• How does the VA loan program work?

    By Brandon Cornett | © 2013 All rights reserved

    Question: "I'm leaving the military soon and want to use the VA loan program to purchase my first house. How does the VA home loan work, and how do I apply for one?"

    This program is available to most military members and their families. The Department of Veteran Affairs does not actually give loans to borrowers, but rather insures the loans made by direct lenders. Some if the homeowner were to default (stop paying) on the loan later on, the lender would be covered for their losses.

    This government insurance is a key part of how VA loans work. Without it, the program would not exist, and lenders would not be willing to finance up to 100 percent of the home. On a conventional mortgage loan that's not insured by the government, you would have to make a down payment of at least 5 percent. But with a VA home loan, you can buy a house with no money down. It's the government insurance that makes this possible.

    There are many lenders who participate in the program, ranging from your local bank to the big national companies like Wells Fargo. While most lenders participate in the program, some do not. So you need to ask about it before you take the time to complete a mortgage application.

    How the VA Program Works

    That's how the VA home loan works, in a nutshell. Here's how to apply for the program. Keep in mind that the process varies slightly from one borrower to the next. These are the basic steps you'll go:

    • First, you need to make sure you're eligible for the program. You can find a complete list of eligibility requirements on the VA website (here's the link). I'm not going to repeat it all here. No point in recreating the wheel -- just click the link.
    • Next, you need to apply for a certificate of eligibility. When it comes time to actually apply for the loan, the lender will want to see your certificate. I applied for a VA loan back in 2002 and had to send a written request for my certificate. These days, you can apply for it online. There are instructions on the VA website for doing this.
    • Once you've obtained your certificate of eligibility, you can apply for a VA home loan through any mortgage lender that participates in the program (which is most of them).
    • I recommend getting pre-approved for a mortgage early on in the process. This is when the mortgage lender looks at your credit, income, debt, and other factors to determine how much they're willing to give you. Make it clear that you want to use the VA loan program, so they can guide you through the proper steps.
    • Next, you will start looking for a house. This is referred to as the house hunting process.
    • When you find a home you want to buy, you would make a purchase offer. If the sellers accepts your offer, you would go back to the same lender that pre-approved you to get a final approval.
    • The lender will send an appraiser to determine the value of the home you are buying. They want to make sure it's worth the amount you have agreed to pay. Remember, it's the lender who is making the major investment up front -- not you. If the home appraises for an amount equal to or greater than the agreed-upon purchase price, you're in good shape.

    Watch Out for Mortgage Lender "Overlays"

    Sometimes, mortgage lenders will impose their own guidelines on top of the VA's guidelines. This adds another layer of (stricter) criteria you must meet. These "guidelines on top of guidelines" are referred to as overlays. When you apply for a VA loan, you should ask the lender if they have any overlays.

    Here's an example of mortgage overlays in action. This borrower was using a VA home loan to buy a house. He started out with Bank of America and was almost to the finish line. A few days before closing, the loan officer came back and said he would need additional cash reserves in the bank, in order to close the deal.

    This came as quite a surprise to the borrower, because the VA program does not have any cash-reserve requirements. (Cash reserves are extra money you need to have in the bank at closing. In this case, the bank said the borrower would need six months worth of mortgage payments in the bank as reserves.) This is not a VA requirement -- it's a lender requirement. Thus, it's an overlay.

    Long story short, the borrower got turned down by Bank of America. Two weeks later, they were approved by a second mortgage lender that did not have any cash-reserve overlay requirements. Lessons we can learn from this: Make sure you ask about overlays up front. If one lender has them, you shouldn't be discouraged. Make some more phone calls, or send some emails, and you'll eventually find a VA lender that doesn't have overlays.

    This is how the VA home loans usually work, but the process is not written in stone. Some of the earlier steps (such as obtaining the certificate and getting pre-approved) can be done in either order, as long as they get done.

    My advice is to read through all of the basic information offered on the VA website, and then get a copy of your eligibility certificate. After that, you can start talking to lenders and shopping for a house.

    This article answers the question: How does the VA home loan work, and how do I apply? I hope you have found this article helpful, and I wish you well in your home-buying adventure.

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