How the Whole VA Loan Process Works

For many borrowers, applying for any kind of mortgage may seem daunting. But, when broken down, this rundown of 6 steps to getting a VA loan is easy to understand.

1. Select a VA-approved Lender

On the surface, it might appear that any lender will do. However, if you dig a little deeper, you may discover that not all lenders are the same. First, only lenders approved by the U.S. Department of Veterans Affairs can originate VA mortgages. Secondly, some lenders focus primarily on conventional loans, while others concentrate almost exclusively on the VA loan program for military clients. Using a VA specialty lender with extensive knowledge about the VA loan process vs. a lender who only funds a few VA mortgages a year may translate into an easier and quicker loan process.

2. Obtain a Certificate of Eligibility (COE)

An experienced lender can help you obtain what’s called a Certificate of Eligibility (COE). The COE will prove that you meet initial eligibility standards for VA loan benefits. It will also let the lender know how much entitlement you can receive, which is the amount the Department of Veterans Affairs will guarantee on your VA loan. To get your COE, you’ll need to give your lender a bit of information about your military service. Usually, a COE can be acquired online instantly through a lender’s portal or through the eBenefits portal on the va.gov website. Those servicemembers or surviving spouses whose COEs cannot be obtained online will have to get theirs by mail. A VA lender or the VA can help direct you to the right resource for your specific situation.

3. Go House Hunting and Sign a Purchase Agreement

The fourth step is usually one borrowers enjoy because they get to look at homes they might consider buying. Working with a real estate professional who specializes in the VA process can help you get the most out of your benefits. This is true because the VA allows certain fees and costs to be paid by the seller (if both you and the seller agree), and a knowledgeable agent will know this and help you negotiate seller-paid fees. Once you’ve got a signed purchase agreement, you can move forward in the VA loan process.

4. Pre-Qualify for Your Loan Amount (optional)

Pre-qualifying is important, but not required. By choosing to complete this step you can save some time and potential surprises later in the process. To pre-qualify for your loan amount, you’ll have a candid conversation with your VA loan professional about your income, credit history, employment, marital status and other factors. Giving your lender complete details during the pre-qualifying step can help prevent surprises later during underwriting.  The pre-qualifying step can also reveal areas that need improvement before you can be approved, such as credit or debt-to-income ratio.  While a prequalification letter gives you a ballpark price range for house hunting, it does not guarantee that you will be approved for a loan, and your lender will later have to verify the information you provide. To get a loan requires later final approval by underwriting once all documents have been received and reviewed (see Step 5).

5. Lender Processes Application and Orders VA Appraisal

A signed purchase contract is the document you’ll need to finish your initial application. Once your lender has the contract, they will order the VA appraisal. Here again, not just any appraiser will do. Only a professional who is certified to perform appraisals to VA standards can evaluate the home being considered for VA financing. The VA appraiser will make sure the price you’ve agreed to pay for the home corresponds with the current value. Another very important part of the VA appraisal is to inspect the home to make sure it meets the VA minimum property requirements (VA MPRs). However, the VA appraisal does not take the place of a home inspection, which focuses on code violations, defects and the condition of the property. While many borrowers have heard horror stories about the length of the VA appraisal process, the Department of Veterans Affairs gives the appraisers 10 days from order to completion barring extenuating circumstances. While you’re waiting for appraisal documents, you’ll be busy submitting documents of your own to your VA-approved lender to show you have the ability to qualify for the loan. If the home passes appraisal for value and VA minimum property requirements, and it’s verified by the lender that you qualify for your loan, the underwriter will give his or her stamp of approval.

6. Close on Your Loan and Move In

After being approved by the underwriter, all that is left to do is close and move in. During closing, the property legally transfers from the former owner to you. Closing is a step that requires you to sign documents that confirm you understand and agree to the terms of the loan. You will need to provide proof of homeowners insurance and, if required, pay closing costs. Once you’ve signed all your closing documents, you’ll get the keys to your new home.

While these steps may not happen in the order above or be a required part (such as prequalification)*, they represent the typical process for the applicant in obtaining a VA purchase loan. Your lender may need to take other steps.

