There is a "right program" for every mortgage borrower, but for many, the VA loan stands apart for its combination of low rates, aggressive underwriting, and secondary benefits.
Backed by the U.S. Department of Veterans Affairs, VA loans are designed to help active-duty military personnel, veterans and certain other groups become homeowners at an affordable cost.
The VA loan asks for no down payment, requires no mortgage insurance, allows flexible guidelines for qualification among its many other advantages.
Here's an overview of the 10 biggest benefits of a VA home loan.
Most home loan programs require you to make at least a small down payment to buy a home. The VA home loan is an exception.
Rather than paying 5, 10, 20 percent or more of the home's purchase price upfront in cash, with a VA loan you can finance up to 100 percent of the purchase price. The VA loan is a true no-money-down opportunity.
Typically, lenders require you to pay for mortgage insurance if you make a down payment that's less than 20 percent. This insurance, which is knownÂ as private mortgage insurance (PMI) for a conventional loan andÂ a mortgage insurance premium (MIP) for an FHA loan, protects the lender in the event that you default on your loan.
VA loans require neither a down payment nor mortgage insurance. That makes this a VA-backed mortgage very affordable upfront and over time.
There's a reason why the VA loan comes with such favorable terms. The federal government guarantees that a portion of the loan will be repaid to the lender even if you're unable to make monthly payments for whatever reason.
This guarantee encourages and enables lenders to offer VA loans with exceptionally attractive terms to borrowers that want them.
VA loans are neither originated nor funded by the VA. Furthermore, mortgage rates for VA loans aren't set by the VA itself. Instead, VA loans are offered by U.S. banks, savings-and-loans institutions, credit unions and mortgage lenders -- each of which sets its own VA loan rates and fees.
This means you can shop around and compare loan offers and still choose the VA loan that works best for your budget.
A VA loan won't restrict your right to sell your home if you decide you no longer want to own it. Thereâ€™s no prepayment penalty or early-exit fee no matter within what time frame you decide to sell your home.
Furthermore, there are no restrictions regarding a refinance of your VA loan.
You can refinance your existing VA loan into another VA loan via the agency's Interest Rate Reduction Refinance Loan (IRRRL) program or switch into a non-VA loan at any time.
A VA loan can have a fixed rate or an adjustable rate. It can be used to buy a house, condo, new-built home, manufactured home, duplex or other types of properties.
Or, it can be used to refinance your existing mortgage, make repairs or improvements to your home, or make your home more energy efficient. The choices are yours. A VA-approved lender can help you decide.Click to see your VA loan eligibility (Oct 23rd, 2017)
Like all mortgage types, VA loans require specific documentation, an acceptable credit history and sufficient income to make your monthly payments. But, as compared to other loan programs, VA loan guidelines tend to be more flexible. This is made possible because of the VA loan guaranty.
The Department of Veterans Affairs genuinely wants to make it easier for you to buy a home or refinance.
The VA limits the closing costs lenders can charge to VA loan applicants. This is another way that a VA loan can be more affordable than other types of loans. Money saved can be used for furniture, moving costs, home improvements or anything else.
VA loans require a "funding fee", an upfront cost based on your loan amount, your type of eligible service, your down payment size plus other factors. Funding fees don't need to be paid as cash, though. The VA allows it to be financed with the loan, so nothing is due at closing.
And, not all VA borrowers will pay it. VA funding fees are normally waived for veterans who receive VA disability compensation and for unmarried surviving spouses of veterans who died in service or as a result of a service-connected disability.
Most VA loans are "assumable," which means you can transfer your VA loan to a future home buyer if that person is also VA-eligible.
Assumable loans can be a huge benefit when you sell your home -- especially in a rising mortgage rate environment. If your home loan has today's low rate and market rates rise in the future, the assumption features of your VA become even more valuable.
VA loan eligibility.Â Contrary to popular belief, VA loans are available not only toÂ veterans,Â but also other classes of military personnel.Â The list of eligible VA borrowers includes active-duty servicepersons, members of the National Guard, Reservists, surviving spouses of veterans, cadets at the U.S. Military, Air Force or Coast Guard Academy, midshipmen at the U.S. Naval Academy and officers at the National Oceanic & Atmospheric Administration. A minimum term of service is typically required.
Houses you can buy with a VA loan.Â A VA loan can be used to buy a detached house, condo, new-built home, manufactured home or duplex, triplex or four-unit property or to refinance an existing loan for those types of properties.Â You can alsoÂ borrow extra moneyÂ to make repairs or improvements to the home; or, make it more energy efficient.
