Millions of Americans are eligible for a U.S. Department of Veteran Affairs (VA) loan. For those who meet the requirements, VA home loans offer a mortgage with no money down and refinance options that make rate reduction possible.
The U.S. Department of Veteran Affairs offers both direct home loans and VA-backed loans. In other words, the VA can either serve directly as your mortgage lender or they can guarantee part of the mortgage you get through a private lender, like us, which boosts your chance of approval.
To receive a Certificate of Eligibility (COE) for a VA loan, you need to meet the following requirements:
- You served at least 90 consecutive days of active duty during wartime.
- You served at least 181 days of active service during peacetime.
- You are the spouse of a service member who died during active duty or as the result of an injury they received while on active duty.
Even if you didn’t serve the minimum amount of time, qualifying for VA loan is still possible if you received an honorable discharge or suffered a service-related disability.
Advantages of VA Mortgage Loans
1. You aren’t required to have a down payment.
Although many lenders no longer make people put down 20% of the purchase price the average down payment in the United States is currently 7%. Even Federal Housing Administration (FHA) loans require 3.5% down. With a VA loan, though, your savings can go directly into home improvements — which is a huge advantage, especially for first-time homeowners.
2. There’s no private mortgage insurance (PMI).
When you opt to put down less than 20% on a conventional mortgage, you need to pay insurance on the fraction of the loan that falls beneath that 20% threshold. What this premium does is provide the lender with insurance in case you default on the loan in the early stages. PMI can add hundreds of dollars to your monthly mortgage payment until you have met the obligation. With a VA loan, there is no PMI. Instead, borrowers pay a one-time funding fee of 2.3% of the loan amount, which you can pay upfront or have rolled into the total loan cost.
3. You may get a lower interest rate.
A possible perk for those eligible for a VA home loan is the interest loan rate. VA loans can be points lower than conventional loans. It depends on the market.For the first week of March 2020, the average 30-year conventional loan rate was 3.219%, while a 30-year VA loan was just 2.925%.
4. The seller can pay up to 4% of your closing costs.
Buyers can pay anywhere from 1% to 3% of the loan amount on bigger VA home loan purchases, and possibly 3% to 5% on smaller ones. Although the VA doesn’t charge so-called “junk” fees, the VA’s loan origination fees can be higher than what you’ll pay to close out a conventional mortgage loan elsewhere. However, the seller can pay up to 4% of the closing costs of a veteran home loan. That’s worth negotiating as part of your sales contract.
5. There’s no maximum debt-to-income (DTI) ratio.
What does 43% DTI mean? Your total debt payments (including your mortgage payment) can’t exceed 43% of your gross income. VA loans don’t set a maximum DTI ratio, so there is more flexibility. Having debt payments or a low monthly income is not an automatic disqualification, provided the bank sees that you have other income sources.
6. There’s no minimum credit score needed.
In order to qualify for a conventional mortgage, you may need a credit score of at least 620, depending on the lender. Even FHA loans have a minimum score requirement, typically 580. The VA itself doesn’t have a credit score threshold, even though the lenders who make VA-backed loans might. If your score falls below 580 a lender may opt to manually underwrite your loan.
7. There are two different refinance options.
You can refinance your VA mortgage loan to try and lower your monthly payment. (Eligible parties can also refinance a conventional mortgage loan with a VA loan.) You can also do a cash-out refinance, taking some of the equity that you’ve earned over time and putting toward debt repayment or other expenses.
8. You can use the remainder of your Tier 2 loan entitlement to purchase additional property.
When you apply for a VA loan, there are two tiers of entitlement. The “entitlement” is the 25% of the total loan amount that the VA guarantees. Essentially, this is what allows you to get a VA home loan with no down payment. The first tier is $36,000. Because most people need a home that costs more than $144,000, there is also a second tier entitlement. You may not use all of your second tier entitlement amount when you purchase a home. The VA loan program allows you to use the balance to make a subsequent purchase.
9. Someone else can assume your VA home loan.
If you want to move to another part of the country, or you are retiring and wish to downsize, you can have a buyer assume the same mortgage loan you have on the property. Any loan that closed before March 1, 1988 can be freely assumed by another party; loan assumption of more recent purchases is subject to lender approval and must go through a set procedure.
10. The VA loan program provides foreclosure avoidance advocacy.
The VA has staff who can help veterans and the spouses of deceased veterans to find alternatives to foreclosure in the event that you are delinquent on your monthly mortgage payments. In fact, the VA can provide foreclosure counseling to veterans even if they don’t have VA loans. If you have a VA loan that is 61 days past due, the VA will automatically assign a loan technician to your case so that you can work out a repayment plan or loan modification.
We at Southwest Funding are here to help. We’ve been around for 25 years, and in addition to VA loans, we have extensive experience in terms of Coventional, FHA, USDA, Jumbo and a myriad of other specialty loan products. We’re happy to discuss the specifics of your own situation further. We want to make sure you have all the most actionable and accurate information to work from at all times.
If you’re interested in finding out more about the process of getting a VA home loan and all the benefits attached, or if you just have any other pressing questions you’d like to get answers to, don’t wait — contact us today.
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