VETERAN ADMINISTRATION (VA LOAN)

For more than 25 million Americans, the U.S. Veterans Administration’s home-loan program offers mortgages with competitive rates and unique features especially attractive to first-time buyers — including no down payments, little or no closing costs and lenient credit-history requirements. This article offers a primer on VA housing loans, shares information on mortgage application requirements and credit qualification criteria, and provides links to additional VA mortgage resources.

Created under the GI Bill of Rights at the end of World War II, the VA mortgage loan program is open to all veterans (except those dishonorably discharged) who served a minimum of 90 days or more during wartime or 181 straight days during peacetime. It’s also open to members and veterans of the Reserves and National Guard and surviving spouses under varied guidelines.

Banks and other private lenders process and extend VA home loans under a federally-backed guarantee that covers up to 25% of loan amounts up to so-called conforming mortgage loan limits, which recently stood at $417,000. In the event a borrower defaults on the mortgage, the VA would cover up to $104,250 of any loss the lender suffers as a result. That feature enables participants to borrow without the down-payment lenders typically require to protect their interest if home values decline.

Closing Cost Relief

Along with not requiring a down payment, VA mortgages also can be structured so a borrower pays little or no closing costs. The maximum loan amount is “the lesser” of either appraised value or the home purchase price. Once a borrower determines his or her closing costs — which typically run about 4% of the sales price — a seller can add that amount onto the sales price. So long as the property appraises for that higher amount, the closing cost get rolled into the housing loan.

Local VA offices determine what itemized fees and expenses borrowers in their area may be required to pick up as part of closing costs. They may include a credit report, appraisal fee, title exam and insurance, a property survey, flood zone check, homeowner’s insurance, prepaid taxes and recording fees.

In addition to home purchase loans, the VA mortgage program also offers “cash-out refinancing,” in which veterans with existing mortgages can apply for new loans at amounts higher than what they owe and take “cash out” of their home equity for general use.

To qualify for VA housing loans, prospective borrowers must meet so-called debt-to-income ratios designed to gauge their ability to repay. The maximum ratio generally allowed is 41%. To calculate your debt-to-income ratio, add up

  • The total monthly household cost of the mortgage payment
  • Property taxes
  • Homeowner’s insurance and association dues
  • Revolving and installment debt, such as payments for credit-card, auto, student and personal loans

Divide the total figure by your gross monthly income.

There is no limit on how much you can borrow with a VA loan. There is a limit on the VA Loan Guaranty, which effectively limits how much you can borrow with no money down to $417,000 in most of the country. (Higher limits apply in certain counties with elevated home values.) However, it’s possible to borrow more by choosing to put up some of your own money for a down payment. For more information, see the explanation of the VA Loan Guaranty further down the page.

Borrowers with diminished credit may have an easier time qualifying for a VA loan than for other types of mortgages. The VA itself does not require a minimum credit score, but lenders will have their own standards.

Some lenders will approve a VA mortgage for borrowers with a FICO credit score as low as 580, though 620-640 is the more common minimum, Even then, you may have better luck qualifying for a VA loan than for other mortgages with similar minimum scores, because the VA is guaranteeing the loan.

Borrowers with no established credit history may be able to qualify by demonstrating a record of timely payments on recurring expenses such as rent, utilities or cell phone bills.

VA loans also have shorter waiting periods following foreclosure and bankruptcy than most other types of loans. Homeowners who have been through foreclosure can re-qualify for a new VA loan in as little as two years, though they may have to repay losses the VA suffered on the previous mortgage in order to do so. Those with a Chapter 7 bankruptcy may reapply in as little as two years after the discharge date, while those with a Chapter 13 may qualify after as little as one year of making timely payments on the bankruptcy obligations.

As for debt-to-income levels, lenders typically like to see a borrower’s total monthly debt payments, including the mortgage, at no higher than 41 percent of gross monthly income, similar to other types of home loans. They may go higher in some situations, however.

The VA funding fee is an upfront fee charged on all VA home loans. For members and veterans of the regular military getting their first VA loan, it is 2.15 percent of the amount borrowed for mortgages with less than 10 percent down, including those with no down payment.

