What are VA Loans?
VA Loans are government backed mortgage loans made available through approved lenders to United States veterans, service members and their spouses. Approved lenders could be banks, savings and loans or mortgage companies. You should understand that gov Instead, what the government does is to provide guaranty to the approved lenders through the U.S. Department of Veterans Affairs. The essence of this guaranty is to protect the lenders from loss in case the borrowers are unable to pay back their VA Loans. This reduces the lenders’ risks and therefore makes the interest rates on VA loans to be more favourable. However, U.S. Department of Veterans Affairs will not guarantee certain loans. For instance, if there is any bye law or association agreement that restricts the VA Home Loan borrowers from selling or disposing the property, such loan will not be guaranteed. It is expected that VA Home Loan borrowers should have the rights to sell or dispose his property.
Eligibility of VA Loans
VA Loans are not for everybody. Before you start researching on how you can apply for the loans, it is better to find out first if you are eligible for any of the loan programs. Below are the categories of people who can apply for VA Loans:
- Service members
- National Guard
- Reserve Member>
- Reserve Members
- Surviving Spouses (under certain conditions)
For emphasis, you will be able to apply for VA Loans if you are a U.S citizen and served during World War II in the armed forces of a government allied with the United States. Also, people with service as members in organizations like cadets at the Air Force, United States Military or Coast Guard Academy, Public Health Service officers, National Oceanic and Atmospheric Administration officers, midshipmen at the United States Naval Academy, merchant seaman with World War II service, and others are eligible to apply for VA Loans.
The above notwithstanding, you are expected to have spent satisfactory period of time in active service before you can be considered eligible for VA loans. The basic requirements are set as follows:
- You must have served for 90 consecutive days of active service in wartime, or
- You must have served for 181 consecutive days of active service during peacetime, or
- You must have more than 6 years of service in the National Guard or Reserves, or
- You must be surviving spouse of a service member who died in line of duty or as a result of a service related disability.
In addition, you must have sufficient income and a valid Certificate of Eligibility (COE). For clarity, qualifying VA income includes salary from regular employment, seasonal employment, part time job, second job, bonus and overtime, self employment income, LES stipulated military income and child support or alimony. Income from gambling, unemployment, lotteries, one time bonuses or one time payments from employer and non-occupying co-borrower income among others may not be considered as qualifying VA income. The level of residual income VA lenders may require that you have may be influenced by the the location of the house you intend to buy and the number of people that will be living in the house. The size of the loan you want to take will be another factor that lenders will like to consider too.
You can apply for Certificate of Eligibility (COE) online or through your lender. You can also apply by mail or contact Veterans Administration by yourself and complete a Certificate of Eligibility (VA Form 26-1880). If you want to apply for Certificate of Eligibility (COE), you should have your evidence of eligibility readily available. The evidence you will need to provide may vary depending on the nature of your eligibility. In addition to this eligibility requirements set by the Veterans Administration, individual approved lenders may still require that you meet certain criteria. These criteria may include that you maintain a certain level of credit score, debt-income ratio and specific credit requirement. In order for them to ascertain your credit status, the lenders may need to make inquiry on your credit from the three leading credit bureaus. Please note that if any veteran who have been discharged under questionable conditions apply for VA Home Loan, such personal may be considered not eligible.
Features of VA Loans
VA Loans are quite different from the traditional mortgage loans in some ways. The unique features of VA Home Loans are what make the loans to be more attractive to individuals. That is why you may like to take advantage of the loan if you are eligible. Below are some of the features of the loans:
- No down payment is required: If you want to apply for traditional mortgage loans, some lenders will ask you to make up to twenty per cent down payment. Not everybody can afford to make this down payment, thereby denying them the privilege of owning their own house. Since no down payment is required to access VA Loans, you don’t need to make a huge initial payment. You just need to borrow the amount that you will be able to pay back monthly. In 2017, government increased the VA loan limit from $417,000 to $424,100 with exception of some high cost counties where the limits are higher. The VA loan limit is the maximum amount you can borrow without down payment. If the value of the property you want to buy is more than the set limit, you may be required to make a down payment.
