The Ultimate Guide to the VA Loan

This is a recurring article that is constantly updated. Additional questions about the VA Loan? Shoot us an Email

Article Summary can be found at the bottom of this article.

What is the VA Loan?

The VA loan is a zero down mortgage with a low  interest rate. It is offered to active duty who have served for at least two years, reservists (see note), veterans and eligible surviving spouses. This loan is guaranteed by the VA. That’s financial jargon for saying the VA helps you get an amazing mortgage that will put you well ahead of where a regular mortgage would get you. Why is the VA Loan such an amazing financial tool?

Note

Reservists can use the VA Loan if they served for at least six years with 90 days of AD in that time.

Say you were in your 20’s and went to a bank to get a mortgage (not a VA) for a house that costs 200K. You recently read on MoneyGouge.com that buying a house and renting it out when you move to a new duty station will be a really good move. You also know that the sooner you do this the more you stand to gain as your wealth grows over time. Good for you, you’re making all the right moves.

Guess who doesn’t give a shit? The bank. Do you have $40,000 for a 20% down payment? If you don’t, you can put as little as 5% down but it will raise your interest rate and raise your mortgage payment through PMI. PMI (private mortgage insurance) literally means that you will pay around $100 extra a month just because you didn’t have $40,000 to put down.  You can play around with the PMI calculator at nerdwallet here. That extra payment doesn’t go towards paying down the house or anything-it’s just there.

Back to the example, maybe you just got back from deployment and you happen to have 40K on you when you walk into the bank. Good to go right? Not so fast…….. you will also need about 8K in closing costs. Closing costs are essentially transaction costs. Typically they are around 2-4% of the total costs of the mortgage. See our breakdown of Closing costs elements in Buying Your First House. So to avoid fees and an increase in interest rate you are going to need 48K out of pocket to make this happen. That’s a big number and imagine what it would be in a market like San Diego or Hawaii with the average home price being 3-4 times that.

Actually, you don’t have to imagine- just take 20% of the price and add the closing cost estimate from this calculator.

Okay, so lets say you have 48K on you and you’re motivated by the benefits of owning real estate. I hope you have a strong credit score. The average for a 25-30 year old is 628.

That’s not gonna cut it. You’re not going to get near the best interest rate. You know what sucks? Adding just .25% to a 30 year mortgage increases your cost by 4K over the life of the loan.

Now lets replay this with a VA Loan. You walk into the bank and you ask for a VA Loan for the same 200K house. Your out of pocket costs are going to be closing costs between 8-12K for the same house. Unless of course, you want to just add those to the total costs of the loan (new mortgage amount 208K) and then your total out of pocket costs is a whopping $0. Yeah, you just bought a house for nothing out of pocket. This is a big f*cking deal.

It is also much easier to qualify for the best interest rate (650 +) so you have access to a low interest zero down mortgage. This is almost impossible to obtain elsewhere. Your age and ability to come up with a down payment will not keep you from buying a house.

Where Can I Get A VA Loan?

Because the VA backs you up almost any bank offers the VA Loan. My personal recommendation (we have multiple  VA loans with them) is Navy Federal or USAA. Seriously, they are the best- easy to work with and unbelievably low rates. Game set match.

That being said the mortgage business is incredibly competitive. Lenders like the VA loan because there is less risk to them (because the VA guarantees it) and may offer you very attractive rates to gain your business over other banks. This is a great time to be looking for a mortgage. Rates are lower than anytime in the past 50 years. For reference, every .25% saved on the interest rate saves you $4,000 in interest over the life of the loan. If you want to shop around the best tool to do so is nerdwallet.

If you are planning on buying a new construction home you’re going to want to check out the mortgage company offered by the builder. Companies like DR Horton and Richmond American will cover your closing costs if you use their lenders. That means literally nothing out of pocket and nothing added to the loan. Their rates are competitive and the money that they give you for closing costs makes this a no brainer.

With a regular house you may be able to get some or all of the closing costs covered if the seller agrees. You should always ask (How to Buy Your First House) but it is not guaranteed.

How Much House Can I Buy?

Because we’re dealing with the VA this answer can be complicated so here’s a breakdown:

How big of a house could you buy and put zero down?

