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VA Home Loan: A Great Advantage For Veterans

Anyone who has served in the United States armed forces or is currently serving there is brave and has put their life on the line for the love of their country. They have therefore earned respect, admiration, and some valuable benefits too.

Veterans and military service members that need a mortgage have access to a unique benefit known as VA Home Loan. Whether you are buying a home or renovating your current home, the VA Loan might be the best option for you.

Started before the end of World War II, the VA Home Loan is the only widely known mortgage that requires no down payment. It is a mortgage-backed by the U.S Department of Veteran Affairs (VA), but it is issued by private financial sectors like banks, credit unions, or mortgage companies. Millions of qualified veterans use VA Loans every year to purchase a place they can call home.

In this comprehensive article, we’ll explain everything you need to know about a VA home loan to help you decide if you should consider one too.

Part 1: Ten (10) Incredible Benefits of VA Home Loans In 2020

1. No Down Payment On A VA Loan

For many qualified VA loan borrowers, being able to get a home loan without making any down payment is the most exciting benefit of the VA Home Loan program. Compared to FHA loans and other conventional loans, this amazing VA loan benefit means significant monthly savings for veterans and active military members as they get to experience the American dream without having to spend years struggling to save for a sizable down payment.

The VA Loan is truly a no-money-down mortgage loan, and it’s a fantastic benefit for those who serve our country.

2. VA Loans Does Not Require Mortgage Insurance

Unlike FHA loans or conventional loans, VA loans don’t require any mortgage insurance. FHA loans come with both down payments and an annual mortgage insurance premium (MIP), while conventional loans request for private insurance mortgage (PIM) from borrowers that can’t make up to 20% down payment. This insurance helps to limit the lenders’ loss in cases where the borrower goes into default. However, the VA Loan is guaranteed by the government, and you’ll never pay mortgage insurance.

3. The Government Guarantees VA loans

VA loans were not created nor founded by The Veterinary affairs. The government created it. So, the federal government guarantees lenders such as U.S banks, credit unions, savings and loans institution, and mortgage lenders that a part of the loan will be repaid if the borrower is unable to make the monthly payments due to whatever reason. This guarantee assures lenders that they are safe, and it also encourages them to give out VA loans with mouthwatering terms to borrowers that need them.

4. VA Loans Doesn’t Enforce Prepayment Penalty

Many borrowers realize they can save a significant amount of money when they pay off their loans early but are mandated to pay for the prepayment penalty if they wish to do so.

Prepayment penalties were started to protect lenders and investors from financial loss. When a borrower pays early, the lenders/investors will lose months/years of interest payments on the loan. Hence, the reason for the prepayment penalties.

Fortunately, as a VA loan borrower, you can pay off your mortgage as early as you wish with no fear of being pressed with any prepayment penalty charges

5. You Can Get An Expensive House With VA Loan

As at January 2020, the limit on VA loans has been eliminated, and qualified borrowers can now make a more expensive home purchase without worrying about down payments.

So, you can use a VA loan to purchase a duplex, condo, newly built home, and other property types. Also, you can use a VA loan to renovate your home, refinance your existing mortgage, or to make your home more energy-efficient.

6. Closing Costs Are Limited With VA Loans

Closing costs are inescapable fees and expenses you have to bear to obtain a mortgage. Fortunately, The Veteran Affairs Department limits the costs, and fees borrowers have to pay at closing time.

Also, VA loan borrowers can ask home sellers to pay all of their loan-related closing costs and up to four percent in concessions. However, there’s no guarantee that the home seller will agree to pay, but homebuyers/VA home loan borrowers can still ask during the negotiation process.

7. The VA Loan Funding Fee Doesn’t Have To Be Paid Upfront

VA loan borrowers don’t have to pay for PMI, but they do have to pay a funding fee. The funding fee is a part of the guarantee process, and it is charged based on the amount of the borrower’s loan, eligible service type, and some other factors. However, the funding fee is much less expensive than PMI. It will be paid once, and can even be financed from the loan so that the borrower doesn’t have to pay out of pocket.

