Would-be homeowners need to make many decisions as they navigate their purchasing journey. One of the biggest is the type of mortgage loan they will use to pay for their property. A professional loan originator can lay out the options so homebuyers can reach the best financing decision when they purchase their home.
Depending on your circumstances, your best choice may be a VA loan.
Less than 10% of service men and women took advantage of the VA loan program to purchase homes in the last five years. This is because the loan program is largely misunderstood and erroneously thought to require tons more paperwork and “hoops” than other loan options. In addition, many lenders don’t take the time to fully explain the advantages and benefits that VA loans can offer to veterans. At MIG, we want to make certain our borrowers are fully informed about all facets of the loans available to them.
Some potential borrowers may not be familiar with VA loans, how they work, their benefits, and who is eligible for them. That’s why you have us! We have talked with some seasoned mortgage pros and created the “Ultimate Guide to the Benefits of A VA Loan.”
What is a VA Loan?
The U.S. Department of Veteran’s Affairs offers VA Loans to eligible veterans and military members. The VA doesn’t actually loan the money on VA Loans, they simply insure the money loaned to veterans.
How it Began
The Servicemen’s Readjustment Act, also known as the G.I. Bill, was signed into law in 1944 by President Franklin D. Roosevelt, giving veterans a way to buy a home with no down payment. VA loans were born to help those returning home from war afford a house. The program flourished since its inception, with over 18 million veterans using it to become homeowners.
The VA Loan Offers Many Benefits
According to VP Underwriting Manager Dianne Rymer, “MIG is the best. Our veterans deserve the opportunity to achieve homeownership and MIG’s goal is to help them do just that with as much ease as possible.”
When you compare VA loans with other mortgage loan options, you’ll notice several appealing benefits right away.
No-money-down options. Hefty down payments are a big obstacle for many would-be homebuyers that haven’t saved the thousands of dollars needed for a down payment. Even FHA loans require a small percentage down. With VA loans, buyers can move forward with buying a house months, or even years, before it would be possible with other loan programs.
Little to no funds required at closing. Coughing up several hundred dollars to cover fees at closing can be difficult. The seller, or other interested parties, may pay all closing costs associated with the loan. VA loans don’t limit LOAN fees or charges PAID by other parties.
Bonus entitlements. There is a maximum guarantee for each borrower. Every first-time VA loan user starts with enough entitlement to secure a $417,000 mortgage loan. This doesn’t mean everyone can automatically get a mortgage of this value. There are still credit score thresholds to meet and income requirements to prove.
No monthly mortgage insurance. Typically, when borrowers don’t put 20% of the home price as a down payment, they must pay costly mortgage insurance as part of their monthly house payment. This adds a significant amount to the payment, which can be a budget buster. With VA loans, mortgage insurance is not required, since the VA is already guaranteeing the loan. This can keep thousands of dollars in your pocket over the life of the loan.
Competitive interest rates. A VA loan offers an interest rate that competitive with other available loan types. The lower the interest rate, the less you need to pay in a monthly payment, so it frees up your budget a bit. In addition, lower interest rates decrease the total amount you pay for your home. An interest rate that is even a small amount lower can save you thousands of dollars on your home.
You can use the benefit over and over. You may have more than one VA loan, if you have enough remaining VA Entitlement. The program is designed for primary residences, but things change and sometimes we must move for work or other reasons. VA will allow a veteran to obtain a second, or even third, VA loan when the borrower intends to move into the new house, provided they have sufficient remaining entitlement.
Who is Eligible for a VA Loan?
Your first step toward eligibility is getting your DD Form 214 (discharged veteran) or Statement of Service (active military). One of the Loan Originators at MIG can request your VA Certificate of Eligibility, or you can request it on your own.
Tamara McLain, an underwriting help desk extraordinaire at MIG, says, “MIG has a deeper understanding of the guidelines and what VA will allow. We have many borrowers who were denied at other companies, but MIG has been able to assist them with obtaining VA loan financing.”
Eligible borrowers for a VA loan include:
- Veterans. Even if you served 50 years ago you are probably able to take advantage of a VA mortgage loan. This includes active-duty military, who are most likely eligible after serving for six months. Members of the National Guard, and reservists are eligible after 6 years. It is also available to cadets at the U.S. Military Academies.
- Veteran and spouse. This has recently been expanded to include same-sex marriages.
- Spouses. Husbands and wives of service members who died either on active duty or because of a disability resulting from service are eligible.
- Veteran and nonveteran, non-spouse co-borrowers. The loan must be sent to VA for prior approval and down payment requirements will apply to the nonveteran, non-spouse borrower’s portion of the loan.
- Two unmarried Veterans. Recently, the VA changed the process. If both borrowers on a loan are unmarried veterans, the loan does not need to be sent to the VA for prior approval. This can save up to two weeks in the closing process.
Qualifying for a VA Loan
The VA wants to assist borrowers in realizing home ownership. As such, VA guidelines are built around making this process as easy and as accommodating as possible. This allows Mortgage Investors Group to apply common sense to underwriting guidelines to meet the unique circumstances of each veteran we work with.