VA Loans: Understanding Occupancy Rules

Most veterans say that some of the more confusing aspects of qualifying for a VA home loan are the occupancy requirements. This usually stems from when a service member gets their PCS orders and has to move. Will they be able to rent the house? Will they be able to get a second VA loan at their new location? Are there penalties or fines for not meeting this requirement?

While it can seem daunting, understanding the occupancy requirements of a VA loan is actually quite simple if you break it down.

1. What is “reasonable time”?

VA loan occupancy requires that the veteran move into the home within a “reasonable time.” But what does that mean? The VA requires that the borrower move into the home within 60 days after the VA loan closes.

As you’ve read, there are exceptions to that rule. The 60-day rule may be waived if you meet both of the following conditions:

  • There is a specific event in the future that will make it possible for you to occupy the property on that date
  • You certify that you will occupy the property at a specific date after your VA loan closes

Generally, the VA does not make exceptions if you want to set an occupancy date for more than 12 months after your loan closes.

2. Primary residence requirements

You must certify that you intend to occupy the property as your home. Second homes and investment properties do not qualify for a VA loan.

3. Spouse occupancy

The occupancy requirement is satisfied if your spouse will be living in the home while you are on active duty or otherwise unable to personally occupy the home. A spouse may also satisfy the occupancy requirement if the veteran cannot due to long distance employment issues.

4. Deployed active duty service members

If you are deployed after purchasing your home, your occupancy status is not affected by the deployment. You are considered to be in a “temporary duty status” and are able to provide a valid intent to occupy certification. This requirement is met regardless of whether or not your spouse will be occupying the property while you’re deployed.

5. Dependent occupancy

A dependent child may occupy the home while their parent or parents are deployed or on active duty away from the home. It’s important to note that just by having the dependent in the home does not satisfy the requirement. You must take additional action by having your attorney or dependent’s legal guardian make the occupancy certification. Please keep in mind that many lenders will not recognize dependent occupancy as satisfying the VA loan occupancy requirement.

6. Retirement occupancy

If you will be retiring within 12 months from the date of your loan application, you must include a copy of your application for retirement and proof of requirement stability. Although the VA requires moving in to the home within a “reasonable time,” retiring veterans may be able to negotiate a later move-in date. You have the option to apply for a delay (up to 12 months) in the occupancy requirements.

7. Failure to meet requirements

If you do not occupy the home as agreed under the terms of your VA loan, what happens next is at the discretion of the Department of Veterans Affairs.

Even though it seems as if there are a lot of “if, then” rules to define occupancy, it’s really not as complicated as it appears. The VA works hard to help borrowers understand how to fit their situation into these guidelines, and help set you up for success. Understanding your rights and benefits is something that a qualified Home Loan Expert is more than willing to help you with. Remember to always work with a lender who is skilled and specialized in the nuances of VA loans.

8. Delayed occupancy

Typically, a delayed occupancy results from property repairs or home improvements. If extensive changes are being made to the property that prevent you from occupying it while the work is being completed, your occupancy requirements will be considered “delayed.” However, you must certify that you intend to occupy the property as soon as the work is completed.

New Rules for VA Loan Limits

The VA home loan benefit is one that most consumers would be thrilled to have; a mortgage loan with no down payment, no VA-required mortgage insurance, and the lower interest rates commonly associated with government-backed home loan programs.

The VA loan program has weathered many difficult times including the housing crisis of 2008, for much of the agency’s existence, the fundamentals of the VA mortgage program have not seen dramatic changes.

VA loan program rules are often adjusted or modified by legislation, changes to the program itself, and to accommodate changes in the industry.

Of the most significant changes to the program, some of the biggest come not as a result of legislation directly aimed at helping veteran mortgage loan applicants, but as a consequence of legislation addressing a need among Vietnam-era service members. One of those was the Blue Water Navy Vietnam Veterans Act of 2019.

VA Loan Program Changes: A Summary

The “Blue Water Act” makes some important changes to the VA home loan program. Some of them are alterations to help pay for some of the measures required by the act, others are procedural changes, while still others are fundamental alterations to the basic structure of VA loans. The changes include:

    • Purple Heart recipients are now exempt from paying the VA loan funding fee the same as those who receive or are entitled to receive VA compensation.
    • No upper loan limit on VA mortgages as of 1 January 2020.
    • An increase in the VA Loan Funding Fee for all non-exempt borrowers.

