VA loans sound like they come right from the VA, but they don’t. The VA does not make direct loans to borrowers. They set the guidelines and they guarantee the loans, but the lender funds it. When you apply for a VA loan, you’ll likely find different requirements between lenders if you shop around. Because the lender funds the loan, they can decide how strict they want to make the requirements to reduce the risk of default.
How the VA Loan Works
When you apply for a VA loan, you apply with a
VA approved lender, not the VA. The VA approves and licenses certain lenders to write VA loans. You can’t go to just any lender – it has to be one approved by the VA.
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You’ll complete an application and provide the proper documentation. The loan officer can review the information and provide a pre-approval if needed. Most borrowers take this preliminary step before shopping for a home. The pre-approval lets you know if you qualify for VA financing and the conditions you must satisfy.
During this time, you’ll also have to secure your Certificate of Entitlement. You can do this on your own by getting in touch with your
regional VA office or heading to the ePortal. You can also have the VA approved lender secure the certificate for you. It only takes them a few minutes to get it.
Once you have your pre-approval or approval, the lender continues underwriting the loan. They will order an appraisal on the chosen home. The appraiser’s job is to make sure the home meets the VA’s guidelines. Don’t worry, they aren’t anything too crazy, – they just need to make sure the home is secure and stable for you.
The VA’s Role
The VA doesn’t have a large role in any part of the loan process. The VA lender does not have to send the loan to the VA for approval. As long as you use a licensed and approved VA lender, that lender has the ability to approve your loan.
What the VA does do, rather than make direct loans is guarantee the loan. They allow lenders to provide you with 100% financing. This means no down payment. The VA promises the lender they will pay 25% of the loss if you default on the loan. This is how lenders are able to provide 100% financing to borrowers with credit scores as low as 620 and debt ratios as high as 43%.
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VA loans have the lowest default rate out of any loan on the market, though. The VA attributes the success to their focus on
the disposable income they require. They base the amount you need on the cost of living in your area and the size of your family. The larger your family or the highest the cost of living in your area, the more money you need.
Funding the VA Loans
The VA is a government agency, so where do they get their funds? A majority of it comes from the funding fee the VA charges. You’ll only pay this fee once on your loan and you won’t pay a monthly insurance fee.
The 2.15% that most veterans pay to purchase or refinance a loan helps the VA pay for the few loans that do default. It also helps to reduce any cost that would get passed on to the taxpayers. This is what helps the VA stay in business, guaranteeing loans for veterans.
The actual funds for the VA loan, however, come from the lender. The VA does not fund the loans. The only money they provide during a transaction is in the event that a borrower defaults. Otherwise, the VA doesn’t play a role in your loan. The lender you apply with funds the loan and the associated loan servicer handles your loan for the rest of the term.
The VA plays a role in your loan, but it’s an indirect role. They do not make direct loans to borrowers. They can help you find a lender and understand your benefits. But, when you are ready to apply for a loan, you’ll have to find a VA approved lender.
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