As of 2020 if you have never used the VA loan before there is no limit on your entitlement (what the VA will back.)For those who have already used the loan prior to 2020, your remaining eligibility is based on the government home limit for a given area.  There are two limits- regular markets and more expensive markets. As of 2021, the regular market limit is: $548,250. The more one for more expensive markets is: $822,375. If you purchase a home for this amount or less you don’t need to put any money down. This spreadsheet is from the VA and includes every county.

What if I want to buy a more expensive house than that?

If you’ve never used the VA loan you can buy as much as you qualify for. This doesn’t mean you should go and buy the largest house you qualify for. Being house poor is a real thing. It’s when a large amount of your income is spent on your mortgage. This keeps most of your money tied up in a house when it could have been used for other purposes.

What is the credit requirement? Depending on the lender a 620 credit score can allow you to qualify for a VA loan. For most lenders, a credit score of 650 or above is preferred.

If you’ve used some or all of your entitlement prior to 2020……. If you subtract the original loan amount from the entitlement in your county that is how much house you can buy and put no money down. For every dollar over the limit for the county, the VA will not guarantee it. That means you need to. So basically you are responsible for a 25% down payment on anything greater than the limit. I would argue this defeats the purpose of the VA loan but hey………do you.

Can I buy more than one house with a VA Loan?

 Look at you, starting to realize how good of a deal the VA loan is that one house is not enough for you. The answer is yes. This comes back to the previous conversation of loan limits. Say you bought that $200K house in a county with a standard ($548K) limit. You are PCSing to a new location and are absolutely allowed to use that other $348K entitlement to buy another $200K house for zero dollars down.

There are a few criteria you will need to meet to make that happen:

  • You need to have previous property on a 12 month lease with a security deposit. This will prevent your mortgage on that property from being counted against your salary but you will not be able to claim any rental income from it as income for the new mortgage application.
  • If you have two years of tax returns where that property is a rental property you can count the income…obviously this is difficult to achieve right away if you’re living in the place.
  • In some cases to get the income to count you will also need six months of mortgage payments in cash in your bank account.
  •  You will need to present your lender with a Certificate of Eligibility (this says how much you have left in entitlement)

The Certificate of Eligibility login will require a CAC or account info and then: Manage Your Benefits>Housing>Certificate of Eligibility for a Home Loan

Note

Using a second VA mortgage can increase your funding fee costs, making your closing costs or loan value higher. You can offset this with a 5% down payment on your second house or selling your original home as part of the transaction. The fee is shown in the table of the next section.

What’s The Catch?

The VA Loan is one of best wealth building tools out there. The first rule of building wealth is not to lose money. The biggest downsides to the VA Loan come from not using it properly. Here are three common ways it can get you in trouble:

The VA home inspection: When you buy a house the bank does an inspection to make sure it’s lending for an asset that’s actually worth the amount on the loan. The amount they say the property is worth is called the appraisal value. If the value it appraises is less than the amount you will purchase it for, you will be responsible for 100% of the difference out of pocket. This rarely happens, and can happen in any mortgage appraisal but can be more of an issue with a VA loan because you weren’t intending on placing much money down to begin with.  Also, the VA inspection is more stringent than a normal inspection, so buying a fixer upper is probably a no go.

The VA Funding Fee: The VA charges a fee for it’s guarantee. The fee rates are in a chart below. This fee shows up in your closing costs and can add to the amount of the loan. There are two main groups of veterans who are exempt from paying the fee:

  • Those who have received the Purple Heart on or before the closing
  • Surviving spouses of a veteran who died in service or from a service connected disability

Fortunately, that is a small subset of the VA Loan eligible population.

Down PaymentFunding Fee(% of loan)
First VA Loan<5%2.3
5-10%1.65
>10%1.4
Subsequent VA Loans<5%3.6
5-10%1.65
>10%1.4
VA Loan Fee Structure

Loan to Value Risk:  Realistically, you are going to have to find where your comfort level is with this. You may be paying zero down but the loan amount may be significantly higher than the cost of the house. This is because the closing cost can be added to the total loan amount.