Agent Orange And “Herbicide Exposure”

The need for the legislation arises from large numbers of claims associated with Agent Orange or other herbicides that may have been used during the Vietnam War.

Agent Orange was used during the conflict as a means to destroy crops, forest cover, and expose North Vietnamese troops (also known as the NVA or North Vietnamese Army) to American forces and those of the Army of the Republic of Vietnam (ARVN).

Agent Orange, and likely other herbicides in use at the time in-theatre, contained a chemical known as dioxin which is known for causing birth defects, cancer, neurological, and even psychological problems.

To give you an idea of how wide-ranging the use of Agent Orange and dioxin was at this time, History.com reports more than 20 million gallons of Agent Orange were sprayed on portions of Vietnam, Cambodia and Laos for a full decade between 1961 and 1971.

The use of Agent Orange created medical and psychological issues for a high volume of cases on both sides of the Vietnam conflict.

What Is The Blue Water Navy Vietnam Veterans Act of 2019?

This legislation, signed into law in 2019 and effective starting in January of 2020, created relief for veterans with medical conditions presumed to have been caused by Agent Orange or “herbicide exposure” during service in Vietnam.

Specifically, “…a veteran who, during active military, naval, or air service, served offshore of the Republic of Vietnam during the period beginning on January 9, 1962, and ending on May 7, 1975, shall be considered to have been incurred in or aggravated by such service, notwithstanding that there is no record of evidence of such disease during the period of such service.”

This means that a veteran who files a VA medical claim “on or after” September 25, 1985, and before January 1, 2020, for a disease (covered by the legislation) and the claim “was denied by reason of the claim not establishing that the disease was incurred or aggravated by the service of the veteran” may be entitled to VA compensation for that claim.

This is true unless “there is affirmative evidence to establish that the veteran was not exposed to any such agent during that service.”

In short, those who served in Vietnam filing certain types of VA medical claims are presumed to have had exposure to Agent Orange or other herbicides and would have those claims approved for financial compensation from the VA.

How The Blue Water Navy Vietnam Veterans Act of 2019 Affects Your VA Home Loan Benefit

The Blue Water Navy Vietnam Veterans Act is also known as House Resolution 299 and addresses a variety of Vietnam-era, Korean War-era, and Gulf War-era issues associated with VA medical claims. But the law also includes other items in the bill including a removal of VA loan limits for approved transactions, and an increase in the VA Loan Funding Fee.

Removal Of The VA Loan Guaranty Limit – No VA Loan Limits!

The Blue Water Navy Vietnam Veterans Act Act amends existing VA program guidelines with changes designed to “expand maximum guaranty amounts for purchase, construction, and cash-out refinance loans greater than the Freddie Mac conforming loan limit”.

That means that if you apply for a home loan using your VA loan benefits, you can apply for a loan for the most expensive home you can find (assuming you have full VA home loan entitlement) and the VA guaranty of the loan is 25% of the loan amount with no down payment.

Essentially, there is no upper limit on the price of the home you wish to purchase using a VA loan as of the law’s implementation date of 1 January 2020. However, if the asking price and the appraised value of the home do not agree, the VA loan amount will be based on the lower of the two amounts.

The borrower cannot be required to proceed with the loan in such cases because when the VA loan amount is lower than the asking price, the borrower must pay the difference in cash and cannot finance that amount. That’s something a borrower may choose to do, but VA loan rules prohibit forcing the borrower to buy the home and pay that difference out of pocket.

VA borrowers who wish to use their entitlement to apply for home loans “equal to or less than $144,000 regardless of Freddie Mac” are not affected by the rule changes and should expect their transaction to be handled in the traditional way.

Loan limits still apply for those who have more than one active VA loan, only partial entitlement available or those who have defaulted on a previous loan.

The Purple Heart Exemption For The VA Loan Funding Fee

The VA Loan Funding Fee is an expense associated with VA mortgages which most veterans must pay unless they receive or are eligible to receive VA compensation for service-connected medical issues.

