1. Certificate of Eligibility (COE)
The first step in the VA loan process is to get a hold of your Certificate of Eligibility (COE). The COE is your evidence or your military service. As you might imagine, eligibility depends on the category of your service and that your discharge was not dishonorable. There’s a handy chart available to compare service categories on VA’s site.
In terms of obtaining the COE itself, there are three ways:
- You can go online via VA’s eBenefits portal.
- Recommended: A lender can get it for you; they have access to the online VA-guarantee home loan system.
- If you’re a really patient person, you can have your your COE snail mailed to you after filling out VA Form 26-1880 Request for a COE. Then send the form and the required supporting evidence to VA.
2. Pre-Qualification / Pre-Approval
Pre-qualifications are basically a lightweight, thumbnail sketch of what kind of loan you may be able to get. You can sort this out over the phone; a quick conversation with a loan officer. You briefly describe your credit and employment history and financial profile (income, debt and savings) and the loan officer offers a prediction about what kind of loan you might get. None of this is set in stone. It’s more of a working hypothesis.
Pre-approvals are more formal and full of important, verified details like your credit score and employment. Thus, they are more useful in the real world.
Neither the pre-qualification nor pre-approval is required, though the later is highly recommended. Pre-approvals will help you navigate the mortgage loan process smoothly. Here’s why…
- Taking a closer look at your financial profile can uncover the broadest number of loan program options
- Real estate agents will often only show homes to people who are pre-approved
- You will be in a better position to negotiate with sellers, especially in “hot” markets where multiple offers on properties are common
3. Home Shopping
Your real estate agent will help you find a home and negotiate an offer. There are a couple of VA-specific things to do when making a purchase offer.
VA Escape Clause
What happens if you make an offer on a home but the appraisal comes in lower? You’ll probably want out of that contract (or you can pay the difference out of pocket, which most people don’t want to do). That’s why VA has mandatory escape clause for purchase offers. Here’s what it says:
“It is expressly agreed that, notwithstanding any other provisions of this contract, the purchaser shall not incur any penalty by forfeiture of earnest money or otherwise or be obligated to complete the purchase of the property described herein, if the contract purchase price or cost exceeds the reasonable value of the property established by the Department of Veterans Affairs.”
VA Financing Contingency
Make the purchase agreement contingent upon loan approval, meaning you are off the hook if for some reason you don’t qualify for financing. It’s a way of saying, “I’ll buy the house if I get a loan.” Your real estate professional can help you craft a purchase offer that includes a release from the contract and returns your earnest money.
4. VA Loan Application
Your loan officer will ask a bunch of questions and fill out a loan application. They’ll pulls a credit report if not already done during a pre-approval. They’ll provide you with a Loan Estimate which summarizes the expected costs of transaction.
Then you’ll get a checklist of items to gather up and send back such as:
- Tax returns from past two years
- Pay stubs from past two months
- Name and address of employers for the past two years
- Income statement and balance sheet from your business if you are self-employed
- Banking account numbers (checking and savings)
- Social security number
- Information regarding any real estate you currently own
- Information about existing credit extended to you (student loans, auto loans, credit cards, etc.)
- Approximate value of your personal property
5. VA Loan Processing
As you return paperwork back to your loan company, a Loan Processor (the person who organizes and packages the loan file) starts verifying things like employment (calling HR departments) and income (pay stubs and bank statements, etc.) An appraisal is ordered to verify the property value and that it is safe for habitation. A lot of wheels are in motion at this point.
Processing is typically the longest part of the transaction. Loan processors are really a central piece of a hub and spoke model; they make a lot of phone calls and information requests and everything flows back to them. They produce a loan file which contains the guts of the deal; the property, the amount of the loan requested and the borrower’s financial profile plus all the supporting paperwork. This bundled up file is then sent to an underwriter.
Underwriting is where the rubber hits the road in term of decision-making, i.e. loan approval or rejection. Underwriters are kind of like the parents in the room; cool dispassionate folks only interested in following the rules while everyone else is having fun and excited.
They zero in on the borrowers credit and capacity to repay the loan. They make sure the property meets VA guidelines and will sufficiently collateralize the debt. They’ll look to see the the title on the property is free and clear of any liens. And they’ll make sure all the other VA guidelines are met.
7. VA Appraisal
After you’ve made an offer and the seller has accepted it, your lender will order a VA appraisal. An appraiser is chosen from a pool of qualified appraisers; the VA has a rotational assignment system in order to prevent abuse and fraud. There was a time in the real estate business when incentives were promised to appraisers who would assign inflated home values to properties. That’s now illegal. If anyone you work with — from a real estate agent to loan officer — suggests that they work with an appraiser and can guarantee a home’s value will come in at a certain price, do yourself a favor and bail out of that relationship.
8. Home Inspection
The VA does not require a home inspection, nor do they manage a pool of inspectors. However, home buyers are strongly encouraged to order an inspection in order to identify any issues with the home’s condition. Your real estate agent can also help you put a contingency clause in your offer — that the deal is only good based on a satisfactory inspection. Homes are more often than not the biggest single investment that people make. It’s hard to imagine pouring your hard-earned money into something without the peace of mind that a home inspection brings to bear.
9. Interest Rate Lock
You can lock your interest rate at any point during the loan process after you apply. The timing of which will depend on marketing conditions. Your loan officer and you can make that decision together.
Underwriters issue loan approvals and rejections. Quite often approvals will also come with conditions; things that need to be cleared up before a final approval is made. These are called conditions.
Borrowers may be asked to produce additional or missing documentation. Alternative documentation may be requested to support the existing paperwork in the file. Underwriters might ask for additional verifications or explanations for a particular anomalies. If they spot an error they’ll ask for a correction.
A closing is a meeting, typically a Title/Escrow company’s office. This is when and where the loan documents (or “docs”) are signed and notarized. There will be several documents and closings can take awhile. Take your time and don’t be shy if you have questions along the way. You will be signing quite a few things, most notably:
- Promissory Note
- Deed of Trust
- Closing Disclosure
After the closing, the lender gets the escrow file back and verifies the contents. Then funds are wired from the lender to the escrow company where they are disbursed. Lastly, a representative from the title company records the Deed with the county offices (such as a county courthouse) in which the property resides.