VA loans in foreign countries.Â You cannot use a VA loan to buy a home in a foreign country. You are only permitted to purchase homes located in the United States or a U.S. territory or possession, such as Puerto Rico, Guam or the U.S. Virgin Islands.
VA loans and rental properties.Â You cannot use a VA loan to buy a rental property. You can, however, use a VA loan to refinance anÂ existingÂ rental home you once occupied as a primary home. For home purchases, in order to obtain a VA loan, you must certify that you intend to occupy the home as your principal residence. If the property is a duplex, triplex or four-unit apartment building, you must occupy one of the units yourself.Â The exception to this rule is via the VA's Interest Rate Reduction Refinance Loan (IRRRL). This loan, also known as theÂ VA Streamline Refinance, can be used to refinance an existing VA loan for a home where you currently live or where you used to live, but no longer do.
VA loans and second homes.Â Federal regulations doÂ limitÂ loans guaranteed by the Department of Veterans Affairs to â€śprimary residencesâ€ť only, however, "primary residence" is defined as the home in which you live "most of the year." Therefore, if you ownÂ an out-of-stateÂ residenceÂ in which you live for more than 6 months of the year, this other home, whether it's your vacation home or retirement property, becomes your official "primary residence". For this reason, VA loans are popular among aging military borrowers.
How to demonstrate eligibility.Â In order to show a VA mortgage lender that you are VA-eligible, you'll need a Certificate of Eligibility (COE), which your lender can acquire for you online, usually in a matter of seconds.Â The IRRRL is again an exception. For that loan, you won't need a COE at all.Â You'll also need to meet standard VA loan requirements including income and employment verifications, and residual income requirements.
About the COE.Â Does a Certificate of Eligibility (COE) mean you are guaranteed a VA loan? No, having a COE doesn't guarantee a VA loan approval. Your COE shows the lender you're eligible for a VA loan, but no one is "guaranteed" VA loan approval. You must still qualify for the loan based on VA mortgage guidelines.Â The "guarantee" part of the VA loan refers to the VA's promise to the lender of repayment if the borrower defaults.
Getting a VA loan without perfect credit.Â You can get a VA loan even without "perfect credit". Many lenders use aggressive underwriting to help people who are VA-eligible receive loan approval, so you don't need perfect credit or a high credit score to qualify. If you have at least a middling credit score plus a history of paying your bills on time, you shouldÂ apply for a VA loan.
VA loans after you've been denied.Â You can get a VA loan even if you've been denied forÂ other financing. Because the VA loan offers such flexible guidelines, you might be able to qualify even if you've been turned down for another type of home loan, including the FHA loan, aÂ Conventional 97Â mortgage, or some other type of credit.
VA home loans are available to active servicemembers, veterans (unless dishonorably discharged), and in some cases, surviving family members. Youâ€™re probablyÂ eligibleÂ if one of the following is true:
Your eligibility never expires. Veterans who earned their benefit in long ago are still using their benefit to buy homes.
Part of applying for VA home loans is documenting your eligibility. This is very easy to do in most cases -- simply have your lender order your COE through the VAâ€™s automated Web LGY or Automated Certificate of Eligibility (ACE) system.
Any VA-approved lender has access to these systems.
Alternatively, you can order your certificate yourself through the VA benefits portal. If the online system is unable to issue your COE, youâ€™ll need to provide your DD-214 form to your lender or the VA.Click to see your VA loan eligibility (Oct 23rd, 2017)
VA mortgage underwriters evaluate your credit history, debt,Â incomeÂ and assets. Here are some thresholds to be aware of.
The VA has established no minimum credit score for a VA mortgage. However, many VA mortgage lenders require minimum FICO scores in the low- to mid-600s.
Even VA lenders that allow lower credit scores donâ€™t accept subprime credit. VA underwriting guidelines state that applicants must have paid their obligations on time for at least the most recent 12 months to be considered satisfactory credit risks.
The VA usually requires a two-year waiting period following a Chapter 7 bankruptcy or foreclosure before it willÂ insureÂ a loan, and borrowers in Chapter 13 must have made at least 12 on-time payments and secure the approval of the bankruptcy court.
Debt-to-income (DTI) ratio
The relationship of your debts and your income is called your debt-to-income ratio, or DTI.
VA underwriters divide your monthly debts (car payments, creditÂ cardsÂ and other accounts, plus your proposed housing expense) by your gross (before-tax) income by to come up with this figure.
For instance, if your gross income is $4,000 per month, your new mortgage, property taxes and homeowners insurance, plus other debt payments total is $1,500, your DTI is 37.5 percent.