Thanks to House Resolution 299, those who still serve on active duty and were awarded the Purple Heart are now also exempt from paying the funding fee (as of 1 January 2020) the same as those who receive or are entitled to receive VA compensation for their service-related conditions.

The Resolution also provides for the first increase in the VA loan funding fee program in some time.

A Higher VA Loan Funding Fee Starting In 2020

The VA loan funding fee is on a sliding scale with the lowest fees reserved for first-time VA borrowers, and higher fees for those who have used VA loans before. Prior to the new law, VA loan funding fees for active duty military members buying for the first time were set at 2.15%, with a higher fee for subsequent use set for the same active duty buyer set at 3.3%.

Under the new law, the VA loan funding fee for an active duty first-time borrower is increased to 2.30% and the subsequent use fee set at 3.60%. Other VA loan funding fees are increased too; higher fees may apply for VA refinance loans and other transactions.

What You Need To Know About The VA Loan Limit Rules

VA loan rules under the “Blue Water Act” do remove the loan limits and permit a borrower to potentially buy a house with any price. But VA loan rules cannot compel the lender to approve the transaction in cases where the loan officer feels the borrower cannot realistically afford the mortgage. It will still be required of the borrower and lender alike to prove the loan is affordable and sustainable.

Borrowers will still need to financially qualify for the VA home loan, and lenders must still prove on paper that the loan is affordable. Just because some of the VA loan program requirements have changed does not remove the lender’s need for due diligence.

An Added Benefit: VA Loan Closing Costs

Besides the advantage of requiring no down payment for qualified VA borrowers, there’s also a distinct advantage for the borrower regarding closing costs. The veteran is limited to the types of closing costs that may be paid, helping the veteran save money at the closing table. But if there are costs associated with a VA mortgage and the veteran isn’t allowed to pay for them, who does?

Types of Closing Costs

A common way to remember which costs a veteran is allowed to pay for is to remember the acronym ACTORS. That stands for:

  • A  Appraisal
  • C  Credit Report
  • T  Title Insurance
  • Origination Fee
  • R  Recording Fee
  • S  Survey

These are common charges found on most every VA mortgage and while they can vary a bit by amount; these fees are the ones that can be paid for by the veteran. But what about these charges?

  • Attorney
  • Underwriting
  • Escrow
  • Processing
  • Document
  • Tax Service

These fees, and others, are example of charges that the veteran is not allowed to pay. Even though the VA lender requires a processing and an underwriting fee in order to approve the VA loan, the veteran may not pay for these charges and any other fee deemed “non-allowable.” So if the veteran can’t pay them, who does?

The Agent Might

A real estate agent representing the buyer can contribute toward closing costs in the form of a credit at the closing table. Real estate agent commissions are paid for by the seller of the property and typically represented as a percentage of the sales price.

When a real estate agent brings a buyer to a seller and there are two agents, the listing agent and the selling agent, the commission is typically split between both agents. If the sales commission is six percent, each agent gets three percent each for their services. Some states don’t allow the practice of an agent contributing toward a buyer’s closing costs so check to see if it’s okay in your area.

The Seller Can

Non-allowed closing costs can be paid by the seller of the property and is typically the initial method of dealing with such charges. As part of a sales contract, the buyer can say, “We’ll pay you $200,000 for this home as long as you pay for $3,000 in closing costs.”

Paying for a buyer’s closing costs is considered a seller concession, and is limited to four percent of the sales price of the home. If a home sells for $200,000, then the seller can only pay $8,000 of the buyer’s costs.

Such concessions can be used to pay for the buyer’s VA funding fee, loan costs, property taxes and insurance among others.

The Borrower Can

The seller can pay, an agent can pay, the lender can pay but the borrower also has one more way to pay non-allowable closing costs. Recall that an origination fee is an allowable charge. An origination fee is represented as one percent of the loan amount.

In lieu of charging the borrower non-allowed fees, the lender can charge a one percent origination fee instead of itemized non-allowable charges for things such as attorney or underwriting charges.