The VA will, however, waive the funding fee for veterans who sustained disabilities in service or for unmarried spouses of veterans that died in service or as a result of a service-connected disability.

8. It’s Easy To Quality For VA Loanst

However, in comparison to other loan programs, the requirements needed for a VA loan is flexible and basic. They are;

  • Borrowers need to present proof that they have an income to pay back the VA home loan.
  • Borrowers can’t have a huge debt load.
  • Although there’s no minimum credit card requirement, borrowers might find it challenging to get a lender’s approval if they do not have up to 600 FICO score.
  • It is also possible to apply for a VA home loan after bankruptcy as long as sufficient time has passed.

9. No Limit To The Number of Times To Get a VA Loan

If a veteran decides to sell the home they purchased with a VA home loan, they will be eligible to get another VA loan. However, there is a little catch to this. For subsequent use of the VA home loan, the funding fee goes up to 3.7%. Yet just like the first approved loan with a lower funding fee, the funding fee can be financed from the loan so the veteran won’t have to pay cash.

Also, the veteran can reduce the funding fee by paying a little down payment, but a veteran who’s exempted from paying the fee will never pay for funding fees regardless of the number of times they use the program.

9. No Limit To The Number of Times To Get a VA Loan

If a veteran decides to sell the home they purchased with a VA home loan, they will be eligible to get another VA loan. However, there is a little catch to this. For subsequent use of the VA home loan, the funding fee goes up to 3.7%. Yet just like the first approved loan with a lower funding fee, the funding fee can be financed from the loan so the veteran won’t have to pay cash.

Also, the veteran can reduce the funding fee by paying a little down payment, but a veteran who’s exempted from paying the fee will never pay for funding fees regardless of the number of times they use the program.

10. VA Loans Are Assumable By Non-Veterans

A non-veteran can assume the loan from a veteran borrower, but there is a condition. Allowing a non-veteran to assume your loan means that your entitlement to another VA loan will be tied off until the non-veteran ultimately pays off the loan.

However, if the person assuming is also a veteran, they can use their entitlement as a substitute and free up selling the veteran’s entitlement for reuse.

Part 2: VA Loan Rates

Veterans and service members find that the VA loan rates are generally lower compared to that of conventional loans. This is because the federal government backs VA home loans, so lenders view VA loans as a low-risk mortgage type, and charge competitively low VA loan rates.

The Veteran Affairs department doesn’t set the VA loan rate, and the lender determines the VA loan rate based on your financial condition.

Please note that the VA loan rate is subjected to change based on market conditions.

What Determines My VA Loan Rate?

Different factors can influence the VA loan rate, and they include:

  • Credit score
  • Type of loan (IRRL, jumbo, purchase, cash-out, etc.)
  • Duration of the loan (15-30 years)
  • Current market condition

As a result of the risk involved in issuing a loan, a good credit score is a sure way of getting a low VA loan rate. However, if your credit score is not in good condition, you may not find it difficult to get a low VA loan rate due to the federal government guarantee to the lenders.

Part Three: VA Loan Eligibility

Am I eligible to Apply for a VA Home Loan?

VA home loans are a benefit for both active-duty military service members, veterans, and unmarried spouses of members that died in service.

You are eligible to apply for a VA loan if:

  • You served in the Army, Air force, Coast guard or Marine guard, and Navy after September 15, 1940.
  • You are an active-duty serviceman.
  • You are a member of the national guard
  • You are a reservist
  • You are a midshipman at the US Naval Academy
  • You are an officer at the National Oceanic and Atmospheric Administration

Minimum Service Required For A VA Home Loan

VA home loan is available to active service members, Veterans that were honorably discharged, and surviving spouses.

To be eligible, you need to meet the minimum service requirements below:

  • You’ve served 181 days of active duty during peacetime.
  • You’ve served 90 days of active duty during wartime.
  • You’ve served for six years in the Reserves or National Guard.
  • You are the surviving spouse of a veteran who died on duty or from a service-connected disability, and you’ve not remarried, or you remarried after 57 years of age.
  • You may still be eligible for a VA loan if you couldn’t meet the length of service requirements because you were discharged as a result of a service-connected disability.