A DTI over 41 percent means the lender has to apply additional formulas to see if you qualify underÂ residual incomeÂ guidelines.
Using residual income when your DTI is too high
VA underwriters perform additional calculations which can affect your mortgage approval.
Factoring in yourÂ estimated monthly utilities, your estimated taxes on income, and the area of the country in which you live, the VA arrives at a figure which represents your "true" costs of living.
It thenÂ subtracts that figure from your income to find your residual income (e.g.; your money "left over" each month).
Think of the residual income calculation as aÂ real-world simulation on your living expenses. It is the VA's best effort at ensuring you a stress-free homeownership experience.
Here is an example of how residual income works, assumingÂ a family of four which is purchasing a 2,000 square foot home on a $5,000 monthly income.
ThisÂ leavesÂ a residual income calculation of $1,220.
Now, compare that residual income toÂ VA residual income requirements for a family of four:
The borrowerÂ in our example exceeds VA's residual income standards in all parts of the country. Therefore, despite the borrower's debt-to-income ratio of 50 percent,Â the borrower could get approved for a VA loan, if it applied.
Qualifying with part-time income
You can qualify for this type of financing even if you have a part-time job, or multiple jobs.
You must show a 2-year history of making consistent part-time income, and stability in the number of hours worked. The lender will make sure any income received appears stable.
See our complete guide on getting a VA loan with part-time income.
The VA charges an up-front fee to defray the costs of the program and make it sustainable for the future.
Veterans pay a lump sum that varies depending on the loan purpose, the veteran's military experience, and down payment amount.
The fee is normally wrapped into the loan; it does not add to the cash needed to close the loan.
|Type of veteran||Down payment||First-time use||Subsequent use|
|Â Regular military||Â 0%||Â 2.15%||Â 3.30%|
|Type of veteran||Down payment||First-time use||Subsequent use|
|Type of veteran, loan use||Loan assumption||Streamline refinance||Manufactured home|
|All military, first-time and subsequent use||0.50%||0.50%||1.00%|
Note that not all veterans pay the funding fee. Veterans receiving compensation for a service-connected disability are exempt, as are surviving spouses of veterans killed or missing in action.
In 2017, the Department of Veterans Affairs (VA) increased the maximum VA mortgage it will fully guarantee in most US counties fromÂ $417,000 to $424,100.
In 328 additional counties covering 33 US states territories, 2017 VA mortgage limits are somewhat higher. For a single-family dwelling, VA loans may beÂ 100 percent guaranteedÂ up to $636,150 in these places. Finally, some locations in Hawaii enjoy single-family VA limits as high as $721,050.
Sometimes, the Department of Veterans Affairs' extended loan limits will beÂ too low to help you purchase your home with no money down.
That's okay. You can make a small down payment to increase the maximum VA loan.
Here's how it works.
Let's say you wanted to buy a home in Bellevue, Washington. Bellevue is in King County, and the 2017Â VA loan limit in King County is $592,250.
The home you want to purchase, though, costs $600,000.
In order to use your VA benefits, you would only need to make a down payment of one-fourth of the difference between what the home costs and what the VA agrees to guarantee (which is $592,250).
This means that, with a down payment of $1,938Â -- just 25 percent of the $7,750 excess purchase priceÂ --you can buy your Bellevue home with a VA loan and get a great, low mortgage rates with no accompanying mortgage insurance whatsoever.
The same principle applies to any overage amount. For instance, you can buy a $1 million home where the VA loan limit is $500,000. You would just need a down payment of 25% of the difference.
VA loans allow you to buy a duplex, tri-plex, or four-plex with 100% financing. You must live in one of the units.
Higher loan limits are available for these homes.
However, buying a home with more than one unit can be challenging. Mortgage lenders consider these properties riskier to finance than tradition single-family residences, or SFRs, so you'll need to be a stronger borrower.
VA underwriters must make sure that you will have enough emergency savings, or reserves, after closing on your house. That's to ensure you'll have money to pay your mortgage even if a tenant fails to pay rent or moves out.
The minimum needed after closing isÂ six monthsÂ ofÂ mortgage paymentsÂ (covering principal, interest, taxes, and insurance - PITI).
Your lender will also want to know about previous landlord experience you've had, or any experience with property maintenance or renting.
If you don't have any, you may be able to sidestep that issue by hiring a property management company, but that's really up to the individual lender.
Your lender will look at the income (or potential income) of the rental units, using either existing rental agreements or an appraiser's opinion of what the units should fetch.Â They'll usually take 75 percent of that amount to offset your mortgage payment when calculating your monthly expenses.
