The U.S. Department of Veterans Affairs (VA) provides several options for eligible military members to obtain loans when buying or refinancing a home. In most instances, the VA does not provide loans directly. Instead, it backs loans by offering a guarantee to lenders ensuring that if the borrower is unable to pay the loan, the VA will cover the losses. That guarantee makes banks, credit unions and mortgage companies more comfortable with providing loans to service members who are seeking loans through the VA, allowing them to offer those service members more favorable terms.

VA Home Loan

If you want to buy a house, a VA Home Loan can help you make that purchase sooner.

Key advantages of the VA Home Loan include:

• The VA loan does not require a down payment, as long as the sales price is not higher than the appraised value.
• The VA loan does not require that borrowers have a minimum credit score, although some lenders may have their own requirements.
• The VA loan does not require private mortgage insurance (PMI), which is usually charged when
• a down payment is less than 20%.
• The VA loan limits how much borrowers can be charged in closing costs. Closing costs usually vary from 2% -5% of the purchase price.
• The VA loan allows closing costs, which are normally paid by the buyer to instead be paid by
• the seller.
• The VA loan has no penalty if borrowers pay the loan off early.

Service members do not need to be first-time home buyers to be eligible for the VA loan program, and even if the benefit has been used before, it can be used again. Most VA home loans may only be used in the purchase or refinance of a service member’s primary residence. The loans may be used to buy or build a home, buy a condominium in a VA-approved project, buy a manufactured home or lot and complete home renovations that include energy-efficient upgrades.

Below are a few of the specialty loan types that are included under the VA Home Loan Program:

Cash-Out Refinance Loan

If you own a home and want to borrow from the money you’ve invested in your home, you can take out a Cash-Out Refinance Loan. With this loan, you can refinance your current mortgage with a loan amount that is more than you owe on the house and “cash-out” the difference. Homeowners typically use cash-out refinance loans to make long-term investments, such as to pay tuition, pay off a credit card debt or to reinvest the money back into the house with home improvements/renovations.

Since this type of loan ultimately increases your loan balance, which will result in a higher mortgage payment, it should never be used simply as a way to get extra cash. It should instead be used to make smart investments that offer a reasonable return.

Interest-Rate-Reduction Refinance Loan (IRRRL)

The IRRRL is only used to refinance an already owned property. It cannot be used to purchase new property. Additionally, in order to refinance with an IRRRL, the original loan must also be a VA loan. The IRRRL is a VA to VA only refinance. You may want to consider this type of loan if mortgage interest rates have significantly decreased from the time your current loan was initiated, and you want to potentially reduce your mortgage payment by taking advantage of the lower rates. Many borrowers also choose this loan when they want to switch from a VA Adjustable Rate Mortgage (ARM)—where the interest rate may change from month-to-month, resulting in a constantly changing mortgage payment—to a fixed rate loan with a steady payment amount. While the IRRRL offers several advantages, borrowers should be aware of some important points highlighted below.

Advantages of the IRRRL include:

• No appraisals or underwriting package to assess credit worthiness are required.
• A new Certificate of Eligibility (COE) is not required.
• No out-of-pocket cost is required. All fees may be rolled into the new loan.
• Unlike other VA loans, the property does not need to be the service member’s primary residence. Borrowers need only certify that they previously occupied the home.

Keep in mind these points about an IRRRL:

• Unlike the Cash-Out Refinance loan, you may not receive any cash from the IRRRL.
• If refinancing from an existing VA ARM to a fixed rate loan, the interest rate may increase.
• The VA does not set a cap on how much service members can borrow; however, the amount it will guarantee is capped at $36,000.
• The Consumer Financial Protection Bureau and the VA caution Soldiers with VA home loans to be aware of unsolicited offers to refinance mortgages from lenders that may use misleading advertising and sales tactics. For more information on how to assess if a refinance offer is “too good to be true,” visit Blogs.va.gov; search: VA and Consumer Financial Protection Bureau.

Native American Direct Loan (NADL) Program

The NADL is a loan for eligible Native American Veterans who want to purchase, build or improve property that is on Federal Trust Land. The NADL may also be used to refinance a previous NADL to reduce the interest rate. Unlike most VA loan programs that simply provide a guarantee to outside lenders, under the NADL, the VA is the direct lender for the loan.

To qualify for an NADL, the applying service member’s tribal government must have a signed Memorandum of Understanding, which spells out how the program operates on trusted lands, on file with the Secretary of Veterans Affairs. Service members must also have a valid COE, occupy the property as the primary residence, be a good credit risk and have a high enough individual and/or household income to meet mortgage payments and specified other costs.

For more information on VA loans or to assess which loan best fits your needs, go to Benefits.va.gov/homeloans

By Staff Writer Pamela DeLoatch