Part Four: The VA Loan COE

What is a COE?

To go through the VA loan process or show the lender that you are eligible, you need to obtain a VA Certificate of Eligibility (COE). You won’t be able to get a VA loan without this certificate.

How to apply for a VA loan Certificate of Eligibility (COE)

It is effortless to get a COE in most cases. You can apply through your lender, and they’ll apply for you through the VA’s automated system if they are an approved lender.

Alternatively, you can apply for the COE yourself via your eBenefits online portal. To apply for a COE, you’ll be required to provide various information based on your current status. Veterans need to provide a DD Form 214, while active service-members need to provide a signed statement of service. Which should include:

  • Full name
  • Date of birth
  • Social security number
  • Date duty was started
  • Any lost time
  • Name of the command providing the information

However, different information might need to be provided by National Guard or Reserve Members as well as surviving spouses. You can work with your lender for the list of paperwork and identifying the information you need to provide.

Does a COE Mean Your VA Loan Application Has Been Approved?

No, having a COE doesn’t make you automatically qualified for VA home loans. This only shows the lender that you are eligible for the loan, but you are not guaranteed the loan yet. You still have to qualify for the loan based on VA mortgage guidelines.

Part 5: Qualifying For A VA Home Loan

VA Loan Qualification: Credit, Debt, and Income

VA lenders will review your credit, debt, and income to determine if you qualify for the loan and to determine the interest rates they’ll offer you.

Credit Requirements For a VA Home Loan

The VA didn’t set a minimum credit score to be used to qualify for the loan, but VA loan lenders can set their minimum credit standards for FICO credit scores, which are usually between 580 and 620. So, it is advisable to apply with as many lenders as possible if you think your credit score might be an issue.

Also, even VA loan lenders that accept low credit scores won’t accept subprime credit. VA has an underwriting guideline that states that applicants must have paid their obligation on time for at least the most recent twelve months before they can be considered satisfactory credit.

Also, VA always requires a two year waiting period after a Chapter 7 bankruptcy or foreclose before it approves a loan.

VA Loan Debt-to-Income Ratio

The relationship between your debt and your income is referred to as the debt-to-income (DTI) ratio. This is calculated by dividing your monthly debts by your gross income (before tax).

If your DTI is over 41 percent, the lender will need to apply additional formulas to determine if you qualify under “residual income” guidelines.

VA Residual Income Rules

The VA’s residual income rules provide an accurate and realistic way to determine whether homeowners have enough income to cover their living expenses and still keep up with their mortgage.

The aim of this is discretionary income. Residual income reviews how much money you have left over after paying your major expenses each month, including mortgage payment. Residual income varies based on location, family size, and loan amount. This is simply a process for the  VA to be sure that veterans have enough income to sustain their homes because paying for a mortgage can put a new strain on a family’s income.

VA Residual Income Chart

The residual income minimum shows how housing costs and other expenses vary based on where you’re buying in the country and your family size. This is why larger families in the northeast and west need larger residual income than those in the south and Midwest. VA also requires less residual income for loan amounts below $80,000.

Qualifying For a VA Loan With Part-time Income

To a VA lender, income is income as long as you can prove to them that it is stable, and you can provide a two years history of earning part-time income.

Other guidelines regarding applying for a loan using part-time income varies based on lenders.

Part 6: VA Funding Fee and Loan Limit

VA Funding Fee

You won’t pay for mortgage insurance as far as VA loans are concerned, but you will pay a one time VA loan funding fee. The fee can be paid upfront in cash or rolled into the mortgage, be it for a home purchase or a home refinance. The federal government backs VA loans, and they repay the lender a portion of the loan if the borrower defaults. So this funding fee helps to defray the guarantee costs.

How Much Is The VA Funding Fee?

