finance the fee, but the fee has to be paid by closing.

Most of the veterans who fund their home loans with the VA have to pay the funding fee; however, there are some exceptions. You do not have to pay the fee if:

  • You are a veteran who is receiving VA compensation for a service-related disability,
  • You are a veteran who would be eligible to receive VA compensation for a service-related disability if you did not receive retirement or active-duty pay, OR
  • You are the surviving spouse of a veteran who died in service or from service-related injuries.

Additionally, there are other fees that you should be aware of, such as lender fees and closing costs. The lender sets interest rate, discount points, and closing costs, not the VA. These rates vary from lender to lender. Some of the closing costs are up to the buyer to pay; however, the seller usually picks up various closing costs on behalf of the buyer. It’s important to speak to the seller and delineate who will pay which costs. Below is a table outlining various costs and the party designated to pay for it.

VA Home Loan Fees Party/Parties Responsible for Payment
VA Appraisal May be paid for by the buyer or the seller/ Cost may be shared
Credit Report May be paid for by the buyer or the seller/ Cost may be shared
State and Local Taxes May be paid for by the buyer or the seller/ Cost may be shared
Closing Costs The seller can contribute to closing costs; however, the seller can’t pay more than 4% of the concessions such as payment of pre-paid closing costs, the funding fee, payoff of credit balances or judgements against the buyer, and temporary “buydowns”. The 4% Rule excludes the payment of discount points.
Termite Report Generally the responsibility of the seller, unless the loan is for a refinance in which case the borrower pays for the report.
Commissions, brokerage fees, or “buyer broker” fees N/A

 

Understanding Your DD-214

 

At the end of your military career, your command sends you off with several copies of your separation paperwork, known as your DD-214. A DD-214, also known as Discharge from Active Duty or a Certificate of Release is the official record of a veteran’s service. It is REQUIRED to collect benefits such as unemployment, the GI Bill, retirement, and your VA Home Loan. It’s CRUCIAL that you keep multiple copies of your DD-214 in a safe, yet easily accessible location. If you happen to lose your Certificate of Release, you can obtain extra copies of it from the Veteran’s Administration; however, it is a lengthy process that can take months.

Though every service member receives a brief explanation of the DD-214 prior to separation, many don’t give it second thought, only to be puzzled by the format and coding. Though every branch is different, the format is relatively similar:

  • If you look at sections 1-6, you’ll notice that these boxes contain personal identification information, such as name, branch of service, SSN, pay grade, date of birth, etc.
  • Blocks 7-9 contain home of record and duty station information, and box 10 displays your SGLI coverage information (if applicable).
  • Section 11 explains what your specific job or jobs were, and how much time you spent in that specialty.
  • Box 12 is your Record of Service. It explains show much total service time was accrued by type of service (Net Active Service, Foreign Service, Sea Service, etc.), and box 13 lists all awards, medals, and achievements during your time in service.
  • Section 14 details all military education, such as A-School, C-School, Security Reaction Force Basic (SRF-B), Firefighting, AIT, etc.
  • Most service members ignore block 15, because it’s generally the same for all service members.
  • Box 16 explains how many paid leave days you had left when you were separated, this money should have been given back to you, BAH and BAS included, a couple days after you received your DD-214.
  • Block 17 outlines whether you received the medical and dental exams required prior to your separation.
  • If you look at section 18, you’ll notice that it explains any additional remarks, including the reason for your separation.
  • Boxes 19a and 19b are the military’s best way to reach you in the event that the need to do so, and 21 and 22 are signatures verifying that all information listed is true and correct.
  • Sections 23-29 explain the type of separation, whether your service merited an honorable discharge or an “other than honorable” discharge, and whether you qualify to re-enter again if you choose to do so

Every military branch has its own set of separation codes that outline the character of your separation and specifically why you were separated. When you make the decision to finance your home through the VA Home Loan, not only do you need your DD-214, but you need to know if the separation code on your DD-214 qualifies you for the VA Home Loan or not. Having a good understanding of your separation paperwork will save you lots of time, and save you even more frustration.

Debunked: Myths and Misconceptions that will Drive a Veteran Away from a VA Loan

The VA home Loan is one of the most beneficial home buying programs on the market. However, despite over 60 years of success, several myths and misconceptions prevent millions of Veterans and Servicemembers from utilizing this benefit. The biggest problem is that so many veterans aren’t aware that they have access to the home loan benefit! I’ve had this discussing with Dustin Mack, a loan specialist here at Generation Mortgage. Let’s discuss some common myths and misconceptions about the VA Home loan!

“The Home Loan Benefit is a lousy loan product!

Dustin: “That’s simply not true. Many veterans leave the service with little to no money saved up. The VA home loan provides a low interest rate with no money down.”

