The VA Home Loan Offers Veterans Unrivaled Advantages
The VA loan program is the greatest potential mortgage for individuals who qualify.
Supported by the U.S. VA, loans are established by the U.S. Department of Veterans Affairs to enable active-duty military people, veterans, and certain other groups to become homeowners at a reasonable rate.
The VA loan has several advantages, including no down payment, no mortgage insurance, and relaxed eligibility requirements.
Here is all the information you need to apply for and utilize a VA loan.
Top 10 VA Loan Advantages
1. No Down Payment Is Required With a VA Loan
Most home loan options need a down payment of at least a modest amount. VA mortgage loans are an exception.
Instead of paying 5%, 10%, 20%, or more of the home’s purchase price in cash upfront, you can finance up to 100% with a VA loan.
The VA loan is a genuine zero-down payment mortgage option.
2. No Mortgage Insurance Is Required for VA Loans
Lenders often ask you to pay for mortgage insurance if you make a down payment of less than 20%.
This insurance, known as private mortgage insurance (PMI) for conventional loans and mortgage insurance premium (MIP) for FHA loans, would safeguard the lender if you default on your loan.
VA mortgages do not demand a down payment or mortgage insurance. Thus, a VA-backed mortgage is highly inexpensive both initially and over time.
3. The Government Guarantees VA Loans
There is a reason why the VA loan has such advantageous terms.
The federal government guarantees these loans, which means that a portion of the loan will be reimbursed to the lender if you cannot make monthly payments for whatever reason.
This guarantee encourages and enables private lenders to offer extraordinarily favorable terms on VA loans.
4. You May Compare VA Loan Interest Rates
The VA neither originates nor finances VA loans. They are not government-guaranteed loans. Furthermore, the VA does not determine mortgage rates for VA loans.
Instead, VA loans are made available through U.S. banks, savings-and-loan associations, credit unions, and mortgage lenders, each of which determines its own VA loan rates and costs.
This means you may browse and compare loan offers while selecting the best VA loan that fits your budget.
5. VA Loans Prohibit Prepayment Penalties
A VA loan will not restrict your ability to sell the property throughout the loan’s duration.
There is no prepayment penalty or early departure charge, regardless of when you want to sell your house.
In addition, there are no limits on refinancing your VA loan.
You can refinance your current VA loan into a new VA loan under the agency’s Interest Rate Reduction Refinance Loan (IRRRL) program, or you can convert it to a non-VA loan at any time.
6. VA Mortgages Come In Several Forms
A VA loan may have either a fixed or variable interest rate. In addition, you can utilize a VA loan to purchase a house, condo, newly constructed home, mobile home, duplex, or other property types.
Alternatively, it can be used to refinance an existing mortgage, make repairs or additions, or make the property more energy-efficient.
The decision is yours to make. A VA-approved lender can help you decide.
7. VA Loans Are Easier to Qualify For
Similar to other mortgages, VA loans need particular documents, a good credit history, and adequate monthly income.
However, compared to other lending programs, the rules for VA loans are typically more liberal. This is achievable as a result of the VA loan guarantee.
The Department of Veterans Affairs sincerely desires to simplify the mortgage application process for service personnel, veterans, and eligible military spouses who wish to purchase or refinance a property.
8. Lower VA Loan Closing Expenses
The VA restricts lenders’ ability to charge VA loan applicants closing charges. This is yet another way a VA loan might be more reasonable than other loans.
The money saved on closing fees can be utilized for anything, including furnishings, relocation expenses, house upgrades, or anything else.
9. The VA Provides Fee Financing Flexibility
VA loans involve a “funding charge,” which is an up-front expense based on the loan amount, kind of qualified service, size of down payment, and other considerations.
However, funding fees are not required to be paid in cash. The VA permits the charge to be covered with the loan, so there are no closing costs.
Not all VA borrowers will pay the fee. Veterans who receive VA disability compensation and unmarried surviving spouses of veterans who died in duty or due to a service-connected disability are often exempt from VA financing fees.