Money Gouge Tip

Unless you are buying a new construction home you’ll want to have money for maintenance cost. These are usually unexpected and can be quite expensive. This starts on closing. We recommend around $5,000. This should be considered when thinking about paying closing costs. If you re going to pay closing costs, consider whether you will have some money left over when something breaks. If you already have 3-6 months worth of savings separate of this money then you should be covered. However, you will likely need to increase that savings because you now have more liabilities and your monthly expenses may have increased.

That being said, if you have 10-15K on hand (not including emergency savings) you are probably better off paying some closing costs or putting a little down. Ideally, this is better than paying for it with borrowed money which increases your monthly mortgage costs and costs a lot in interest over 15-30 years. It will also give you the freedom to sell the house more quickly and either break even or make money. 

With mortgage rates at historical lows this is more of a grey area than ever because it really doesn’t cost you much in interest. As rates increase the costs of borrowing money will make it an easier decisions to pay closing costs to reduce the cost of the mortgage. Either way, you have more freedom if you put a little money down or into closing costs than if you put it all in the costs of the mortgage. You will need to strike a balance between the increased flexibility or having more cash on hand.

Bonus: Can you use the VA Loan for Multifamily Real Estate?

All the advantages of multifamily real estate plus the advantages of the VA loan? Uncle Sam is pretty much handing you the keys to your financial future at this point.

Here’s the crazy thing: This is totally possible..

You can buy up to a quadplex (4 unit building) with a VA loan. You still need to live in one of the units within 60 days of the purchase to be eligible though. The building also needs to pass the VA inspection which requires each unit to have:

  • Independent utility lines with separate shut offs
  • Each unit must be private and accessible
  • Property may have common facility for laundry

There are some complications you will need to overcome as well.

First, multifamily real estate costs much more than single family and is often priced on cash flow. The limit for multifamily in 2020 is:

  • $981,700 for a quadplex
  • $789,950 for a triplex
  • $653,550 for a duplex

Are you going to be able to qualify for a mortgage that big? Obviously, the reality is that the cashflow from the other units will cover the costs of the mortgage. However, you are not going to be able to get the rental income considered unless you meet the qualifications listed in the Can I Buy More Than One House? section of this article. Qualifying outright for mortgages this large is difficult for most military members. If you don’t qualify you can still work together and combine your eligibility with another VA Loan eligible person. 

Multi family investing with the VA Loan is not for the faint of heart and is best for the most driven individuals. The payout can be awesome, but it will take a solid amount of work to make the vision come to life. You will also decide whether you want to be a landlord, which can be a part time job in and of itself.

Summary

The VA Loan is an amazing tool that allows you to buy a house with zero down. That doesn’t mean you should though, there are some serious considerations to borrowing everything.

You can get a VA Loan at any bank but: you should consider the home builder lender if buying a new construction house because they may pay closing costs. Our personal recommendation is Navy Federal Credit Union. After tons of research this is where we got our VA Loans because they really are the best.

There is no zero down limit for those who have not used VA Loan eligibility prior to 2020.

The minimum credit requirement is 620. But if you want to have the best rates and full loan amount available your credit will need to be 650 or above.

You can buy more than one property with the VA Loan but: there are criteria you will have to meet as listed in the relevant section of this article. The VA funding fee will also be larger if you’re going zero down on that second property. Lastly, the costs of your combined houses must fall within your eligibility or you’ll have to put down 25% of the amount greater than that.

No free lunch, but it’s damn close:  Risk with the VA Loan are all derived from misuse. Considerations before going with the VA Loan include funding fee, loan to value and the more stringent home inspection.

You can buy multifamily real estate with a VA Loan: Combining the benefits of multifamily real estate and the VA Loan is capitalism at it’s finest. But it does not make sense for everyone. For those with families, the space of a single family home is likely more desirable than a unit in a multifamily complex. There is also the issue of qualifying for a much larger loan due to the higher costs of  multifamily property and the responsibilities of being a landlord. The VA Loan is a great tool for almost any property but combining it with the cash flow of multifamily takes the advantages even further. You get out what you put in.

Note

You will need a statement of service when applying for a VA Loan. This is just a document that verifies your service. There is no official template. Here is one that I’ve used before that works. Just fill it out and send it to your admin office.

Additional questions about the VA Loan? Shoot us an Email

Leave a comment and we'll answer you shortly!

%d bloggers like this: