Table of Contents
How VA Loans Work | Things to Know | Multiple VA Loans | Other Advantages | VA Eligibility | What to Look for in a Lender | Joint VA Loans | Closing Thoughts
How VA Loans Work
The VA home loan is one of the best available benefits for Military Veterans. If you are looking to buy at home at your current duty station or considering home shopping at your next assignment, this may be the best mortgage loan option for you and your family.
The US Dept of Veterans Affairs does not directly fund mortgage loans to Veterans. You apply for a VA home loan directly through a VA approved mortgage lender, bank, or credit union.
The VA’s role is to provide a guarantee to the mortgage lender for up to 25% of the loan amount in the unfortunate event of a loan default.
Your VA loan benefit does not expire, so you can use it at any time throughout your lifetime as long as you have remaining eligibility in the County in which you intend to purchase.
The features and benefits of the VA home loan are so good, you’d need at least 25% down and a high FICO score for conventional financing to be comparable to the VA loan.
One of the best ways to leverage a VA loan is with 100% financing. The VA does not impose a maximum loan limit for 100% financing if you have never used your VA benefit or have full VA entitlement restored after selling/refinancing a previous VA loan.
*Note: many lenders have a maximum loan amount they will support with $0 down payment, such as $1.5M for example. This means you can purchase a home for $500,000, $900,000 or even $1.5M or more without a down payment! The major stipulation is qualifying for the housing payment.
Things You Need to Know About the VA Loan
When buying a home, your VA home loan can only be used to purchase your primary residence that you will occupy within 60 days of closing. As an owner occupant, you must live in the property for at least 12 months to satisfy this requirement.
There are exceptions to the 60 day move in requirement, for example, if you are deployed or are overseas, your spouse may be able to satisfy this condition for you.
Also, you may be able to depart your home within the 12-month owner occupancy period if you receive PCS orders or are required to relocate for other situations beyond your control.
Credit Requirements. The VA does not establish a minimum credit score but the vast majority of VA lenders require a minimum credit score of 620. The higher your credit score, the better your interest rate and purchasing power. Even if you do meet the minimum, it is far better to have a FICO score over 680 to obtain better financing terms.
VA loans can be used to purchase newly built or existing single-family homes and condominiums. The condition of the property must meet VA Minimum Property Requirements (MPRs). These MPRs are established to ensure that the property is structurally sound, safe, and sanitary.
Basically, if the property has some cosmetic issues, it is satisfactory for VA financing. However, if it needs repair or has obvious signs of damage, these issues may have to be corrected prior to loan closing.
There are local requirements for VA loans by State so that you can do additional research as it relates to your specific locality.
Condominium projects must be approved by the Veterans Administration prior to closing on a condo in the project with a VA loan. Once a condominium project is approved by the VA, it remains on the approved list until something warrants the suspension of the approval.
Most established condominium projects are already VA approved and can be verified on the VA Condo Search website. If the condo is not VA approved, many lenders will submit the necessary paperwork on your behalf to approve the condo for VA financing during your purchase transaction.
For Condo projects, be wary of the HOA (Home Owner Association) Dues as these can be a costly addition to your monthly housing payment. Make sure to factor in the amenities, utilities, and other expenses included in the HOA dues to determine their benefit to you as the home buyer.
Multiple VA Home Loans.
You can have more than one VA loan simultaneously! If you have an existing VA loan outstanding or have part of your VA entitlement used due to a previous foreclosure or short sale, then you are limited to the Fannie Mae County loan limit in the County you intend to buy your new home.
For example, the Honolulu County loan limit is $1,089,300. The easiest way to figure this out would be to subtract the original loan amount for your existing VA loan from $1,089,300 and the result would be your remaining limit for 100% financing.
If you used your VA eligibility to buy a home in CONUS with a VA loan of $489,300 and then re-assigned to Oahu, Hawaii, you have $600,000 remaining for 100% VA financing. This is determined by subtracting the $489,300 of loan eligibility in use from the Honolulu County loan limit of $1,089,300.
There is no limit to the size of a VA loan, however, any purchase price that exceeds your remaining VA eligibility amount requires a down payment of 25% of the difference between that amount and the purchase price.
Referencing the example above, you are not limited to a $600,000 purchase price. You can still purchase a home for $700,000, for example, but need a down payment of 25% of the difference between the $600,000 remaining eligibility and the $700,000 sales price.
The $100,000 difference results in a minimum down payment of $25,000 and you have a $675,000 VA loan plus VA Funding Fee, if applicable.
If you sell or refinance the original residence that you purchased with VA financing, then your full VA eligibility can be restored so you can purchase a home WITHOUT concern for the County loan limit with 100% financing (assuming you qualify for the payment and find a lender to lend as high as you desire).
What are the other advantages of the VA Home Loan?
Interest Rates are Typically Lower with VA Loans – generally, VA loan interest rates are lower than conventional loans and other types of financing potentially resulting in a lower monthly payment than other options.
Flexible Qualifying Guidelines – there are no rigid debt-to-income limitations with VA loans. Lenders are able to review your entire credit profile and make a decision to approve your VA loan by demonstrating you have sufficient income to cover the new mortgage payment along with other existing debts and living expenses.
No Private Mortgage Insurance (PMI) – with VA loans, there is no separate monthly PMI payment as the Veterans Administration guarantees a portion of the loan for the lender to satisfy this requirement. The VA Funding Fee helps to support the VA guarantee.
