For many military borrowers, VA home loans are the most convenient lending program in the market. This loan program has helped over 22 million military personnel since 1944. However, many borrowers who can qualify for a VA home loan aren’t aware of its importance and they don’t understand how VA home loans can help them.
In order to help veteran borrowers get familiar with VA home loans, I’ll demonstrate some important facts about VA home loan and highlight its benefits.
VA home loans are insured by the U.S. Department of Veterans Affairs (VA). Most people don’t understand this simple fact and they think that VA originates and grants loans to borrowers. VA doesn’t originate loans; it only insures them and provides a guarantee to lenders in case a homeowner defaults on the VA home loan. Due to insurance and guarantee provided by the VA, mortgage lenders offer 100 percent financing to veteran borrowers with no private mortgage insurance.
Unlike conventional mortgages and FHA loans, VA loans don’t have any minimum credit score requirements. This means that veteran borrowers can qualify for a VA home loan even with a poor credit score. Furthermore, VA doesn’t require borrowers to have a specific debt-to-income ratio. Many veteran borrowers, who aren’t able to qualify for conventional loans and FHA loans because of stringent debt-to-income ratio, may be able to qualify for a VA loan.
Veteran borrowers with outstanding charged off and collections accounts can also qualify for a VA home loan without paying them off. As you can see the requirements of VA loans are convenient. This is the reason why VA loans are considered one of the best mortgage programs in the United States.
Home buyers who wish to apply for a VA home loan should know about its qualification requirements. Members of National Guard and reservist, active military and retired military personnel are eligible for a VA loan if they meet the minimum service requirements. All veteran borrowers who want to get a VA loan must get a Certificate of Eligibility (COE) to verify to the lender that they meet the eligibility requirements on the VA home loan.
Spouses of military veterans, who died while on duty or because of a disability that resulted from military duty, may also qualify for a VA home loan. Military members can qualify for a VA loan after they have completed active duty for six months. National Guard and reservist members must wait for a period of six years before they become eligible for a VA home loan. However, if members of National Guard and reservist are transferred to or assigned to active full time duty, they become eligible after serving for 181 days. National Guard or reservists members who have served activity duty for 90 days continuously during wartime on foreign soil are also eligible for a VA home loan.
A lender won’t approve a VA loan if the veteran borrowers aren’t able to acquire a Certificate of Eligibility (COE) from the VA. If a veteran borrower is unable to get a COE from the VA, it means that they don’t meet the minimum service requirements on the VA loan and therefore, can’t qualify for the loan. Those borrowers who can’t qualify for a VA loan should consider the other viable loan option with lax requirements like the FHA home loan.
VA loan program is a gift from the United States Department of Veteran Affairs to the fine military personnel who willingly serve in the Armed Services and fight for their country. Private mortgage lenders love to originate and fund VA home loans because they are partially guaranteed by the VA in case the borrowers defaults on the loan. Because of this guarantee, VA home loans come with many benefits for the borrowers.
For instance, on conventional mortgage, borrowers must make a down payment uo to 20 percent to qualify for the loan. However, VA loan doesn’t require veteran borrowers to make any down payment. They can qualify for a VA home loan with a zero down payment.
Interest rates on VA home loans are also lower than conventional mortgages. Since VA home loans are insured by the VA, lender can offer lower interest rates to veteran borrowers. The military personnel who are eligible for a VA home loan can greatly benefit from the low interest rates on these loans. The VA doesn’t set the interest rates on the VA loan; rather the lender who is issuing the loan decides the interest rate. The interest rates on VA home loans may vary depending on the credit score of the borrower, loan-to-value ratio, debt-to-income ratio, down payment and other factors. A borrower who can put a down payment of at least 10 percent will get a lower interest rate than those borrowers who can’t make a down payment. Therefore, veteran borrowers who want to get a low interest rate on VA loan should make a down payment of at least 10 percent.
Another benefit of VA home loans is that they don’t require private mortgage insurance (PMI) unlike conventional mortgage where borrowers who finance more than 80 percent of their home’s value must pay for PMI. Furthermore, there are no closing costs on VA home loans.
Veteran borrowers often have low credit score which makes it hard for them to qualify for conventional mortgage. Borrowers with a poor credit score can get a VA home loan because there are no minimum credit requirements for this loan. There is also no requirement for debt-to-income ratio on VA home loans.
VA home loans, however, do have some requirements for a housing event like a short sale or foreclosure. The minimum waiting period for a VA home loan after a short sale or foreclosure is 2 years. This waiting period is less than that of other loans. After a housing event, a borrower must wait for 3 years to qualify for FHA home loans and USDA loans and they’ll become eligible for a conventional loan after four to seven years.