10. VA Debts Are Assumable
Most VA loans are “assumable,” meaning you can transfer your VA loan to a future homebuyer who is also eligible for a VA loan.
Assumable loans can be a significant advantage when selling a house, particularly with rising mortgage rates.
If your mortgage has a low-interest rate now and market rates rise in the future, the VA’s assumption characteristics become even more advantageous.
VA Loan Rates
The VA loan is considered one of the lowest-risk mortgage options available.
This safety allows banks to offer cheaper loan rates to experienced borrowers.
According to statistics collected by mortgage software provider Ellie Mae, VA rates are more than 25 basis points (0.25%) cheaper than conventional rates on average.
The VA home loan requires a lower down payment and credit score than most other lending options. A VA loan should cost a higher interest rate on the open market due to more relaxed lending standards and a higher perceived risk.
However, due to the Department of Veterans Affairs’ efforts to maintain veterans in their homes, banks face less risk, and qualified veterans pay less for loans.
Am I Qualified for a VA Mortgage?
Contrary to common assumption, VA loans are accessible to service members of all ranks, not veterans.
Required Minimum Service for a VA Mortgage
Active-duty service personnel, veterans (until dishonorably discharged), and surviving family members are eligible for VA home loans in some situations.
To be qualified, you need to satisfy one of these service requirements:
- You have served 181 days of peacetime active duty.
- You’ve spent 90 days of active duty during wartime.
- You’ve served in the Reserves or National Guard for six years.
- Your spouse was killed in service, and you have not yet remarried.
Your eligibility for the VA home loan program never expires.
Veterans who received their VA benefits decades ago continue to use them to purchase houses.
The Certificate of Eligibility for VA Loans (COE)
What Exactly Is a COE?
A Certificate of Eligibility is required to prove to a mortgage firm that you are VA-eligible (COE). Typically, your lender can get one online in a few seconds.
How to Receive Your Coe (Certificate of Eligibility)
Obtaining a Certificate of Eligibility (COE) is often not difficult. Your lender should order the COE through the automated VA system. Any lender approved by the VA may do so.
Alternatively, you can order your certificate using the VA’s portal for benefits.
If the online system cannot provide your COE, you’ll need to deliver your DD-214 paperwork to your lender or the VA.
Does a Certificate of Eligibility Guarantee a VA Loan?
No, the Certificate of Eligibility (COE) does not ensure acceptance for a VA loan.
Your Certificate of Eligibility informs the lender that you are qualified for a VA loan, but approval is not guranteed.
You must still meet VA mortgage requirements to qualify for the loan. The guarantee portion of a VA loan is the VA’s pledge to repay the lender if the borrower defaults.
Eligibility for a VA Mortgage
VA Loan Eligibility vs. Qualification
Even if you are qualified for VA home loan advantages based on your military status or affiliation, this does not guarantee that you will be approved for a VA loan.
You must still meet VA mortgage eligibility requirements based on your credit, debt, and income.
Minimum Credit Score for a VA Loan
There is no minimum credit score required for a VA-backed mortgage.
However, many VA mortgage lenders need minimum FICO ratings of 620 or above; thus, if your credit score may be an issue, apply with multiple lenders.
Even VA lending institutions with lower credit scores do not accept subprime financing.
Following VA underwriting criteria, applicants must have made on-time payments for at least the previous 12 months to be deemed acceptable credit risks.
In addition, the VA typically demands a two-year waiting period after a Chapter 7 bankruptcy or foreclosure before insuring a loan.
Borrowers with a Chapter 13 bankruptcy must have made at least 12 payments on time and have the bankruptcy court’s permission.
VA Loan Debt-To-Income Ratios
The ratio of your obligations to your income is known as your debt-to-income ratio (DTI).
VA underwriters calculate your debt-to-income ratio by dividing your monthly obligations (auto payments, credit cards, and other accounts, including your estimated housing expenditure) by your gross (pre-tax) income.