- Low closing costs. There is a limit to the closing costs you can be asked to pay. Closing costs contribute to the reasons why mortgage loans can be very expensive a times. With the cap placed on the closing costs on VA Loans, the loans become more affordable. In certain circumstances, seller can even be asked to pay the closing costs instead of you to be the one paying the costs.
- Low interest rates: VA Loans are backed by the government through the U.S. Department of Veterans Affairs. This reduces the risks that the lenders need to carry on the loans. As a result of the fewer risks, the interest rate on VA home loans is generally lower than traditional mortgage rates. With this, the monthly payment on the loan will not be a burden to the borrower. On the other hand, the low interest rates can help the borrower to pay off their loans faster. Greater part of their repayment can go towards the repayment of the principal instead of just servicing the loan interest.
- No prepayment penalty: In case you receive windfall of unexpected cash as gifts, you can apply the money towards the repayment of VA Loans. If you are able to pay off the loan before the maturity date, you cannot be charged repayment penalty. This is another cost that VA Loans help you to avoid.
- No Private Mortgage Insurance (PMI). If you obtain a conventional mortgage loan, you will be required to buy Private Mortgage Insurance (PMI). This is essentially to protect the lender in case you stop making the monthly payments on your loan. The insurance premium is usually added to your monthly payment. However, there are some lenders who may decide to waive the Private Mortgage Insurance (PMI). Nevertheless, this will result to higher interest rate on the loan. In the case of VA Home Loans, you don’t need to pay for such Private Mortgage Insurance (PMI). The fact that you are not buying the insurance does not have anything to do with the interest rates you will pay on your VA Loans. The reason you don’t need any insurance is the guaranty that the government has already provided in case of default.
- VA Assistance: If borrowers happen to have problem paying back their VA Loans, Veterans Administration can provide assistance.
- Reusability: Once you are qualified for VA Loans, you can use your full entitlement over and over again in as much you keep paying each loan. It is not just a one off affair. The loan is supposed to be revolving. As borrowers keep paying back, the funds will be available for eligible individuals to borrow.
- No specific income level required: A lot of people usually misinterpret that statement that individuals interest in VA Home Loan should have sufficient income. This does not mean that you should reach a specific income level before you can apply for your VA home loan benefits. What the Veterans Administration expects is that, individual should have a stable and reliable income that will allow you to meet your monthly mortgage payments while you still have enough balance to cover your family needs.
- Credit Score: The approved lenders will still like to pull out your credit score so as to determine whether you are a good borrower. The only difference here is that the required credit score for VA Home Loans may not be as high as it may be required for traditional mortgage loans.
- Required Debt to Income Ratio: VA does not set any specific maximum debt to income ratio for borrowers. Nevertheless, lenders may be more disposed to individuals whose debt to income ratio does not exceed 41%. People with debt to income ratio above 41% may need to provide proof of their ability to repay the loan.
Types of VA Loans
There are different types of VA Home Loans that are available for the individuals who are eligible for the loan. These are highlighted below.
VA Purchase Loans: This VA Home Loan program allows veterans and their families with suitable credit and sufficient income to purchase a primary residence with one hundred per cent financing. That is, you will be able to purchase your home without putting any money down towards the sale price of the home. But the sales price should not exceed the appraised value of the home. If the sales price of the home exceeds its appraised value, lenders may require down payment.
VA Refinance Loan: In case you are in need of cash to make a large home improvement for instance, this type of VA Home Loan allows you to get additional cash out on top of your mortgage provided you have built enough equity on your home.