Another good thing about VA home loans that can help veteran borrowers is that borrowers aren’t required to pay their outstanding charged off and collections accounts to qualify for the loan.
Borrowers aren’t required to pay anything in closing costs and down payment with VA home loans. However, does that mean that there aren’t any types of costs associated with a VA home loan? No, that’s not the case. Closing costs do apply on purchase and refinance mortgage transactions. But, these closing costs should not be a major concern for borrowers as lender credit or seller concessions can cover them.
Buyers do, however, need some money to provide as advance when they are buying a home. Sellers require a check of earnest money that can range anywhere between $500 and $1000. Earnest money applies towards closing costs and down payment. Since borrowers aren’t required to make any down payment and lender credit or sellers concessions generally cover closing costs, earnest money is refunded to the home buyer at the time of closing.
Most companies require the borrower to pay for the cost of home appraisal upfront before ordering appraisal and this cost is normally under $500. Another cost that must be paid upfront by veteran buyers is of home inspections.
Appraisal is required by mortgage lenders to ensure there is sufficient collateral for a loan. Once purchase agreement has been made (signed by both the seller and the buyer) the lender will sent an appraiser. The appraiser will provide their opinion on home’s value and the borrower will be required to pay the fee of appraisal. Borrowers aren’t involved in the selection of the appraiser to ensure that the process stays impartial.
For a VA home loan, the appraisal will be completed by an appraiser approved by the VA to determine the value of the home and ensure it’s safe and sanitary for the borrower and their family. The appraisal will be reviewed by the lender once it’s complete to ensure that it meets the underwriting standards of the VA. An appraisal copy will be provided to the borrower.
An appraisal isn’t inspection of the home. A qualified home inspector should be hired by buyers for a thorough inspection of the home to check defects and maintenance issues.
VA although doesn’t require mortgage insurance, but there is a VA Funding Fee that must be paid once and this fee may be rolled into the total loan balance. The funding fee varies depending on the type of service and veteran and the down payment. Borrowers who are using the VA home loan to buy a home for the first time may be required to pay VA Funding Fee of 2.15 percent of the total value of the loan. However, veterans who able to put a down payment of over 10 percent may only have to pay a 1.25 percent funding fee. National Guard members and reservist members are required to pay 0.25 more than service members in the funding fee. Veterans who are using the VA home loan second time may have to pay a 3.3 percent funding fee. The upfront funding fee on VA loan is waived for disabled veterans whose disability is service related. The VA Funding Fee can be rolled into the loan so the Veteran does not have to pay for it in cash at closing.
The maximum amount that veteran homebuyers can borrower via VA home loan is $453,100 for 2018. However, in some high-cost areas of the United States, the limit on the VA loan is $679,650.
An important VA loan fact that veteran borrowers should know is that requirements of all lenders for this type of loan aren’t same. It’s true that there is no minimum credit score requirement and no down payment on VA home loans, but some lenders don’t issue loans to borrowers with poor credit score or demand a down payment from borrowers. They set additional requirements over those of VA.
The additional requirements of mortgage over those established by the U.S. Department of Veteran Affairs (VA) are known as lender overlays. Lender overlays make it hard for veteran borrowers to qualify for a VA home loan. VA lenders are free to add their own specific guidelines on top of what is required by the VA. The reason lenders establish overlays is because they want to reduce the risk on the mortgage. Although VA loans are guaranteed by the VA, but lenders will still suffer a partial loss if the borrower defaults on the loan.
Veteran borrowers with higher debt-to-income ratios or lower credit score are more prone to housing events like a foreclosure. Therefore, lenders establish overlays for mortgage requirements like debt-to-income ratio, loan-to-value ratio and credit score to manage risk. Some lenders don’t qualify a borrower if their credit score is below 620 or their debt-to-income ratio is more than 43 percent. Veterans can struggle obtaining a home loan when they have bankruptcy issues or late payments. Most of them will not have issues with obtaining a VA loan after bankruptcy.
For veteran borrowers, it can be hard to qualify for a VA loan with lenders who have set their own specific requirements. Therefore, they should find lenders who strictly adhere to the guidelines established by the VA. Just because one lender turns a veteran borrower down for a VA loan doesn’t mean that others will too. Some lenders follow the guidelines of VA and don’t have any overlays. Veteran borrowers with a dented credit and higher debt-to-income can qualify for a VA loan from such lenders.
If you have been denied a home loan or have any questions about real estate or mortgage please contact the author, Matt Herbolich, MBA, JD, LLM by phone or text at 786.390.9499 or by email at email@example.com. Mr Herbolich works when you work, so feel free to contact him any time.