Following the conclusion of World War Two, a conflict that saw over one-million Americans killed or wounded, congress, wishing to show returning veterans a special gratitude, enacted the VA Home Loan. As part of the original GI Bill, the VA loan was designed as a sustainable way for veterans to receive long term financing and thus achieve the stability of homeownership. Rather than giving returning service members a cash bonus to purchase a home, the VA opted to insure home loans, making them more accessible for veterans to qualify for. By insuring mortgage loans, banks take on less risk in issuing a loan than they otherwise would with a traditional loan, in the event of a default, the VA will repay the principal investment.
Included among the many benefits offered by VA home loans to qualified candidates are lessened underwriting standards, higher front-end, improved debt ratios and a variability that extends beyond purchasing a home to making energy efficient improvements, repairs and interest rate refinance.
Simply put, over the past 60 years, many veterans have been able to achieve a dream they may not have otherwise been able to. Since the inception of the program, over 18 million VA Home loans have been insured by the government. Despite the obstacles created in a post 2008 economy, the housing market continues to be populated with VA loans. In spite of only accounting for nine percent of the entire civilian population, veterans make up 10 percent of the market for new homes.
Benefits of VA Home Loans
For Veterans, the VA loan is without question the most advantageous entitlement available. This loan offers active duty service members and veterans a multitude that traditional loans do not, including:
- Competitive interest rates: Because every VA loan is guaranteed by the federal government, the accompanying interest rate is usually anywhere from 0.5 to 1 percent lower than on conventional loans.
- No private mortgage insurance: Borrowers using conventional lenders are often required to pay for private monthly mortgage insurance (PMI), unless they put down 20 percent of the cost of the home. PMI is used to protect lenders in the event of a default, because VA loans come with a VA guarantee, private mortgage insurance is not a VA loan requirement.
- No down payment requirement: Borrowers using traditional lows are typically required to make a down payment of up to 20 percent of the loan value. VA loans offer no down payments, representing a significant savings cost for veterans using this loan.
- No pre-payment penalties: With many traditional loans, if the borrower pays off the mortgage before the date of maturation, they are charged a penalty. This is because lenders are missing out on the opportunity to collect more money in interest payments. VA home loans allow borrowers to pay off their loan whenever they choose, without any penalties. Borrowers who use VA home loans have more opportunities to purchase a new home in the future, as well as expanded refinancing options
- More lenient credit requirements: Low credit scores are not used as a solitary reason to deny loans by the VA Program. In addition, the majority of lenders who offer VA loans do not offer lower or raised interest rates based on poor credit scores. The VA program generally only assesses the previous 12 months of a borrower’s credit history.
- Refinancing options: An opportunity frequently exists for borrowers using the VA home loan to make a purchase to refinance to a lower interest rate, without having to fully re-qualify.
- Service-related disability options: Veterans with a disability that occurred in conjunction with service may qualify for a waiver of the funding fee, this means reduced mortgage payments and or closing costs if the funding fee is financed.
Closing Costs and Funding Fees
All VA loans require a VA Funding fee, this is a legal stipulation. The intended purpose of the VA funding fee is to ensure the borrower contributes towards the cost incurred by the VA to provide this benefit, for the borrower to contribute towards the cost of this benefit, reducing the burden upon taxpayers. For first time home buyers, the VA funding fee amounts to 2.15 percent of the purchase price. For second time users it is 3.30 percent. If the borrower makes a down payment of 5 percent or greater the funding fee will be reduced. For borrowers unable to pay the funding fee upfront, it is allowable to add the funding fee to the final loan amount, because a VA loan can exceed the appraised value of a home.
Congress set the VA funding fee, thus it can only be waived under two circumstances, if the borrower has been given an acceptable disability rating, or if the borrower receives a regular disability check resulting from an injury that occurred during service.
Who’s Eligible for a VA Loan
First and foremost, to qualify for a VA loan, a veteran most have received an honorable discharge. For active duty personnel and veterans, eligibility for a loan is determined by service time. 90 continuous days of service during wartime or 181 days during peacetime is required. In certain situations the surviving spouse of a veteran may also qualify for a VA loan.
Furthermore there is no cap on the number of times aperson can use a VA loan. Even in the event of a short sale or foreclosure, as long as you are up to date on any outstanding debt payment, you may qualify for another loan. Generally after a short sale it takes 24 months for the applicant to use another VA loan, however using specific programs grants you the usage of your VA eligibility immediately.
Credit Score Requirements
Although each lender/investor has their own underwriting guidelines, no minimum credit score requirement has been established by the US Department of Veteran Affairs for applicants in obtaining VA home loan approval. Credit guidelines are subjective and vary largely from funder to funder. The presence of unpaid debt, judgments and collections does not necessarily preclude loan approval or cause automatic denial. Investors mostly will want to be presented with an acceptable explanation for all late payments over the 12 months prior to the loan application.
The VA Loan Process
It often comes as a surprise to interested applicants just how simple the VA loan process is. The general process follows a general template:
- Apply for pre approval; this takes 60-90 days usually
- Upon pre approval, apply for the VA loan through a certified lender
- Verification is then conducted by the lender, this means validating employment and financial data through things like pay stubs.
- The property up for purchase will then be inspected and appraised, the VA has guidelines about property meeting certain safety and livability standards
- Following inspection, repairs may be required to insure habitability, this includes termite clearance
- After a contract to purchase the home is in place, the documentation for the loan will go through underwriting for review. The underwriter will require specific documents and information to ensure that everything meets VA guidelines
- After final approval the borrower is clear to close. Loan documents will be signed before a notary and sent to escrow
- The last step is the review of funding for accuracy; the sale is then closed with the exchange of funds and deed of trust from one party to the other.
Purchase and Refinance VA Home Loans
Many misunderstandings surround VA loans, perhaps the most common, not knowing the difference between purchase and refinance loans.
A VA purchase loan enables veterans, surviving spouse and active duty service members the ability to purchase a property at a competitive interest rate, with no money down. This loan is the best option available for those who have had prior trouble finding alternative sources of financing to purchase a house.
A VA cash-out refinance loan is used by qualified homeowners who want to take cash out of their home’s equity in order to fund alternative things, such as expenses incurred by educational pursuits or to make home improvements. Borrowers may also be able to refinance a non-VA home loan into a VA loan, with the VA guaranteeing up to 100 percent of the value of the borrower’s home.
By taking advantage of an interest rate reduction refinance loan, veterans, surviving spouses and active personnel are able to reduce their interest rate by refinancing their existing VA loan, thereby lowering monthly mortgage payments. An interest rate reduction refinance loan, does not incur any out-of-pocket cost for the borrower.
Maximum Loan Amounts
The maximum amount of a VA home loan that a borrower may qualify for is variable. The amount is based on a combination of their unique situation, as well as the maximum zero
Down limits that depend upon where the purchase property is located. More information can be found by contacting VA Home Loan Centers, a VA sponsored third party lender.