The VA Funding Fee
This fee in included on most VA loans and is the fee the VA charges to guarantee your VA loan. These funds are used to offset lender loan losses as a result of VA foreclosures and short sales. The VA requires lenders to collect this fee directly from you as a closing cost or it can be financed into your new VA loan (most common).
The dollar amount of the VA funding fee is calculated as a percentage of the loan amount and depends on several factors, such as the down payment amount and whether or not you have previously used your VA benefit.
Here are the current VA funding fees for VA purchase loans:
- First-time usage with 0 down payment – 2.15%
- Subsequent usage with 0 down payment – 3.3%
- First-time & Subsequent usage with 5% down payment – 1.5%
- First-time & Subsequent usage with 10% or more down payment – 1.25%
For example, if you are buying a home at $500,000 with 100% VA financing and using your VA benefit for the first time, the VA funding fee is 2.15% ($10,750).
If you finance the VA funding fee into the loan (most common), your total loan amount for your home purchase is $510,750. The property must appraise for the sales price of $500,000 for 100% financing as the VA funding fee is allowed to be financed above the sales price/appraised value.
The VA funding fee can be waived entirely. Veterans who receive service-connected VA disability compensation and all others who have at least a 10% VA Disability rating. If the VA funding fee is waived, it is indicated on your VA Certificate of Eligibility.
Purple Heart recipients are exempt from the VA funding fee. To document this, provide a certificate or military orders to evidence the receipt of the Purple Heart.
VA Eligibility
Your eligibility is determined by your type of service, whether you served active duty, reserves, or national guard, your length of service, and your character of service. Here are the most common minimum eligibility requirements:
· Current active-duty service members (since 2001) – 90 continuous days of active service.
· Recent Reservists and National Guard members – six good years of service and either honorably discharged or continuing to serve in good conduct. Reservists or National Guard deployed on Title X Federal orders to OIF or OEF are eligible with 90 continuous days of active service.
· Reservists or National Guard activated under Title 32 State active duty do not meet this requirement.
· Special circumstances – some service-connected disabled veterans (who have not already met the requirements above) and spouses of deceased veterans may also be eligible.
Each VA approved mortgage lender can access your VA Certificate of Eligibility (COE) through the online VA lender portal to verify your eligibility.
You may also request a VA COE directly through the US Dept of Veterans Affairs in advance of your home purchase to be certain you are eligible. You may need a copy of your DD214 or Active Duty Statement of Service to verify your service.
What to look for in a VA Lender.
Each VA approved lender will likely be able to provide you with VA financing for your home purchase. However, the customer service you receive and the overall experience of the VA loan approval process with vary wildly from lender to lender.
Recommended “Do’s” and “Don’ts.”
· Do take the recommendation of your real estate agent. If you agent is experienced with VA buyers, they will have a trusted lending source for VA financing that has demonstrated excellent service to their clients.
· Do ask lots of questions. Even if you are not a first time home buyer, none of these concepts are taught in school and you shouldn’t be expected to know and fully understand all of the aspects of VA lending. There are no dumb questions.
· Do expect great service. If your VA lender is responsive to your inquiries, takes the time to explain the process to you, and answers your questions informatively, look no further, this is the lender you want to use. Great service is often worth the extra expense.
· Don’t choose a lender simply because they have VA or “Veteran’s” in their name. No mortgage lender is part of the Veteran’s Administration, they are independent mortgage lenders, just like all banks and credit unions. Many loan officers at these VA lending companies are inexperienced and may not be capable of guiding and advising you through one of the largest purchases of your lifetime.
· Don’t settle for a bad lending experience. Find a new lender immediately if you believe you are being misled, ignored, over-charged, or if you feel your loan officer cannot adequately answer your questions. As long as you have at least 3-4 weeks remaining in your purchase timeline, a new lender can step in to assist.
Joint VA Loans and VA Loans with Non-Veteran Family and/or Friends.
A joint VA loan is typically between 2 VA eligible buyers who are not married. Each Veteran would use half of their eligibility for the purchase but it is not nearly as advantageous as a VA loan jointly with Veteran and Spouse. Joint VA loans with 2 non-married Veterans are limited to the County loan limit for 100% financing where the home is purchased.
Joint VA loans with Veteran and non-Veteran(s) are also available now but cannot be done with 100% financing. For example:
If the primary buyer is a Veteran and the co-buyer is a non-Veteran, then half the Veteran’s eligibility is used and a 25% down payment is required for the non-Veteran’s half of the purchase price. Overall, this works out to 12.5% down payment on the purchase price.
If the primary buyer is a Veteran and there are 2-3 non-Veteran co-buyers, the Veteran’s eligibility percentage equates to their portion of participation in the purchase. In this case, a 25% down payment would be necessary for 67% or 75% of the purchase price if there are 2 or 3 other non-Veterans on the loan.
Closing Thoughts.
The VA home loan is an excellent option for you to consider to help finance your first home purchase or your next home purchase. Spend the time to research and investigate various VA mortgage lenders to find the one with the responsiveness, expertise, and communication skills to help guide you throughout your home purchase process.
The VA lender you choose for your home financing can make all the difference between a smooth and enjoyable buying experience and a complete nightmare. Choose wisely!
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