Streamline Refinance Loan: You can equally call this Interest Rate Reduction Refinance Loan (IRRRL). If you have existing VA Loan, Streamline Refinance Loan helps you refinance the loan so that you can take advantage of the lower interest rate. With this, you will be able to lower your monthly payment. On the other hand, if you maintain the same amount of monthly payments, you will be able to pay off your loan faster. You may not need to incur any out of pocket expenses if your lender chooses to pick up the closing costs. However, this may result in paying higher interest rate. Alternatively, you may opt for low interest rate while the closing costs are rolled into the balance of your loan. Borrowers that want to get Streamline Refinance Loan can use their original document of eligibility to process the loan. This means less paperwork and this will make the whole process to be fast.
VA Loans Repayment Types
Even though we have different VA Home Loans, they can be further classified based on their repayment plan. The three options available are discussed below.
Fixed Rate VA Loans: These VA Home Loans work just like the conventional fixed rate mortgages as the interest rate on the loan remains unchanged over the whole life of the loan. The interest rates on Fixed Rates VA Loans are usually set higher than Adjustable Rate VA Loans. However, borrowers on this plan don’t need to worry about the fluctuations in the interest rates. Borrowers under Fixed Rate VA Loans pay the same amount every month from the beginning of the loan to the end of the loan period. The rate is stable and this makes the monthly payments to be predictable. This is good for planning and budgeting purposes. Fixed Rate VA Loans are good for people who will like to stay in their home for a long period. The drawback is that, if you are on this plan, you may not be able to take advantage of any fall in interest rate. Before you can enjoy the lower interest rate, you will need to finance your VA Loan. This comes with additional closing costs.
Adjustable Rate VA Loans: The interest rates on Adjustable Rate VA Loans may either go up and down over the life of the loans. The interest rate reflects the prevailing interest index in the market. Initially, the interest rate on Adjustable Rate VA Loans may be lower than that of Fixed Rate VA Loans. This can make it to be tempting. But the rates can be increased if the interest index increases and vice versa. This means that your payments will keep fluctuating over the life of the loan. This makes the payment unpredictable and it can be difficult to understand for the first time homeowners. But there is a limit to how much the lender can raise the interest rates on government backed loans. The first and subsequent increases in the interest rate may not be more than one per cent per time. Furthermore, the maximum percentage increase on the interest rate may not be more than five per cent over the entire loan period. This type of VA Loans is suitable for people who don’t intend to stay long in their home. They just simply take advantage of the introductory low rate and then move out before the rate increases.
Hybrid Adjustable Rate VA Loans: Some lenders have a more flexible option by combining the features of both Fixed Rate VA Loans with Adjustable Rate VA Loans. If you are on this program, you will be placed on fixed interest rates for the first three years minimum. Thereafter, the lender can adjust the rate on an annual basis up to the maximum of five per cent over the entire life of the loan. This type of VA Loans is equally good for people who intend not to stay long in their home.
Uses of VA Loans
You can use VA Loans for the following purposes:
- To purchase a home or condominium unit that you want to occupy.
- You can use it to buy manufactured home. This include the purchase and improvement of the lot where the manufactured home will be placed.
- Construction: You can use your VA home loan to construct a house from the scratch covering the purchase of the land where the home will be built. Even though this is allowed by VA, it may be difficult finding lenders that will not require down payment.
- Purchase and Home Improvement: It is possible that you buy a house that needs some improvements. You can use your VA loan to buy a house and carry out improvement on the house at the same time.
- Make specific improvements on the house by installing energy related features or making energy efficient improvements.
- VA Loan refinancing: You can refinance existing VA Loans. If you are a veteran, you can also refinance existing mortgage loan secured by a home owned and occupied by you as home. People refinance their loans for different reasons. You can refinance your VA home loan to lower your interest rate so that you can save money on interest payments. You can also cash out the equity in your home to invest in another property. However, you may not be able to cash out your loan equity with interest rate reduction refinancing loans.
Please note that there are some loans that VA will not guarantee because of the illegibility of the purposes of such loans . VA will not guarantee loans made for the following purposes:
- Purchase of land that you don’t intend to improve immediately.