The amount of funding fee varies based on different factors like the amount of loan you’re applying for. The funding fee for a first VA purchase with zero down payment is 2.3% and 1.65% with a down payment of 5% to 9.9% and 1.4% for a down payment of 10% and above.

VA Funding Fee 2020 Chart

VA Funding Fee 2020 chart

2020  Funding Fee Exemption

You will be exempted from paying the funding fee if you are:

  • Entitled to or currently receiving compensation for a service-connected disability.
  • A surviving spouse of a veteran who died on duty or died from a service-connected disability.
  • An active-duty service member who has received a Purple Heart.

VA Loan Limit In 2020

VA loan limit restricts the amount of loan you can borrow whiteout, making a down payment. However, as of January 2020, a new law has eliminated this, and there will be no limit to the amount a borrower can request.

Although, lenders may choose to set their limits, so be sure to confirm from your lender.

Part 7: Eligible Property Types

The VA home loan was created to help veterans and active service members achieve the American dream of being homeowners. So, this loan program solely focuses on helping eligible and qualified individuals purchase residential properties they will live in full time.

Acceptable Houses You Can Buy With A VA Home Loan

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A Single Family Home

Single-family homes are the most commonly purchased properties by VA loan borrowers, and it is an excellent option for a lot of buyers.
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A Condominium Unit In A VA Approved Area

The VA has a list of approved condo projects within which you can purchase a unit with a VA home loan. You can go to the VA’s website and search for the thousands of approved condominiums across the United States.

Also, if a condo development you like is not approved, you can request approval from the VA, but be informed that the approval process can take months.

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New Construction

The VA allows a $0 down payment to build a new home too. However, with today’s economic disruption, it’s challenging to find a lender who is willing to fund the construction of a new home.

The more common approach borrowers tend to use if they want to build their own home is to obtain a construction loan from a builder and then refinance the short term loan into the VA home loan program.

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Multi-Unit Property (Up To Four-plex)

VA loans can be used to purchase four residential units in a multi-unit property provided the buyer will occupy one of the units. Then the rental income from the other units will also determine if the borrower will qualify from the loan.

Also, the borrower must show that he or she has the background knowledge needed to be a successful landlord.

Part 8: Unacceptable VA Loan Uses

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If You Are Purchasing A Home As An Investment Property

VA home loans are designed to fund primary residences for veterans and service members, so you can’t use a VA loan to purchase a home mainly as investment or to purchase a second home. If you want any of these, you’ll have to apply for a conventional loan.
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Property In A Foreign Country

Homes purchased using the VA home loan must be located in the United States, its territories, or possessions. This includes Puerto Rico, Guam, U.S Virgin Islands, Northern Mariana Islands, and American Samoa. So if you want a vacation home in a foreign country, you can’t use a VA loan to fund its purchase.
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Unimproved Land

Borrowers can’t use the VA home loan to purchase bare lands that don’t contain any home except there are laid down and immediate plans to start building on the land. However, acquiring loans for building a home comes with its own set of financing guidelines. You can ask your lender for more information.
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If You Are On The “CAIVRS” List

Credit Alert Interactive Voice Response System (CAIVRS) is a database of individuals who have defaulted on government obligations. If you are looking for a government-backed home loan like the VA loan, lenders are mandated to run your name through the CAIVRS database to find out if you are a defaulter. If your name shows up on this list, you’ll not be eligible to apply for the VA loan.
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If You Have A Non-Veteran Co-borrower

Some lenders will process a “joint loan” for a veteran and a non-veteran, non-spouse, co-borrower. This might not be your best choice as the veteran, but if you insist on taking it, your income must cover half of the loan payment.

Please note that the income of the non-veteran co-borrower can not be used to make up for your insufficient income. Also, the lender will require a down payment of 12.5 percent to 14.5 percent. Why? The VA can only guarantee for 25% of the loan, so having a non-veteran co-borrower on loan means the lender will only be getting half of the guarantee. So, a down payment for the remainder helps keep the risk at bay.