Closing costs on VA loans are indeed a different breed compared to FHA or conventional loans, especially with regard to who is responsible for any particular fee. If there are any questions about who pays for what, those questions should be asked directly to your loan officer. VA costs can be confusing, there’s no need for them to be.

The Lender Can

The lender can offset part or all closing costs with a lender credit. Lenders can offer a credit to a borrower by adjusting the borrower’s interest rate. It’s like paying a point to get a lower interest rate but in reverse.

For example, a VA borrower applies for a 30 year fixed rate VA mortgage and is offered a 3.75 percent rate. The lender offers the buyer a lower rate if the buyer pays one point, or one percent of the loan amount. The choice is 3.75 with no points or 3.50 with one point.

In the other direction, the lender can offer 3.75 percent with no points and 4.00 percent with one point credit to the borrower. On a $200,000 loan, the lender can increase an interest rate by about one-quarter of one percent and the borrower gets a $2,000 credit toward closing fees.

Facts for Veterans: What is IRRRL?

IRRRL stands for Interest Rate Reduction Refinancing Loan. You may see it referred to as a “Streamline” or a “VA to VA.” These loans are typically used to reduce the borrower’s interest rate or to convert an adjustable rate mortgage (ARM) to a fixed rate mortgage.

As you’d expect, IRRLs typically must result in an interest rate reduction. Otherwise, why refinance? However, there is an exception: when refinancing an existing VA guaranteed adjustable rate mortgage (ARM) to a fixed rate the interest rate may increase.

Besides that, there are a few other facts anyone considering an IRRRL should know.

First, no appraisal or credit underwriting package is required by the VA. You should be aware, however, that lenders may require an appraisal and credit report anyway.

Second, a certificate of eligibility is not required. Your lender can use the VA’s e-mail confirmation procedure for interest rate reduction refinance in lieu of a certificate of eligibility.

Further, an IRRRL can be done only if you have already used your eligibility for a VA loan on the same property you intend to refinance. It must be a VA to VA refinance, and it will reuse the entitlement you originally used. You may have used your entitlement by obtaining a VA loan when you bought your house, or by substituting your eligibility for that of the seller, if you assumed the loan. If you have your Certificate of Eligibility, take it to the lender to show the prior use of your entitlement.

Another important fact: an IRRRL may be done with “no money out of pocket” by including all costs in the new loan or by making the new loan at an interest rate high enough to enable the lender to pay the costs. (Remember: The interest rate on the new loan must be lower than the rate on the old loan unless you refinance an ARM to a fixed rate mortgage).

Veterans are strongly urged to contact several lenders. There may be big differences in the terms offered by the various lenders you contact.

Some lenders may contact you suggesting that they are the only lender with authority to make IRRRLs. Remember – Any lender may make you an IRRRL.

Some lenders may say that VA requires certain closing costs to be charged and included in the loan. Remember – The only cost required by VA is a funding fee of one-half of one percent of the loan amount which may be paid in cash or included in the loan.

You must NOT receive any cash from the loan proceeds.

The occupancy requirement for an IRRRL is different from other VA loans. When you originally got your VA loan, you certified that you occupied or intended to occupy the home. For an IRRRL you need only certify that you previously occupied it.

The loan may not exceed the sum of the outstanding balance on the existing VA loan, plus allowable fees and closing costs, including funding fee and up to 2 discount points. You may also add up to $6,000 of energy efficiency improvements into the loan. But NOTE: Adding all of these items into your loan may result in a situation in which you owe more than the fair market value of the house, and will reduce the benefit of refinancing since your payment will not be lowered as much as it could be. Also, you could have difficulty selling the house for enough to pay off your loan balance.

Some lenders offer IRRRLs as an opportunity to reduce the term of your loan from 30 years to 15 years. While this can save you a lot of money in interest over the life of the loan, if the reduction in the interest rate is not at least one percent (two percent is better) and lots of new loan costs are rolled into the new loan, you may see a very large increase in your monthly payment – an increase bigger than you can afford.

Still need more information on IRRRLs and refinancing a VA loan? The next step is to shop around for lenders, compare no-obligation rate quotes between lenders and against your current loan, and then discuss your options. We’ll match you with up to five lenders, making the shopping part of the refi quick and painless.