- If your monthly gross revenue is $4,000
- And your monthly debt total is $1,500 (including the new mortgage, property taxes, and homeowners insurance, plus other debt payments)
- Consequently, your DTI is 37.5% (1500/4000 = 0.375).
A DTI greater than 41% requires the lender to apply different formulae to see if you meet residual income eligibility requirements.
VA Residual Income Regulations
The additional calculations performed by VA underwriters might affect your mortgage approval.
The VA calculates your “real” cost of living by considering your expected monthly utility bills, your projected income taxes, and the region of the nation where you reside.
This number is then subtracted from your income to determine your residual income (i.e., the amount of money “leftover” each month).
Consider the residual income computation a simulation of your actual living expenditures.
The VA’s top priority is facilitating a stress-free homeownership experience for military families.
Here is an example of residual income, assuming a family of four with a monthly salary of $5,000 is purchasing a 2,000-square-foot property.
- Future home payment, plus additional loan payments: $2,500
- $1,000 monthly projected income tax payment
- Estimated monthly utility costs at $0.14 per square foot: $280
This results in an estimated residual income of $1,220.
Compare this residual income to the VA’s standards for residual income for a household of four:
- $1,025 for the Northeast
- Midwest Region: $1,003
- South Area: $1,000.00
- West Region: $1,117
The borrower in our scenario surpasses VA’s residual income requirements nationwide.
Consequently, despite having a debt-to-income ratio of 50%, the borrower might qualify for a VA loan.
Obtaining a VA Loan With Part-Time Earnings
You can qualify for this financing even if you have part-time work or many occupations.
You must demonstrate a two-year history of regular part-time income and regular hours worked. The lender will verify the stability of any revenue received. Refer to our comprehensive guide on obtaining a mortgage if you are self-employed or have a part-time job.
VA Financing Costs and Loan Maximums
Concerning the VA Funding Fee
The VA charges an upfront fee to reduce program costs and ensure its long-term viability.
Veterans pay a flat sum that varies based on the loan’s purpose and the down payment size.
Typically, the cost is included in the loan. It does not contribute to the funds required to complete the loan.
VA Loan Limits in 2022
The VA loan limitations have been eliminated due to the 2019 Blue Water Navy Vietnam Veterans Act.
As far as the VA is concerned, there is no maximum amount that a homebuyer can borrow with a VA loan.
Private lenders may, however, impose their boundaries. Check with your lender if you want a VA loan that exceeds the local conforming loan restrictions.
Types of Eligible Properties
Homes That Can Be Acquired With a VA Loan
VA mortgages are broad regarding the sorts of properties that can be purchased. A VA loan can be used to finance the purchase of the following:
- Independent house
- Newly-built dwelling
- Manufactured dwelling
- Four-unit, triplex, or duplex property
A VA mortgage can also be used to refinance an existing loan on any of these categories of properties.
VA Mortgages for Second Residences
Only “principal homes” are eligible for loans guaranteed by the Department of Veterans Affairs under federal laws.
However, “principal residence” is the place where a person resides “the majority of the year.”
Therefore, if you possess an out-of-state dwelling in which you spend more than six months every year, this other home, whether a vacation home or retirement home, becomes your “principal residence.”
For this reason, VA loans are popular among military borrowers in their golden years.
Purchasing a Multi-Family Dwelling With a VA Loan
VA loans permit the purchase of duplexes, triplexes, and quadplexes with complete financing. You must occupy one of the dwellings.
Purchasing a property with many units can take time and effort.
These houses are riskier for mortgage lenders to fund than traditional single-family homes, so you’ll need to be a better borrower.
VA underwriters must ensure that you will have sufficient emergency funds or cash reserves following the completion of your home loan. This guarantees you can pay your mortgage even if a renter stops paying rent or vacates.
Minimum required cash reserves after closing equal six months of mortgage payments (covering principal, interest, taxes, and insurance – PITI).
