VA Loan is a government-backed mortgage designed for Veterans, service members, and eligible surviving spouses. Eligible Veterans can purchase a home with no downpayment, no mortgage insurance, flexible credit guideline, and convenient fixed interest rates.
The purpose of VA loans is to make home buying easier for those who serve our country. The Department of Veterans Affairs (VA) does not lend the money directly, VA loans are made by private lenders, such as mortgage companies and banks.
Who qualifies for a VA loan?
Not everyone who serves or has served in the Armed Forces qualifies for a VA loan.
– You are a veteran who meets length-of-service requirements, which generally are 90 days in wartime and 181 days in peacetime.
– You are on active duty and have served 90 continuous days.
– You completed 90 days of active-duty service or six creditable years in the Selected Reserve or National Guard.
– You are the surviving spouse of a veteran who died while in service or from a service-connected disability and you have not remarried. Or you remarried after age 57 or Dec. 16, 2003. Spouses of service members missing in action or prisoners of war are also eligible.
These are the basic qualifications, for more information, see the VA’s eligibility guidelines.
Document list for VA loan
– government-issued ID
– Recent pay stubs or self-employment income evidence
– Two years of tax returns
– Two years of W-2 statements
– Bank statements from checking, savings and retirement accounts
– Certificate of Eligibility (COE): COE verifies that you meet the military service requirements for a VA loan.
You can get a COE directly from your VA-approved lender. Also apply online through the eBenefits portal or via mail with Form 26-1880.
– DD-214 or Certificate of Release or Discharge From Active Duty
General characteristics of VA loans
No downpayment required: If the home price is greater than the appraised value, you have to make up at least a portion of the difference.
No Mortgage Insurance (PMI)
Competitive low-interest rates
VA Funding Fee: 1.4% to 3.6% depending on the type of loan, size of the downpayment, or if you are a first-time home buyer, and it’s included in the loan.
This fee may be waived for veterans with disabilities or surviving spouses.
VA Appraisal: The value of the property is obtained by a VA appraisal, which is also called a Certificate of Reasonable Value (CRV) or Notice of Reasonable Value( NOV).
Primary residence only. Must move in within 60 days after closing. Can’t be a vacation home or investment property.
Credit score: not required by VA, it depends on the lender’s requirement. With no downpayment, the required credit score is usually 620+.
VA loan Limit: VA doesn’t limit the loan amount, depends on lenders’ guidelines, but if the home price exceeds the county loan limit, a downpayment will be required.
Limited closing costs: VA limits the lender’s origination fee to no more than 1% of the loan amount and prohibits lenders from charging some other closing costs.
Income guideline:
Debt to income (DTI)
41%. PITI and all other debts must be less than 41% of the gross income. If you have a higher credit score, DTI could be higher too.
Residual income:
This requirement is especially for VA loans. This is the amount of money remaining after deducting all your debts and expenses. This money is usually used to buy necessities like food, gasoline, etc. You need to meet the residual income requirement to qualify for a VA loan.
The following charts are the amount of residual income required according to the loan amount, location, and family size. (VA Lender’s Handbook Chapter 4, Section 9)
What are the Advantages and Disadvantages of VA loans?
Advantages
No down payment
mortgage insurance not required
Lower interest rate
Limited closing costs
Disadvantages
VA loan funding fee: The fee is set by the federal government and covers the cost of foreclosing in case of a borrower defaults.
Purchase loans only for primary homes, not for investment property or vacation home
Not all properties eligible: A VA-approved appraiser will evaluate the home you want to buy to estimate the value and make sure it meets the VA’s minimum property requirements. Some fixer-uppers may not meet the VA’s minimum standards.
How many times can you apply a VA loan?
After using a VA mortgage to purchase a home, you can get another VA loan if you:
– Sell the house and pay off the VA loan.
– Sell the house, and a qualified veteran buyer agrees to assume the VA loan.
– Repay the VA loan in full and keep the house. For one time only, you can get another VA loan to purchase an additional home as your primary residence.
What is VA entitlement?
Now let’s talk about something more technical, What is VA entitlement?
VA entitlement is a very confusing thing about VA Loans. The concept seems to be straightforward but the way how it applies, it’s not so easy to understand.
VA entitlement is not the amount of money you can borrow, it’s not a loan limit. VA entitlement is how much the VA will guarantee for a qualified veteran or other eligible people they might obtain. This is also the reason why VA loans can offer no downpayment, no mortgage insurance, and low-interest rate.
The basic VA entitlement is $36,000. This is the amount the VA will guarantee on a home loan. Lenders will generally approve a loan for four times this full entitlement without asking for a downpayment as long as you meet the credit score, credit history, and income guidelines.
This means you have a $144,000 loan amount to buy a home without a downpayment.
$144,000?!
This doesn’t seem to be enough to buy a house these days. Don’t worry, for house price over $144,000, the VA will guarantee up to 25% of the purchase price up to the local loan limit determined by Federal Housing Finance Agency ( ranges from $647,200 – $970,800)
What if you want to buy a house that price is over the local loan limit, you can still do it, but you will need to make a downpayment of 25% of the excess.
Example:
You want to buy a house for $ 747,000, and in this area, the loan limit is $647,200. You need to put a downpayment that is 25% of the difference between these two amounts.
$747,200 – $647,200= $100,000
$100,000 x 25% = $ 25,000 => you need to put this downpayment
In this case, your VA guaranty on the loan would be $161,800 ( $647,200 x 25% = $161,800)
This means that in the event of a default, the VA is guaranteeing that they will repay up to $161,800 to the lender. So lender would have to recover less than $585,400 in foreclosure before it would suffer any loss.
For lenders, this guaranteed amount works similarly to the security provided by a downpayment. And this is the reason why lenders can offer better VA loan terms.
The entitlement and guaranty are only the amounts that the VA insures your loan amount. They are not grants to pay part of your loan. You still need to pay 100% of the price of the house.
What if you want to buy your next home?
Here is where VA loan guaranty distinguishes over VA entitlement when you want to replace the first house or another home.
Technically, you can only use your VA entitlement once. If you buy a home valued at $144,000, you have used all $36,000 entitlement, that’s it, all gone. The only way is you paid off your first VA mortgage, and apply for a VA loan again.
But the exception is you are still entitled to your additional guaranty amount if you choose to buy another home that exceeds $144,000 in value. You may still get some entitlement left.
How to calculate the guaranty on a second purchase?
The calculation is take the base guaranty for the house you are buying and subtracts the entitlement you’ve used before.
Example:
The base guaranty on a $647,200 ( loan limit of the area) is $161,800 ( $647,200 x 25% = $161,800).
From your last purchase, you have used $30,000 of your entitlement to buy your first house.
So your remaining entitlement available is $161,800 – $30,000= $ 131,800
Too much information to understand? Don’t worry, your loan officer should have all this figured out for you.
Remember to shop around and compare rates and conditions between different lenders before you apply.
I have different VA loan programs based on different scenarios to offer, let me know if you want more information about VA loans.