- Purchase or construction of income generating home.
- Purchase or construction of residential property with non residential area occupying more than twenty five per cent of the total floor area.
- Purchase of more than one separate residential unit except the units can be proved to be just one property. Certain criteria will be applied.
- Purchase of home outside U.S.
VA Home Loan Rates
The VA Home Loan rates are competitive but there is no standard rate set for the lenders by the Veterans Administration. But one thing that is sure is that the VA Home Loan rates are lower than lower than that of the traditional mortgage loan rates. Even though the VA Home Loans are backed by the government, the approved lenders have the liberty to charged their own rates which are competitive anyway. The criteria they use to determine the interest rate they charge borrowers include the following:
- Credit Score: Your credit score is used to measure the creditworthiness of borrowers. Individual with excellent credit score are believed to be credit worthy. There is likelihood that people with good or excellent credit score will be able to pay their monthly payment as they don’t have history of defaults. This makes them to enjoy lower VA Home Loan rates compared to people with not too good credit score.
- Debt to income ratio: Debt to income ratio is the expression of the total debts you currently owe as a percentage of your income. If your debt to income ratio is high, you may be considered not having sufficient income that will allow you to meet your monthly loan payments and your family needs. If your debt to income is high already, you can bring it down either by paying off part of your debts or increasing your income. You can increase your income by changing your job to a better paying job or by combining another job to your current job. Lenders will like to ensure that you will continue to receive income from your stipulated source for at least the next three year. This will give them a certain level of assurance that you will be able to make timely payment on a continuous basis.
- Loan Duration: The duration of your VA home loan will influence the interest rate you will be charged. The rates on VA home loan of 15 years and 30 years duration respectively may differ. However, whatever the rates, borrowers tend to pay more interest on loans with 30 years duration than that of 15 years duration. The reason is simple. The longer the loan duration, the longer the period you are going to pay interest on the loan.
- Market Conditions: In a recessionary economy which is generally characterised by low Gross Domestic Product and high rate of unemployment, people have less disposable income. In a period like this, people are more concerned about basic things such as foods and clothing. People are left with no or little money for investments. As a result, there will be a general fall in interest rates. This also affect the VA Home Loan rates.
VA Home Loan Fees
You need to understand that the fact that VA loans are backed by the government does not exempt you from paying certain fees. The only mortgage related fee you are exempted from paying is the Primary Mortgage Insurance (PMI). Primary Mortgage Insurance is essentially to protect the lenders against defaults by the borrower. Since the government has already provided a guaranty on the loan, that is why the insurance is not required. If you don’t prepare to pay any out of pocket expenses, your lender can bear the costs. But this will reflect in the interest rate you are going to be charged. Otherwise, the fee will be rolled into the VA home loan amount. The following are the fees you may be asked to pay on VA Home Loans
- Origination fee: Some lenders call this processing fee. It is usually a maximum of one per cent of the loan. If you are charged origination fee, you might not need to pay some of the other VA home loan fee.
- Appraisal fee: This covers the inspection and appraisal carried out on the property in order to be sure that it meets the VA Minimum Property Requirements (MPRs). I will throw more lights on VA Minimum Property Requirements below. It also covers the checks carried out on the property to find out any safety defects and to accurately ascertain the value of the home.
- Funding fee: This is a one time fee you need to pay to the Department of Veterans Affairs. It is usually a percentage of your loan amount. The percentage that will apply depends on your loan type, your service, whether you have a prior VA loan and whether you are making down payment. Since VA home loans are guaranteed, the Department of Veterans Affairs utilize funding fee to pay for any defaults from the borrowing. This helps lessen the burdens on the tax payers. You will not need to pay funding fee if you are receiving compensation for a service-connected disability or you are entitled to receive compensation for a service-connected disability if you did not receive payment for retirement active duty. Also, if you are a surviving spouse of a Veteran who died in service or from a service-connected disability, you will be exempted from paying funding fee.