In addition, your lender will want to know if you have the expertise as a landlord or with property upkeep or renting.
You can avoid this problem if you hire a property management firm. However, this depends on the specific lender.
Your lender will evaluate the rental units’ revenue (or future income) using either the rental agreements in place or the appraiser’s judgment of what the units should fetch.
When computing your monthly costs, they will typically deduct 75% of this amount to offset your mortgage payment.
VA Mortgages and Rental Homes
You cannot purchase a rental property with a VA loan. You may, however, use a VA loan to refinance a rental property you once occupied as your principal residence.
To secure a VA loan for a house purchase, you must prove that you intend to inhabit the home as your primary residence.
If the property is a duplex, triplex, or four-unit apartment complex, one of the apartments must be occupied by you. You may then rent out the remaining flats.
This regulation is the exemption for the VA’s Interest Rate Reduction Refinance Loan (IRRRL).
This loan, sometimes called the VA Streamline Refinance, may be utilized to refinance an existing VA loan on a residence where you currently or formerly resided.
Condominium Purchase Using a VA Loan
The VA maintains a list of authorized condominium buildings in which a VA loan may be used to purchase a unit.
You may check the VA website for thousands of authorized condominium buildings around the United States.
If you are VA-eligible and looking for a condo, ensure that the unit you are interested in is authorized.
As a buyer, you are likely unable to obtain VA approval for the complex. This is the responsibility of the management firm or homeowner’s association.
If a condo you’re interested in is not authorized, you must obtain other financings, such as an FHA or conventional loan, or go elsewhere.
The condo must fulfill FHA or conventional requirements if you wish to use FHA or conventional financing.
Mortgage Help for Veterans Through the VA Loan
The Department of Veterans Affairs (VA) offers support with home retention. The VA steps in when a veteran has problems paying mortgage payments.
The VA collaborates with loan servicers to provide veterans with loan choices other than foreclosure.
During the fiscal year 2019, the VA reached out to more than 400 thousand borrowers and loan servicers. The objective was to negotiate an acceptable payback alternative for both sides.
Due to this initiative, more than 100,000 veteran homes avoided foreclosure in 2019.
The project has saved an estimated $2.6 billion for taxpayers. Notably, several veterans and military families were given a second opportunity at homeownership.
When NOT to Apply for a VA Loan
If You Have Excellent Credit and a 20% Down Payment
The absence of mortgage insurance is a significant advantage of VA home loans.
However, there is a cost associated with the VA guarantee. The borrower pays an upfront financing charge, often added to the loan amount.
The cost ranges from 1.4% to 3.6% based on the amount of the down payment and whether or not the buyer has previously utilized their VA mortgage eligibility. The typical cost is 2.3%.
A 2.3% charge on a $200,000 transaction amounts to $4,600.
However, purchasers who choose a standard mortgage with a 20% down payment are exempt from mortgage insurance and the upfront cost. The VA financing fee may be a needless expenditure for many military homebuyers.
Exception: mortgage applicants whose credit score or income matches VA requirements but not conventional mortgage guidelines may still choose VA loans.
If You Are on the “CAIVRS” List, You Are Eligible for a Tax Credit.
In order to qualify for a VA loan, one demonstrate that you have repaid past government-backed obligations and paid your taxes.
The Credit Alert Verification Reporting System, or “CAIVRS,” is a database of customers who have defaulted on government payments. These persons are not eligible for the VA home loan program.
If You Have a Non-veteran Co-borrower
Veterans frequently submit applications to purchase a property with a non-veteran who is not their spouse.
This holds. Even so, there may be better options.
Your income must support your portion of the loan payment as a veteran. The income of the non-veteran cannot be utilized to compensate for the veteran’s inadequate income.
Additionally, when a non-veteran owns fifty percent of the loan, the VA guarantees just fifty percent of that amount. For the non-guaranteed component, the lender requires a 12.5% down payment.
