Current and veteran service members, as well as their eligible spouses, can qualify to receive VA home loans for new homes. These mortgages have more competitive interest rates and can also come with other perks, such as no down payment. If you’re in the market for a new home, or you’re ready to refinance your current home, then it’s worth researching how VA loans work. Today, we’re taking a closer look at this form of financing and sharing the most important details you need to know, especially when it comes to VA home loans for new construction.
What Are VA Loans?
A VA loan is a type of home mortgage that’s guaranteed by the U.S. Department of Veteran Affairs (VA). The original Servicemen’s Readjustment Act, also known as the GI Bill of Rights, established the VA Home Loan Program in 1944.
Signed into law on June 22 by President Franklin D. Roosevelt, the goal of the program was to even the playing field for soldiers who were re-entering civilian life after serving in World War II. Today, it continues to help service members, veterans and their families pursue their dream of owning a home.
Determining VA Loan Eligibility
The following individuals are eligible to apply for a VA loan:
- U.S. veterans
- Active-duty military personnel
- Some surviving spouses
Interested home buyers can request a Certificate of Eligibility (COE) from the VA to show to their lender. A COE explains how an individual qualifies for a VA home loan based on their service history and duty status.
To receive a COE, the service member must not have left the military on a dishonorable discharge. They must also meet the VA’s minimum active-duty service requirements based on the time they served.
While these are the eligibility standards necessary to apply for a VA loan, keep in mind that they do not guarantee approval. All borrowers will still need to demonstrate that they can meet the lender’s credit and income loan requirements before they can receive financing.
Applying as a Surviving Spouse
A service member’s surviving spouse can apply for a VA home loan under certain conditions. To qualify, the spouse must meet the following qualifications:
- Has a service member spouse who died while on active duty or from a recognized service-connected disability
- Has not remarried at all, or remarried after age 57 or December 16, 2003
Note that spouses of service members who were prisoners of war (POW) or missing in action are also eligible to receive a VA loan if they meet all other conditions.
Where to Find VA Loans
Many different private lenders offer VA loans, including:
- Credit unions
- Mortgage companies
While most conventional mortgages require homeowners to apply a down payment toward the total cost of the sale, most VA loans do not carry this requirement. This is one of the top reasons why many eligible home buyers pursue this option.
Different Types of VA Loans
There are many types of loans offered under the VA loan program. These include:
- VA purchase mortgage
- VA cash-out refinance
- VA streamline refinance
- VA rehab and rehabilitation loans
- Native American Direct Loan (NADL)
A NADL is a type of VA loan that helps Native American veterans purchase a house on federal trust land. They can also use the funds to build, renovate, or refinance a home in those areas.
The VA Loan Limit
The limit on a VA loan refers to the maximum amount that a borrower can receive from a lender without having to make a down payment.
In 2020, the VA eliminated loan limits for current service members and veterans with access to their full loan entitlement. However, this doesn’t mean there isn’t a cap.
Loan limits are still in force for borrowers who already have a VA loan in place or have defaulted on a VA loan. In November 2021, the Federal Housing Finance Agency (FHFA) announced its conforming loan limits for 2022. To compensate for the rise in home values across the country, the FHFA raised its limit on loans backed by the VA.
The new limit is now $647,200 and applies to most counties in the United States. However, in certain high-cost areas, the limit can go as high as $1 million or higher.
If you have your heart set on a home but its sell price exceeds the county’s VA loan limit, you can still move forward with the purchase. The only caveat will be that you will have to make a down payment to bypass the limit.
The Benefits of VA Home Loans for New Homes
There are many benefits to pursuing a VA loan. Let’s take a look at a few of the main reasons why ths is a smart move.
No Minimum Credit Score
For many home buyers, the application process can be overly stressful due to one part: the credit score check. If your numbers aren’t where they need to be, then lenders may consider you too high of a risk.
If you have time before you buy, there are ways to build and improve your credit score before applying for a home mortgage. However, time is usually of the essence and it’s important to move while the market’s hot.
The good news? Unlike some loans, the VA does not set a minimum credit score for its loans. This makes it easier for borrowers to navigate around this obstacle, especially if all of their other financials are in place. Still, that doesn’t mean those numbers don’t matter.
Most lenders will establish their own minimum credit score standards, though they aren’t usually as high as those you’d find with a traditional loan program. This is good news for individuals who are working diligently toward growing their score by paying down their revolving credit, reducing credit card balances, and other tactics.
No Down Payment or PMI
As mentioned, most VA lenders will not require borrowers to make a down payment unless their home price exceeds the VA loan limit in that county. This is different from other loans.
For instance, most conventional loans require a down payment of 20%. If a borrower cannot make that payment, then they are required to pay private mortgage insurance (PMI) in addition to their other mortgage costs. With an FHA loan, borrowers usually pay PMI regardless of their down payment amount.
With a VA loan, there is no down payment or PMI to worry about.
Fewer Closing Costs
With most loans, closing costs for the buyer make up between 2% and 6% of the home’s total purchase price. This can be a substantial amount that cuts into your overall home budget.
Many of these fees, such as the lender’s origination fee, can be especially high. With a VA loan, that specific fee is limited to no more than 1% of the total loan amount. In addition, the VA also prohibits lenders from charging certain other types of closing costs.
Favorable Interest Rates
While it isn’t always the case, average 30-year mortgage rates are usually lower for a VA loan than an FHA or conventional loan. Though the market can ebb and flow, these terms are consistently competitive and some of the most favorable around.
Are There Drawbacks?
For many prospective home buyers, VA new home loans are an excellent resource. However, there are a few drawbacks to note. Let’s review the top three.
Loan Funding Fee
No, you won’t have to pay exorbitant closing costs, a down payment, or PMI with a VA loan. However, you will have to pay what’s known as a VA loan funding fee.
This is a one-time extra cost that the federal government has established. It simply protects the lender if you default on the loan and the property has to go into foreclosure.
There isn’t a one-size-fits-all funding fee. Rather, the price you’ll pay depends on how much you’re putting down on the loan, as well as if you’ve ever utilized a VA-backed loan before.
In 2022, the fee for a first VA purchase loan is 2.3% with zero down payment. Or, you can pay 1.65% with a down payment of between 5% and 9.9%, and 1.4% with a down payment of at least 10%. Borrowers can choose to pay the fee upfront or fold it into the loan.
Restrictions on Use
Borrowers who pursue VA loans can only use the funds to help purchase their primary place of residence. This means that you can’t use the loan to finance a second home or a vacation property.
An appraiser approved by the VA will visit the home that you’re eyeing and determine if it’s eligible for a VA home loan. The agency sets minimum property requirements to ensure that each investment is a sound one.
If the home doesn’t meet the VA’s safety standards or building codes, it may be ineligible for a loan.
Learn More About VA Loans Today
Now that you know how VA home loans for new homes work, are you ready to pursue one? Once you obtain your COE, the next step is to find the right lender. If possible, try to get pre-approved with a few VA mortgage lenders so you can compare their terms and compare their qualification requirements.
Then, it’s time to find the home of your dreams! If you’re looking to put down roots in Raleigh, NC, we can help you find that perfect property. Feel free to browse our available homes online and contact us if you have any questions.