Credit score requirements. The VA doesn’t currently require a certain minimum credit score to secure a VA loan like most other mortgage products do. Lenders do, however, still pull a credit report and look at the veteran’s credit history and financial management behaviors. VA loans can be available to borrowers with no credit score, but loan limitations and requirements may apply. If you have past credit issues such as late payments, collections, previous foreclosures, or bankruptcies, there still may be an opportunity to obtain a VA loan.
Debt-to-income (DTI) ratio. Your DTI is calculated by dividing your income into your total debt. The lower the ratio, the better. As with the credit scores, the VA doesn’t require a set-in-stone DTI ratio. However, it is favorably viewed if you don’t have a large amount of debt in relation to your amount of income.
Employment requirements. VA loans require two years of consistent employment to qualify for a home loan. A steady work history is evidence of stability and gives the lender confidence that the loan will be paid on time. If the veteran previously performed a job, or similar duties while in service, this may satisfy the employment requirement if the service member is coming out of active duty and just starting civilian employment. While it’s preferable that you are employed full-time, working part-time doesn’t automatically mean that you will be turned down for a VA loan. You can also not work at all, if you receive enough income to qualify, and still get approved.
Residual income. The VA requires that there be a certain amount of monthly income left over after paying the mortgage that can be used to pay other bills and financial obligations. This amount varies depending on where you live and the number of people in your family.
When Can Veterans Use a VA Loan?
VA loans are widely available for veterans to use to fulfill their homeownership goals.
Current primary residence. If you are buying a house for you and your family, you can use a VA loan to finance it. This is true whether it’s the first, second, or even tenth house you’ve bought. The home is defined as a primary residence if the veteran, the veteran’s spouse, or the veteran’s minor dependent child will be occupying the property within two months after closing. The spouse and/or child don’t need to be on the loan to be eligible to meet the occupancy requirement. For example, an active-duty service member currently on duty or participating in distant employment other than military service could still secure a VA loan. It would be possible to have the spouse and family move in before they return home.
Delayed occupancy for primary residence. If the veteran will personally occupy the property and there’s an event making it possible for the veteran to live there sometime in the future, a VA loan might still be able to be secured.
As an IRRRL refinance. An Interest Rate Reduction Refinance Loan (IRRRL) is also sometimes called a streamlined refinance. As the name says, this loan is typically used for current homeowners who want to take advantage of lower interest rates. This loan can also be used to change from an adjustable-rate to a fixed-rate mortgage, to decrease the length of the mortgage-loan terms, or to finance certain energy-efficient home improvements. An IRRRL refinance doesn’t require an appraisal, and there are options for those who don’t have stellar credit scores.
For a cash-out refinance. Veterans who want to tap into their home’s equity can choose this refinancing option. Borrowers can refinance up to 100% of the loan-to-value as long they confirm that the property is their primary residence. A cash-out refinance can be used to pay off any type of mortgage loan, not just a VA loan. Keep in mind that the existing mortgage loan must be paid in full, with funds from the refinance, and the borrower is responsible for all closing costs, which cannot be rolled into the loan.
Other Important Notes About VA Loans
Funding fees. In most cases, veterans using a VA loan must pay a funding fee, which is a percentage of the loan amount. It varies based on several factors, including the type of loan, your military category, if you’re a first-time or repeat loan user, and whether you make a down payment. You can finance the funding fee or pay it in cash, but the funding fee must be paid at the time of the closing. There are exceptions in certain cases. For example, you do not have to pay the fee if you are a veteran receiving VA compensation for a service-connected disability, or if you are a veteran who would be entitled to receive compensation for a service-connected disability if you did not receive retirement or active duty pay. Also, surviving spouses of a veteran who died in service or from a service-connected disability are not required to pay it.
Concessions. The buyer can ask the seller to pay costs associated with the transaction. While the VA allows them to pay all fees, seller concessions are limited to 4% of the established reasonable value. Examples of seller concessions include paying the VA funding fee, cash incentives, paying off debts on behalf of the veteran, pre-paying taxes and insurance on the property, or paying down points.
Down payments. In many cases, there isn’t a down payment required on VA loans. However, if you purchase a home over the amount that exceeds your county’s limit, you will be required to put some money down. Your loan originator can advise you of the amount.
Previous foreclosures. Even for borrowers who may have had a foreclosure or deed-in-lieu of foreclosure, this bonus entitlement may allow the borrower to be eligible to qualify for a new VA loan, without the need to repay a previous balance. However, a 2-year waiting period will be required after a recent foreclosure/deed-in-lieu of foreclosure.
If you’re active-duty military, a veteran, or the spouse of a veteran, you may be able to take advantage of the many benefits that come along with a VA loan.
Buy a home faster. Don’t wait until you’ve saved up a big down payment.
Enjoy smaller monthly payments. With lower interest rates and no mortgage insurance, your payments may be hundreds of dollars cheaper than with a traditional mortgage loan.
Don’t worry about using it and losing it. Your status ensures you will be able to utilize the VA loan program more than once.
Don’t be intimidated by the perceived red tape of a VA loan. The experts at MIG make it simple to take advantage of this exciting home ownership opportunity for you and your family.