The Conventional 97 mortgage, on the other hand, requires a 3% down payment.
Another alternative for low-down-payment mortgages is the FHA mortgage, for which a 3.5% down payment is permitted.
USDA house loans need no down payment and give comparable interest rates to VA loans. However, the property must be located in an approved USDA zone.
If you intend to borrow with a non-veteran, one of these loans may be the best option.
If You Apply With a Credit-Challenged Spouse, You Will Be Denied
VA lenders must examine your spouse’s credit score and financial liabilities in areas with community property laws. This law applies even if they are not on the title or mortgage of the property.
A spouse with poor credit or who pays alimony, child support, or other maintenance obligations might complicate your VA approval.
Apply for a conventional loan if you qualify independently for a mortgage. If the spouse is not listed on the loan application, their financial history and status are irrelevant.
If You Wish to Purchase a Vacation House or Investment Property, Consider the Following
VA funding is intended to assist veterans and active-duty military members in purchasing and occupying their homes. This financing is not intended for real estate portfolio development.
These loans are intended for primary residences; therefore, if you wish to purchase a ski cabin or rental property, you will need to obtain a conventional loan.
If You Wish to Get a Luxurious Property, You Should:
Beginning in January 2020, there will be no maximum mortgage size that a lender can accept.
Check with your lender before applying for a big VA loan since lenders may create restrictions.
Couples and the VA Home Loan Program
Which Spouses Qualify for a VA Loan?
What happens if the service member dies before using the benefit? In many circumstances, eligibility is transferred to an unmarried husband.
For the surviving spouse to be eligible, the dead service member must have met the following requirements:
- Died while serving his country
- The cause of death was a service-connected disability.
- At least 90 days as a prisoner of war or missing in action
- Been a veteran with complete disability for at least ten years before death and have died from any cause.
Remarried spouses who remarried beyond 57 on or after December 16, 2003, are also eligible.
In some circumstances, the surviving spouse can utilize VA loan eligibility to purchase a home with no down payment, just as the veteran could.
VA Loans for Surviving Spouses
However, surviving spouses are eligible for extra VA loan benefits. They are not required to pay the VA funding fee. Consequently, their loan debt and the monthly payment will decrease.
Surviving spouses may also qualify for a VA streamline refinancing if they fulfill the criteria listed below.
- The surviving spouse was married to the veteran at the time of death.
- The surviving spouse was included in the first VA loan.
When the dead veteran was the sole borrower on the initial VA loan, even if they remarried after purchasing the property, VA streamline refinancing is often not accessible.
In this situation, the surviving spouse must qualify for either a non-VA refinancing or a VA cash-out loan.
A cash-out mortgage via the VA requires the service spouse to complete qualifying conditions for house purchase.
In this instance, the surviving spouse can utilize the home’s equity for any reason, including paying off an FHA or conventional loan to avoid mortgage insurance.
You qualify if you get (or pay) child support or alimony.
Purchasing a home after a divorce is difficult.
If you formerly lived in a two-income family, your VA home loan application will be affected by your decreased spending capacity and monthly income.
With less income, it may be more challenging to satisfy the VA Home Loan Guaranty’s debt-to-income (DTI) requirements and the VA residual income criteria for your location.
The receipt of alimony or child support can offset a decline in income.
Mortgage lenders will not force you to divulge the alimony or child support provisions of your divorce decree, but if you are prepared to do so, it can help you qualify for a mortgage.
Different VA-approved lenders will evaluate alimony and child support differently.
You must show a copy of your divorce decree or other court documents to substantiate your alimony and child support payments.
Lenders will then want to establish that the payments are solid, consistent, and expected to continue for at least the next 36 months.
You may also be required to provide documentation proving alimony and child support payments have been made regularly so that the lender may include the income as part of your application for a VA loan.
Your debt-to-income ratio might be negatively affected if you pay alimony and child support.
Not only may you be losing the second income of your dual-income households, but you’re paying additional payments that count against your outflows.