Overall, the fee ranges from 0.5 – 3.3 percent, with the lowest fee charged to those who are refinancing an existing VA loan. Otherwise, the fee varies according to the size of the down payment, whether the borrower is a member or veteran of the Reserve or National Guard, and whether the borrower has previously used a VA loan. The fee is waived for those with certain VA disabilities and surviving spouses of those who died in service.

The fee may be rolled into the loan amount, so you don’t have to pay it up front.

THE AMOUNT YOU MAY BORROW WILL DEPEND ON

MORTGAGE OPTIONS

VA mortgages are available as either fixed-rate or adjustable-rate mortgages (ARMs). The most popular option is the VA 30-year fixed-rate mortgage, while 15-year fixed-rate loans offer lower rates and is often used for refinancing. Also available, but less common, are fixed-rate loans with terms of 20 or 25 years.

VA adjustable-rate mortgages are available as hybrid ARMs, where the initial rate is fixed for a period of 3, 5, 7 or 10 years before adjusting, or as a standard ARM, where the rate resets every year. Rate resets on VA ARMs are typically based on current rates for 1-year U.S. Treasury bonds.

STREAMLINED REFINANCE

Another benefit of VA mortgages is streamlined refinancing. This means you can refinance an existing VA loan to a new loan at a lower rate without having to re-qualify. That means no income verification, income documentation, and home appraisals. You can even do a streamlined VA refinance if your home has fallen in value, leaving you underwater on the mortgage (owing more than the property is worth).

STANDARD REFINANCING

VA loans can also be used to refinance a non-VA mortgage into a VA home loan. Standard VA funding fees apply. A cash-out refinance option is available for those who wish to borrow against their home equity by refinancing either a VA or non-VA mortgage, at up to 100 percent of the home’s current value.

HOME EQUITY LOANS

The VA does not guarantee home equity loans or home equity lines of credit (HELOCs). Instead, it allows eligible homeowners to borrow against up to 100 percent of their home equity through a cash-out refinance (see above).

A VA cash-out refinance may be an attractive option, particularly if it allows you to reduce your interest rate in the process. However, in some cases you may be better off obtaining a conventional home equity loan outside the VA system. For example, if you’re only looking to borrow a small amount of money, the fees for a conventional home equity loan may be less than you’d pay for a VA cash-out refinance. Furthermore, if mortgage rates have risen since you obtained your VA loan, a cash-out refinance would mean giving up the low rate you presently have.

WHAT IS THE VA LOAN GUARANTY?

The VA Loan Guaranty is the key to how VA mortgages work. The VA doesn’t actually make home loans, but instead guarantees part of the loan amount on approved mortgages issued by authorized lenders. This typically is 25 percent of the purchase price, up to $104,250 in most of the country, or enough to purchase a $417,000 home with no money down. Higher home price limits, up to $1.1 million, are allowed in certain counties with more expensive real estate (2013 limits).

For the lender, the VA’s 25 percent guaranty is like having a 25 percent down payment as a hedge against default. So the VA borrower gets all the benefits of a hefty down payment – low interest rate, easier qualifying, no PMI – without having to put out the cash. Of course, he or she is still responsible for paying off 100 percent of the loan.

BUYING A MORE COSTLY HOME

If a VA borrower wants to purchase a home that costs more than four times the maximum guaranty amount – say, a $480,000 home in a county with the standard loan limit of $417,000 – they can still do that by putting up some of their own money to cover the difference between the guaranty and what would be required for down payment (usually 25 percent).

So in this case, a 25 percent down payment would be $120,000, minus the $104,250 maximum guaranty, for a borrower contribution of $15,750 at closing.

BUYING ANOTHER HOME

A veteran or active duty service member may use a VA loan to buy a second or even third residence if they have not used up their maximum guaranty entitlement for the county where the property is located. The actual calculation can be complicated, but basically the total loan guarantees used for all homes cannot exceed the loan guaranty for the county where the property being purchased is located. Examples of how the guaranty may be calculated are provided here .

RESTORING THE GUARANTY ENTITLEMENT

Once a veteran or active duty service member uses any portion of their guaranty entitlement, that portion of the guaranty is no longer available to you as long as you own the home. For example, if you buy a $300,000 home and use a $75,000 guaranty, that $75,000 is locked up and not available to you again until the home is sold and the loan is paid off.

There is an exception to this rule where a veteran may have their entitlement restored after they have fully paid off the VA loan it was used for but retain possession of the property. However, this exception can only be used once.