“You need great credit to qualify for a VA Home Loan, right?”

Dustin: “Incorrect! Your credit should be average to good (620-640) with minimum to no outstanding payments or delinquencies.”

“VA loans take forever to close!”

Dustin: “A VA loan takes no longer than any other loan. The process only goes as quickly as you make it. Communicate with you lender, and get a clear outline of what documents they need from you. The sooner you bring in the necessary paperwork, the sooner your loan is submitted for review.”

“No down payment? That sounds risky to me!”

Dustin: “Actually, VA loan conditions conform to state and federal codes. Additionally, the VA loan has the lowest foreclosure rate out of all of the other loan programs. Loan Guaranty employees track all of the VA Loans in the country, and they are notified whenever a veteran is more than 60 days late on their last payment. Home Guaranty then gets in touch with the veteran and his/her lender to discuss options other than foreclosure. This has helped thousands of veterans keep their homes.”

“Can I only use the VA Loan once?”

Dustin: “You can use the VA loan benefit as many times as you’d like, as long as your previous VA loan is paid off.”

“The VA appraisal is a nightmare!”

Dustin: “The VA appraisal is very reasonable! The property has to be move-in ready. No caved-in ceilings or floors. The VA just wants to ensure that veterans and their families move into a healthy, structurally sound environment.”

“You can’t get a VA loan if you’ve had a foreclosure or bankruptcy in the past.”

Dustin: “Typically, a buyer should wait 2-3 years after a foreclosure or a bankruptcy. However, some veterans were able to bypass the two year waiting period and finance a home just one year after filing for Chapter 13 Bankruptcy!”

“VA Loans carry high rate notes.”

Dustin: “VA rates are just as low as FHA, if not lower.”

“I don’t have a full two years of service, therefore I’m not qualified.”

Dustin: “This may be possible, depending on the type of service. According to VA guidelines, a servicemember is eligible for the VA Home Loan Guaranty if:

  • He/She has served a minimum of 90 days active duty during wartime.
  • He/She has served a minimum of 181 consecutive days of active duty during peacetime.
  • He/She has served less than the minimum time required, but he/she was discharged due to service-related disabilities.
  • He/She was discharged from active duty service under honorable conditions.
  • Servicemembers of the Reserves or the National Guard are eligible for the VA Loan after six years of service in the Selected Reserve, or if he/she was discharged before their six year mark due to a service-related disability.
  • The surviving spouse of a deceased veteran may be eligible for VA Loan benefits if the veteran died in service, or if the veteran died due to a service-related disability.

Any one of these myths could hold a veteran back from familiarizing themselves with their home loan. My advice? You’ve worked hard for it, use it!

VA Loan Eligibility

When you completed basic training and dedicated your life to serving your country, you became eligible for a wide variety of benefits! One of the most advantageous benefits you qualify for is the VA Home Loan. The VA Home Loan is provided by private lenders, such as banks and mortgage companies. The VA guarantees a portion of the loan, allowing the lender to offer more favorable terms to the borrower.

Even though the VA Home Loan was created specifically for veterans, not all veterans are eligible for the VA Home Loan. There are a few requirements that must be met before a veteran is approved for a VA Home Loan. You may be eligible for a VA Home Loan if you meet one or more of the following conditions:

  • You have served 90 consecutive days of active service during wartime, OR
  • You have served 181 days of active service during peacetime, OR
  • You have more than 6 years of service in the National Guard or Reserves, OR
  • You are the spouse of a service member who has died in the line of duty or as a result of a service-related disability.

An “Other Than Honorable Discharge” will disqualify a service member from receiving a VA Home Loan.

Obtaining your Certificate of Eligibility (COE) is a crucial step for veterans who are seeking to become recipients of the VA Home Loan. Your COE is a formal document that explains what VA entitlements you possess, through the Department of Veteran Affairs. Typically, you can request a copy of your COE and receive it within a couple weeks; however, if the process seems to drag on longer than anticipated, a phone call to your state senator should get the ball rolling.

Even though the VA Home Loan doesn’t have a specific minimum income requirement, the VA does require that the applicant has a reliable, stable form of income that will cover the homebuyer’s monthly expenses, such as the mortgage payment. Additionally, the VA requires that the applicant makes enough income so that after home expenses are paid for, the homebuyer still has money left over for basic necessities, such as food, transportation, etc., referred to as residual income. This is explained as DTI, or Debt to Income Ratio. Your DTI is a percentage of your total monthly debt divided by your total monthly income.

Another factor that is important to take into consideration is that even though the VA has its own set of requirements, private lenders who finance the mortgage have their own entirely separate list of conditions such as credit and income requirements to be met before they can approve you for a loan. When you choose a lender you may be interested in financing with, be sure to have your loan originator thoroughly explain the company’s requirements, as well as the approval process.