Lenders of VA-guaranteed mortgages carefully calculate these payments.
You can still qualify for a VA loan while making such payments, but demonstrating sufficient monthly income will be more challenging.
Veterans Administration Loan Assumption
What Is an Assumed VA Loan?
One advantage for homebuyers is that VA loans can be assumed. When you assume a mortgage debt, you take over the current homeowner’s monthly payment.
If mortgage rates have risen since the original owner acquired the house, this might be a significant benefit. The buyer would be able to obtain an affordable, low-interest loan, which might make it simpler for the seller to find a buyer in a competitive market.
VA Loan Repayment Savings
Purchasing a property via an assumable mortgage loan becomes more attractive as interest rates climb.
- Say a seller-financed $200,000 on a 30-year fixed loan in 2013 at an interest rate of 3.25 percent.
- Their monthly principal and interest payment under this scenario would be $898
- Consider that current 30-year fixed rates average 4.10 percent.
- If you borrowed $200,000 over 30 years at 4.10 percent, your monthly principal and interest payment would be $966.
In addition, the seller has already paid approximately $25,000 in interest on the loan, as the loan term is already four years old.
Due to the difference in interest rates, you would save $34,560 over the life of the 30-year loan if you assumed the debt. Additionally, you would save around $25,000 due to the interest already paid by the sellers.
This is a total savings of over $60,000!
How to Assume an Existing VA Debt
Currently, there are two methods to assume a VA loan.
- The new purchaser is a qualified veteran who “substitutes” their VA eligibility for the seller’s eligibility.
- The new homebuyer meets VA requirements for the mortgage payment. This is the most secure approach for the seller since the loan may be taken with the knowledge that the new buyer is responsible for the loan and the seller is no longer liable for the loan.
The lender and the VA must authorize the assumption of a loan.
A lender with automatic authorization may handle loan assumptions without submitting them to a VA Regional Loan Center for servicing.
For lenders lacking automatic permission, the loan must be submitted for approval to the relevant VA Regional Loan Center. The duration of this loan procedure usually is several weeks.
When VA loans are taken, it is the obligation of the servicer to ensure that the new homeowner fulfills both VA and lender standards.
VA Loan Assumption Requirements
For a VA mortgage to be assumed, the following requirements must be met:
- The existing debt must be paid up to date. If not, all delinquent balances must be settled at or before closure.
- The buyer must meet VA credit and income requirements.
- If the loan goes into default, the buyer must accept all mortgage responsibilities, including payments to the VA.
- The original owner or the new owner must pay a financing charge equal to 0.5% of the outstanding loan debt.
- A processing charge, including a realistic estimate of the cost of the credit report, must be paid in advance.
Locating VA Assumable Loans
There are several options for prospective homebuyers to get an assumable VA loan.
If you can believe it, print media is still thriving. Some homeowners promote the sale of their assumed house in the local newspaper or a local real estate journal.
There are several web options for locating mortgage loans that may be assumed.
Websites such as TakeList.com and Zumption.com provide a platform for homeowners to advertise their houses to homebuyers seeking to assume a mortgage.
Using the Multiple Listing Service (MLS), real estate brokers are invaluable resources for homebuyers.
This also applies to homebuyers shopping expressly for VA loans that can be assumed.
How Can I Obtain a VA Loan?
A lender can easily and quickly get your certificate of eligibility (COE) to verify your eligibility for a VA loan.
The majority of mortgage companies offer VA mortgages. Therefore, you can shop and compare costs with any firm that strikes your attention.
Obtaining a VA loan for your new home is comparable to receiving any other purchase loan. After locating an appropriate house within your price range, you submit a buying offer, followed by VA appraisal and underwriting.
The VA appraisal confirms that the residence fulfills its minimum property requirements (MPRs) and is safe for occupancy.
In addition, VA-specific mortgage lenders are among the market’s highest-rated (and cheapest). Here are several that we recommend exploring.