Landing an extraordinary home loan probably isn’t anyone’s top reason for enlisting in the armed forces, but since the end of World War II more than 22 million active military members and veterans have used Veterans Administration mortgages to achieve the American Dream of home ownership.
The VA home loan program, part of the 1944 GI Bill of Rights, was designed to ease the path to homeownership for both active military personnel and veterans. Qualified loan applicants aren’t required to make down payments, pay mortgage insurance or some closing costs. Those expenses can be substantial and can kill deals relying on conventional financing.
VA loans are extremely popular because they’re money savers. During fiscal 2018, nearly 611,000 buyers used to VA financing to cover more than $161 billion in real estate purchases.
So how do you get a VA mortgage? Here are a few questions that will help you decide whether one is right for you.
Am I eligible for a VA loan?
Almost all members of the military, reservists, National Guard and veterans are eligible for VA loans. Spouses of military personnel who died while on active duty or as the result of a service-connected disability are also eligible to apply.
Active-duty military qualify after six months in the service. Reservists and National Guard members must be enlisted for six years before applying. If they are called to active duty, they become eligible after 90 days serving during times of war.
What are the benefits of a VA loan?
The VA doesn’t issue mortgages, it guarantees them, setting requirements on the sort of mortgages it will accept and relying on approved lenders (banks, credit unions, online lenders) to issue the loans. The VA takes on risk associated with the mortgages it backs, and the lower risk to the lenders who issue VA is passed along to buyers, often meaning slightly lower interest rates compared to conventional loans.
VA home loan applicants with poor credit histories, including bankruptcy and foreclosure, can often qualify for VA loans more easily than if they sought conventional financing. The VA won’t count a bankruptcy or foreclosure against you after two years. Conventional mortgage lenders often require that you wait up to four years following a foreclosure to apply for a new mortgage.
VA home loans benefits are substantial for those who qualify. Here are some of the ways VA and conventional mortgages differ:
|VA Loans||Conventional Mortgages|
|No down payment for buyers who meet loan requirements.||As much as 20% down payment might be required, though amounts vary considerably.|
|No private mortgage insurance (PMI) required on any loan.||Private mortgage insurance necessary for loans with less than a 20% down payment. This can add hundreds of dollars to a monthly mortgage payment.|
|Underwriting standards are relaxed since the government backs the mortgages. The VA will use an agency-approved appraisal to establish the value of the property you wish to buy.||Underwriting standards can be strict. After the 2008 financial meltdown that was largely pinned on poor mortgage underwriting standards, lenders became much stricter about borrowers’ required incomes, assets and credit scores,|
|Fewer closing costs compared to conventional mortgages. VA loans include a fee that is used to help fund the program. The fee can be waived for eligible borrowers with disabilities.||Closing costs can be extensive, often amounting to 3% or 4% of the sales price.|
|Not available for all types of property. Borrowers must reside in the homes they purchase, excluding vacation homes and many rental properties (you can buy a multi-family property provided you live in one of the units). Also, the home you want to finance must be move-in ready, meaning no farms, businesses or fixer uppers||Loans are available for an assortment of properties, including those not used as the owner’s residence.|
|VA interest rates are typically about 0.25% lower than rates for comparable conventional loans||Interest rates vary and are set by complex market factors. Lenders generally compete with one another, holding rates fairly close. But the rate you receive is based on an assortment of factors, especially your creditworthiness.|
VA loans are guaranteed against default, so they pose less risk to mortgage lenders. In addition to charging fewer closing costs – a VA requirement – lenders often offer lower mortgage interest rates to VA loan customers. The difference between conventionally available interest rates and VA rates can vary over time and from lender to lender.
What are the borrowing limits?
The VA isn’t really in the loan business. It guarantees home loans and you must find a VA-approved lender to get a VA loan. As such, there are no official borrowing limits, but there are limits to the amount of liability the VA will assume.
They vary by county, but the limit was $453,100 in 2018 for most parts of the U.S., but the amount can be as much as $679,650 in high-cost areas such as San Francisco and New York.
What are the fees associated with a VA loan?
Fees? Who said anything about fees? Sorry, but even veterans must deal with some up-front costs.
To keep the VA home loan system afloat, there is a one-time funding fee. It varies, depending on the down payment and type of veteran. For instance, a borrower getting his/her first VA loan and making no down payment would pay a 2.15% fee on the amount of loan. The fee is 1.25% if the borrower makes a down payment of 10% or more.
Reservists and National Guard members usually pay about one-quarter of a percentage point more than active-duty personnel.
If you’re using the VA loan program for a second time and have no down payment, the fee is 3.3% of the total loan amount. The fee is waived for veterans who received disability compensation.
Does the VA Offer Loan Aid and Forgiveness?
The VA attempts to help veterans and their families who encounter financial difficulties, and two of these programs impact housing. If you have a conventional sub-prime mortgage loan and are having trouble making the payments, which may have ballooned, you can try to refinance the loan with a VA mortgage. VA counselors are available to give advice and help you avoid foreclosure. The terms of a new VA loan can be far more manageable than those attached to a conventional sub-prime loan.
If you default on a home loan, the VA allows lenders to forgive the balance that you owed, meaning you are not required to pay the balance of your loan. This doesn’t prevent you from losing your home, but it removes the repayment obligation. However, the IRS treats the amount forgiven as income, which means you might face a sizeable tax liability.
What Are the Income Requirements for a VA Loan?
The VA doesn’t have specific income thresholds for qualifying for a mortgage, relying instead on what it calls residual income requirements.
Borrowers are expected to have steady, stable income, which can come from employment, Social Security, disability payments, investments and other sources. Self-employed persons are often asked to document their income. Even income from foster care, worker’s compensation and public assistance is considered, though it has to be sustainable income that will continue well into the future.
Residual income requirements, often considered a key reason why the VA mortgage program has a very low default rate, vary from community to community around the country. The VA sets amounts of income that remain after all routine bills and expenses are paid. The requirement ensures that borrowers have a sufficient financial cushion to cover emergencies/
Can I get more than one VA loan?
Yes you can, though the fee is slightly higher the second time around and beyond.
Normally you must sell your primary residence and pay off the off the loan before you can take out another VA loan on a new residence. But VA loan programs allow you a one-time opportunity to buy a second home with a VA financing if you have refinanced your primary residence with a non-VA loan or you have paid off the original loan.
How do I apply for VA Loan?
Find a lending institution that participates in the VA program. Since almost all lenders do, that should not be a problem. In fact, the first thing most lenders ask after introducing themselves is: “Are you a veteran?”
If you say yes, it usually puts a smile on the lender’s face because they know the U.S. government is backing your loan and it will be much easier to get you into a home.
Borrowers must have a Certificate of Eligibility to prove they belong on the VA home-loan track. You can apply for one online at the VA website. Most lenders have access to that system.
You can also apply through the mail. If you need assistance with Certificate of Eligibility acquisition, call 1-800-983-0937.
Who are the best lenders for a VA home loan?
The ones with the best rates and customer service, of course.
Interest rates fluctuate, and customer experience varies, however, depending on a variety of factors. The best answer is to find a lender that is well-versed in the VA home loan program. Even then, there is no shortage of candidates.
A 2017 NerdWallet study gave high marks to Navy Federal Credit Union, Veterans United, Quicken, Bank of America, Citibank and Fairway. As with any mortgage, the best advice is to shop around and find a lender you’re comfortable with and has rates that make you happy.
The big advantage veterans have is they can get into a program that makes it easier to get into a home that will make them happy.
After spending so much time in tents and foxholes, they deserve it.