Part 9: Veteran Mortgage Relief

As a Veteran, if you have fallen behind on your mortgage payment, the mortgage company can take your house and use it to cover up for the money owed. However, the good news is that a VA loan can intervene, help you keep your home and avoid foreclosure.

The VA will contact the mortgage company and implore them to offer more options to the veteran defaulter other than a foreclosure.

Part 10: Surviving Spouses And Divorcees

How Are Surviving Spouses Eligible For A VA Loan?

When a service member passes on in-duty before he/she even gets the chance to utilize the VA loan benefit, the eligibility will be passed on to their unmarried surviving spouse in many cases.

A surging spouse may be eligible for a VA home loan if:

  • He/she survived a veteran who died in service or died as a result of a service-connected disability and has not yet remarried.
  • He/she survived a service person missing in action (MIA) or a prisoner of war (POR) for at least 90 days
  • He/she survived a veteran that was disabled for at least ten years and died from any cause.
  • He/she remarried after the age of 57 or on/after December 16, 2003.

VA Loan Benefits For Surviving Spouses

The VA home loan benefits available for surviving spouses are almost like those available to veterans and active-duty military personnel only with some notable differences.

The benefits are:

  • Qualified and eligible surviving spouses are exempted from paying the VA funding fee, which is usually between 0.5% to 3.3%.
  • When a surviving spouse successfully repays a VA loan in full and sells the property acquired with the loan, he/she will have a restored entitlement and can use the program as much as they want. However, MIA and POW surviving spouses are limited to just one use.
  • The surviving spouse won’t pay any down payment.

For more details about VA loans for surviving spouses, please contact your VA approved lender.

Part 11: VA Loan Assumption

Veterans currently paying for a VA home loan can transfer the loan and have it assumed by someone else. This is called a VA Loan Assumption. If your goals, plans, needs, or condition changes, and you want to get out of a VA loan as soon as possible, one option is to sell the home you acquired with the loan.

An alternative option is an assumable mortgage, whereby an interested buyer takes over the loan.

What is A VA Loan Assumption?

VA loan assumption occurs when a buyer takes over the responsibility for a mortgage so far the buyer is financially qualified. Thus, the loan assumption simply means signing over the property and the debt to another person and making them responsible for the debt legally.

What Are The Rules Guiding VA Loans Assumption?

  • Loan assumptions require that the assuming borrower (veteran or non-veteran) is financially capable of assuming the loan.
  • Veteran sellers have to obtain a mortgage liability release from the lender. Without a liability release, the holder could incur a negative credit report on themselves if the buyer fails to make the loan payment.
  • The remainder of the loan to be assumed must be current. If not, any due amounts from the past must be paid before or at closing.
  • The original owner or the new owner must pay a 0.5% funding fee of the existing principal loan balance.
  • The processing fee must be paid in advance, including the cost of the credit report.

Situations That Do Not Require The Approval of The VA for A Loan Assumption

Some circumstances do not need the participation of the VA loan holder or the VA (VA pamphlet 26-7).

Such situations include but are not limited to the following:

  • A transfer to a relative as a result of the death of the holder.
  • A transfer when the spouse or offspring of the holder becomes a joint owner of the property with the borrower.
  • A transfer resulting from a divorce or from an incidental property agreement in which the spouse of the borrower becomes the sole property owner.

How Do I Apply for a VA loan?

First, search and select a VA approved lender.

On the surface, it might look like any lender will get the job done, but along the line, you’ll find out that all lenders are not the same. Only lenders approved by the VA department of the United States can process VA home loans.

Secondly, some lenders’ primary field is conventional loans, while some lenders focus solely on VA loans for military persons. Using the services of a lender who’s well versed with the VA loan process vs. a lender who only funds a few VA loans per year may translate into an easier and faster VA loan process. Many mortgage lenders also offer VA home loans, so feel free to search thoroughly and compare rates with as many lenders as you wish.

There you go! All you need to know about VA loans and how it works. Do reach out to us if you encounter any problem understanding anything VA related, and we’ll be glad to walk you through the path.

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