VA is a great opportunity and if you're eligible, it's probably better than any other kind of a loan.
Eligible veterans may avail of a VA home loan. It is a loan granted by private lenders like banks, mortgage companies and savings & loan. So if a veteran wants to purchase a home, condominium or manufactured home, he can get such loan.
The Veterans Administration can guarantee up to $453,100 of the total home loan in 2018.
This amount is actually much higher than what they can get with most conventional home loan packages. For those who are considering refinancing an existing loan, the VA makes available two options. The first is refinance to reduce the current interest rate. The second is to take equity out (cash out option) up to a maximum of $144,000.
What is a VA Home Loan?
A VA loan is a mortgage loan backed by the Department of Veterans Affairs (VA) for those who served or are presently serving in the U.S. Military. The VA does not directly lend money for VA home loans but works hand-in-hand with private lenders. The VA backs the loans of these savings banks, mortgage companies and savings & loan to veterans, active military servicemen and military spouses who qualify under their guidelines.
There are three types of VA home loans:
- Purchase loans
- Interest rate reduction refinance loan (IRRRL), also called VA streamline refinance loan
- Cash-out refinance loan
There are a good number of benefits of a VA loan but foremost among these is that buyers need not put up a down payment when purchasing a home. This helps make the dream of homeownership a reality for active military personnel and veterans who might not be able to afford it outright.
Who Is Eligible For A VA Loan?
Military personnel, veterans and military families may avail of a VA home loan. Those who are eligible for such loan are the following:
- Active-duty personnel
- Reserve members
- National Guard members
- Some surviving spouses
They should also have suitable credit, sufficient income, and a valid Certificate of Eligibility (COE). The borrowers must also use the homes for their own personal occupancy. Still not sure if you are eligible? Visit the Department of Veterans Affairs for a detailed list of eligibility requirements for military service members, veterans, and military spouses.
What Is The Maximum Amount Of A VA Home Loan?
According to the DA “no maximum that an eligible veteran may borrow using a VA-guaranteed loan.”
However, the VA has set country limits that will serve as a basis to compute the maximum guaranty amount for each particular country. This means that the borrower can borrow any amount for the new home but the VA will assume liability only up to a certain limit, depending on the country. This limit may affect the amount of loan that the private lenders may grant.
Eligible veterans or military personnel can generally get a loan up to $453,100 without any cash-out. However, the amount can be much higher for countries with a higher cost of living. (You can review the list of country limits for VA loans here.)
VA Mortgage Loan Benefits
Here are the most important advantages of VA mortgages:
No Down Payment
This is by far, the loan’s best-selling benefit. Qualified borrowers can purchase a home up to $453,100 without a down payment in most parts of the country. The limit is even higher in more expensive areas.
In conventional and FHA loans, buyers should put up a minimum down payment of 5 percent and 3.5 percent, respectively. So for a $300,000 mortgage, that’s $15,000 down payment for conventional and $10,500 down payment for FHA.
For a service member or a veteran, saving that kind of cash could take up to several years. In fact, studies show that the average VA borrower has only around $7,000 in total assets. Being able to purchase a house with no down payment means that the military personnel wouldn’t have to scrape and struggle for years to get their dream home.
No Private Mortgage Insurance (PMI)
For a conventional and FHA homebuyer, putting up the required down payment is difficult enough. On top of this, they still need to get mortgage insurance – unless they somehow manage to raise the down payment up to twenty percent of the purchase price or more. So, on that same example of $300,000 mortgage, that’s a challenging $30,000 we’re talking about.
FHA loans require upfront mortgage insurance premium and annual mortgage insurance. The annual mortgage insurance will last for the life of the loan. Conventional buyers will have this as an additional monthly cost until they have built up sufficient equity. Sometimes, it takes buyers a long time to reach that level.
But here’s the kicker: With VA home loans, there is no mortgage insurance. This benefit saved over $19 billion for veterans who obtained VA loans last year.
VA loans come with a mandatory funding fee that goes directly to the Department of Veterans Affairs. Borrowers with service-related disability do not need to pay this fee, which keeps the program going for the next generations of servicemen.
Less Strict Credit Requirements
Although credit score requirements are beginning to loosen up, it hasn’t favorably affected many military buyers. They still find it hard to hurdle the credit benchmarks set by both conventional and FHA lenders.
Most VA lenders accept a credit score of at least 620 . In contrast, the average credit score for a successful conventional loan in January was 755. For FHA loans, the average was 688. The 620 credit score has the equivalent of “Fair” in FICO score range, which is just below “Good” and two ranks below “Excellent.” So you can see, VA buyers don’t need a perfect score, or anything near it, to secure a loan.
Soft DTI Ratios
VA lenders are generally happy to see that buyers don’t spend more than 41% of their monthly gross income to pay off major debts. They understand that many buyers still need to pay back their student loans or another mortgage. The debt-to-income (DTI) ratio for VA loans is much higher than many other programs.
The good news: it’s possible to get a VA loan with an even higher DTI. Some lenders accept up to 55% or more depending on the buyer’s credit score (See how your credit score is calculated). It would also help if he can hit additional income benchmarks.
This additional flexibility helps buyers maximize their purchasing power.
Keeping Closing Costs In Check
Whatever mortgage product buyers avail, they will eventually have to deal with closing costs.
The VA actually keeps the closing cost in check by limiting the fees and costs that veterans can pay. The guidelines prohibit VA buyers from paying non-allowable fees like termite inspections, broker fees and document processing fees.
Homebuyers can ask the sellers to shoulder all the loan-related closing costs. They may also ask the sellers to pay up to 4% of the purchase price for things like prepaid insurance and taxes, collections and judgment.
Foreclosure And Bankruptcy
These financial setbacks do not necessarily mean the end of a veteran’s VA home loan chances. A veteran may secure a VA home loan just two years removed from foreclosure, short sale or bankruptcy. In some cases, a veteran who has filed for Chapter 13 Bankruptcy Protection can already be eligible just a year from the filing date.
Homebuyers applying for conventional or FHA financing can find the waiting period significantly longer. Even veterans who lose a VA backed home to foreclosure can still be eligible for another VA home loan.
You may get in touch with a Veterans United loan specialist at 1-800-VA-LOANS to get an idea of your purchasing power. They will be able to provide you with details on what might be possible using your hard-earned home loan benefits.