- Title insurance: This is different from Primary Mortgage Insurance. Title insurance is meant to protect the lender in case of title defects, lien and other problem with the home.
- Other closing costs: These may include cost of recording of the official sale of the house. This is usually done by the government. Government charges for this but lenders usually pass the cost to the borrowers. You may be charged is survey fee to cover the cost of survey to show the property details including its lines and boundaries. Other costs include charges for credit report, flood zone determination, Mortgage Electronic Registration System (MERS), special mail and other fees as may be authorised by VA.
You should endeavour to request for the fees that your lenders may ask you to pay after you have submitted your application. Lenders are requested by the federal law to disclose their fees to you within three days of the submission of your application. With the initial fee disclosure, you will be able to make comparison among different lenders.
VA Minimum Property Requirements (MPRs)
The Department of Veterans Affairs has specific requirements which a property must meet in order to qualify for VA Home Loan. It is expected that your property:
- Must be easily accessible. It must have access from public or private street.
- Must be a single, readily marketable real estate entity.
- Must be primarily residential. That is, not less than 75% must be residential.
- Must have sanitary facility and enough space for living, sleeping, cooking and dining.
- Must not have more than four units sharing laundry, storage, heating and other facilities.
- Must have water, electricity, gas and sewer for each unit. However, these can be shared by several units under one ownership provided there are separate shutoffs.
- Must not allow individual utilities to cross another unit except it is necessitated by repair and maintenance.
- Must have protected connections for shared common utilities if the units are under separate ownership.
- Must have mechanical systems that are save to operate and well protected from destructive elements.
- Must have adequate heat for healthful and comfortable living conditions.
- Must have adequate electricity for lighting and necessary equipment for each unit.
- Must have uninterrupted supply of potable water.
- Must have sanitary facilities and a method of sewage disposal that is safe.
- Must have roof that can prevent moisture from entering the house. The roof must have minimum of five years remaining useful life
- Must be free of hazards that can affect the health and safety of the occupants.
Please, the VA Minimum Property Requirements (MPRs) here is not comprehensive. I will advise that you read the full list as made available by the Department of Veterans Affairs.
How to Get VA Home Loan
In summary, let me walk you through the procedure involved in getting VA Home Loan. If there is any area you don’t understand, you may need to go back to the main body of the article for details.
- Check for Eligibility: The first thing to do is to check your eligibility. If you are not eligible, there is no short cut to it.
- Apply for Certificate of Eligibility: You can do this this online or by contacting Veterans Administration yourself.
- Find a Lender: You need to search for approved VA lenders. Before you settle for a particular lender, you should ensure that you are selecting the one that is right for you. You should not just look for a lender that will give you the loan; a good lender should be able to render other value adding services to you. If you are a first time home buyer, your lender should be able to guide you through the pre-qualification process and help you obtain relevant documents you might need to process the loan. If you don’t know, VA home loans like other mortgages usually have some hidden charges. But if you get a good lender, he should be able to help you identify some cost-saving opportunities. It is not enough to offer you the lowest rate; the lender should let you be aware of other relevant fees and charges you might need to pay. Your lender will give you pre-approval. With this, you can start search for the home of your choice.
- Find a home: You need to understand that you may not go for a home that is beyond the lending limits if you don’t want to make down payment. Engaging a professional agent can be helpful. However, you may need to pay for his service. If you don’t want to pay any fee to a broker, you can tap into experience of someone within your area that has gone through the same process. He will be able to guide you on what to watch out for.
- Have your home financed: This may be like the end of the whole process but it is actually the beginning of a new phase. You need to ensure that you don’t default in your monthly repayment. It is important that you don’t forget to obtain closing disclosure from your lender.
Having gone this far, I believe you have gained some insights on VA Loans. If there are other things you may like to know, you can add it as comment below.