The VA gives loans to military members with far more favorable terms than the conventional housing market offers. VA loans allow buyers to get some of the lowest rates on the market with $0 down and relatively low credit score requirements.
Naturally, this makes the VA loan a highly sought-after product. Let’s look at how civilians can get in on VA loans when buying a home.
Can a Civilian Get a VA Loan?
Generally, civilians cannot get VA loans. VA loans are exclusively for active-duty military members, Veterans, and spouses of deceased or disabled Veterans.
However, there are two exceptions:
- Civilians can get VA loans through the VA’s Vendee financing program
- Civilians can get a VA loan by assuming someone else’s VA loan
The Vendee financing program allows prospective homeowners to buy foreclosed properties that the VA bought from the lenders—with many of the same benefits as the VA loan program. VA loan assumption allows buyers to buy a property with a VA loan straight from the buyer with the loan terms intact. Let’s dive into each option in a bit more detail.
VA Vendee Financing
The VA Vendee financing program is your best option if you’re actively searching for a VA loan. Here’s how it works.
When a Veteran can’t make their VA loan payments, the lender may foreclose on their home. In these cases, due to the Department of Veteran Affairs’ guarantee to the lender, the VA will obtain these properties from lenders and subsequently resell them directly.
The VA refers to these foreclosed homes as VA Real Estate Owned (REO) properties once it takes ownership of them.
The VA then sells these homes to Veterans and non-Veterans alike, offering typical VA financing perks to anyone buying these homes from the REO market.
How the VA REO Market Works
Selling previously owned VA properties is a tall order, so the VA outsources these properties to Vendor Resource Management (VRM). You can use their website to browse properties in the VA Vendee financing program and apply for mortgages with the VRM Lending branch.
A civilian owner who buys through the Vendee financing program will receive the same benefits as Veterans. These benefits include the following:
- Lower interest rates than average
- Lower credit score requirements
- No down payment requirements for non-investment purchases
- Sellers can contribute up to six percent of the sale price to help buyers with closing costs
- No Private Mortgage Insurance (PMI)
- No pre-payment penalties
The VA mandates a 2.25% funding fee on all Vendee financing program homes. Since sellers can contribute up to six percent of the sale price to assist buyers with closing costs, you may have the opportunity to negotiate and include the funding fee as part of a seller concession.
Using Vendee Financing for Investment Properties
One of the most significant advantages of the Vendee financing program is the ability to get the benefits of a VA loan on an investment property. Using an REO property as an investment property also comes with a few extra benefits.
First, there’s no limit to the number of properties you can purchase as investments. Second, you can finance these houses with a down payment of as little as five percent, one of the lowest down payment requirements for a rental property.
There is one serious requirement, though—this can’t be your first attempt at real estate investing. The VA will require you to have experience managing rental properties before using an REO property as an investment opportunity.
» MORE: See today’s refinance rates
Assuming a VA Loan
Another way civilians can access the benefits of a VA loan is by assuming an existing VA loan. VA loans are assumable, meaning that homeowners with existing VA loans can sell their home to a borrower while keeping the existing loan terms intact. Through this method, buyers can get low locked-in rates with several VA loan benefits, even without being eligible for a VA loan under normal conditions.
Assuming a VA loan can offer many benefits, such as:
- Lower rates (potentially lower rates from a better past housing market)
- No down payment requirement
- No pre-payment penalties
- No PMI
- Significantly reduced closing costs—though you will need to pay .5% of the loan purchase price for the VA funding fee
However, you’ll need to find someone who’s willing to give up their VA loan, which can be difficult. When a civilian assumes a VA loan, the Veteran’s ability to leverage the VA loan for any future home purchases becomes limited, as they have to keep their entitlement tied to the loan until the civilian borrower pays in full.
The lender of the original loan will also need to approve the assumption. You’ll need to meet any of their income and credit score requirements to do this.
You can start the VA loan assumption process by getting a real estate agent to help you find homes for sale with assumable VA loans. You can also find VA assumable loans by using specialized sites such as TakeList.com or by searching/posting in local ads.
If there aren’t any homes available on the REO market in your area or you can’t find someone who is selling their home with a VA loan, you won’t be able to get a VA loan as a civilian. However, other government-backed loan options, such as an FHA loan or USDA loan, may be available to you—and like the VA loan, they’re designed to make homeownership affordable.