There are many different home loan types on the market and borrowers might wonder about the pros, cons, and eligibility requirements of each. That means they’ll likely ask you, their mortgage loan originator, some questions.
Here at wemlosm, we want to not only provide full solution loan processing but provide mortgage industry knowledge and education to our customers. We put together this guide to answer some of the common questions that borrowers may ask their MLO when considering a VA loan.
Of course, you’ll always want to do your own research. This is high-level information from the U.S. Department of Veterans Affairs, the best source of current information for VA loans.
What Is a VA Loan and How Does It Work?
VA loans fall into two categories: VA direct and VA-backed. With a VA direct loan, the U.S. Department of Veteran Affairs is the mortgage lender.
With a VA-backed home loan, borrowers use private lenders, but the U.S. Department of Veteran Affairs guarantees a portion of the loan. That means there’s less risk for the lender and the borrower may get better terms as a result.
There are four main VA loan types that borrowers may qualify for:
- Purchase loan: A VA-backed purchase loan may offer better terms than a loan from a private lender.
- Cash-out refinance loan: A VA-backed cash-out refinance loan allows borrowers to cash out the equity in their home in exchange for a new home loan with different terms (that is also usually larger than their current loan).
- Interest Rate Reduction Refinance Loan (IRRRL): For homeowners who already have a VA loan, this allows the borrower to replace the current loan with a new one with different terms (i.e., to take advantage of a lower interest rate or move from a loan with an adjustable or variable interest rate to a fixed rate).
- Native American Direct Loan (NADL) program: This program is for veterans who are Native American or their spouse is a Native American and offers a loan to buy, build, or make improvements to a home on federal trust land.
Most VA loans do not require a down payment. Borrowers usually do not have to pay for extra costs such as processing fees, pest inspections, and real estate broker/buyer fees. Origination (lender) or appraisal fees are sometimes waived, but are often limited or paid at closing instead of upfront.
Who Is Eligible for a VA Loan?
Veterans, service members, and their surviving spouses may be eligible for a VA loan to buy, build, improve, or refinance a home.
Potential borrowers will still need to meet credit and income requirements and eligibility varies based on service history, duty status, character of service, and possibly other factors as well.
What Is the Difference Between a VA Loan and Conventional Loan?
A VA loan is either directly funded by or backed by the U.S. Department of Veteran Affairs.
A conventional loan is not backed by any government agency. It’s the most common loan type and is funded by a private lender. The lender assumes all of the risk if the borrower defaults, so a conventional loan may require private mortgage insurance if the borrower doesn’t put at least 20% down.
What Is a VA Loan Funding Fee?
There are exceptions, but for the most part, the VA funding fee is a one-time payment on a VA-backed or VA direct home loan. The funding fee is a percentage of the total loan and the amount of the fee varies based on the type and total of the loan.
It can be paid as one lump sum or added to the loan and financed.
Click here to see the current VA funding fee rate charts.
What Is a VA Loan Certificate of Eligibility?
A Certificate of Eligibility (COE) is required for a VA loan. It shows the lender that the borrower qualifies for a VA loan based on their service history and duty status.
Learn more about the specific requirements for a COE here.
Are you a mortgage loan originator who works with borrowers interested in VA loans? Sign up for a demo today to see how wemlo℠ can help make your loan processing more efficient and streamlined than ever before!