The VA maintains a list of approved condo projects within which you may purchase a unit with a VA loan.
At VA's website, you can search for the thousands of approved condominium complexes across the U.S.
If you are VA-eligible and in the market for a condo, make sure the unit you're interested in is approved. As a buyer, you are probably not able to get the complex approved. That's up to the management company or homeowner's association.
If a condo you like is not approved, you must use other financing like an FHA or conventional loan, or find another property.
Note that the condo must meet FHA or conventional guidelines if you want to use those types of financing.
The U.S. Department of Veterans Affairs, or VA, provides home retention assistance. They intervene when a veteran is having trouble making their home payments.
The VA works with loan servicers to offer options to the veteran other than foreclosure.
Each year, VA publishes benefit insights in its Home Loan Guaranty report. InÂ fiscal yearÂ 2015, VA made over half a millionÂ contact actions to reach borrowers and loan servicers. The intent was to work out aÂ mutually agreeable repayment option for both parties.
More than 90,000 veteran homeowners avoided foreclosure in 2015 alone thanks to this effort. More than three hundred thousandÂ current and former service membersÂ have kept their homes since 2012.
The initiative has saved the taxpayer an estimated $10 billion. More important, vast numbers of veteransÂ got another chance at homeownership.
Foreclosure avoidance efforts by the VA do not go unrecognized by banks.
The VA loan is viewed as one of the lowest-risk mortgage types available on the market. This safety allows banks to lend to veteran borrowers at extremely low rates.
VA rates are more than 25 basis points (0.25%) lower than conventional rates on average, according to data collected by mortgage software company Ellie Mae.
Most loan programs require higher down payment and credit scores than does the VA home loan. In the open market, a VA loan should carry a higher rate due to more lenient lending guidelines and higher perceived risk.
Yet the result of the Veterans Affairs efforts to keep veterans in their homes means lower risk for banks and lower borrowing costs for eligible veterans.
The following are reasons you might choose financing other than VA.
1. You Have Good Credit And 20 Percent Down
A primaryÂ advantage to VA home loans is the lack of a mortgage insurance requirement.
However, the VA guarantee does not come free of charge. Borrowers pay an upfrontÂ funding fee, which theyÂ usually choose to add to their loan amount.
The fee ranges from 1.25 to 3.3 percent, depending on the buyerâ€™s military status, the downpayment percentage and whether the home buyer has previously used his or her VA mortgage eligibility.Â The most common fee is 2.15 percent.
On a $200,000 purchase, it equals $4,300. However, buyers who choose a conventional (non-government-backed) mortgage, and put 20 percent down, avoid mortgage insuranceÂ andÂ theÂ upfront fee. For these military home buyers, the VA funding fee might be an unnecessary expense.
The exception:Â Mortgage applicants whose credit rating or income meets VA guidelines but not those of conventional mortgagesÂ may still opt for VA.
2. You Landed On TheÂ "CAIVRS"Â List
To qualify for a VA loan, you must prove that you haveÂ made good on previous government-backed debts, and that you have paid taxes.
The Credit Alert Verification Reporting System, or "CAIVRS,"Â is a database of consumers who have defaulted on government obligations. These individuals are not eligible for a VA home loan.
3. You Have A Non-Veteran Co-Borrower
Veterans often apply to buy a home with a non-veteran who is notÂ their spouse.
This is okay. However, itÂ might not be theirÂ best choice.
As the veteran, your income must cover your half of the loan payment. The non-veteran's income cannot be used to compensate for the veteran's insufficient income.
Plus, when a non-veteran owns half the loan, the VA only guarantees half that amount. The lender will require a 12.5 percent down payment for the non-guaranteed portion.
TheÂ Conventional 97Â mortgage, on the other hand, allows down payments as low as three percent. AnotherÂ low-downpayment mortgageÂ option is the FHA home loan, for which 3.5 percent down is acceptable.
TheÂ USDA home loanÂ is another option that requires zero down payment and offers VA-similar rates. The property must be within USDA-eligible areas, but there is no requirement for any applicant to have military experience.
If you plan to borrow with a non-veteran, one of these loan types might be your better choice.
4. You Apply With Your Credit-Challenged Spouse
In community property states, VA lenders must consider the credit rating and financial obligations of your spouse. This rule applies even if he or she will not be on the homeâ€™s title or even on the mortgage.
Such states are as follows.
A spouse with less-than-perfect credit or who owes alimony, child support, or other maintenance can make your VA approval more challenging.
Apply for a conventional loan if you qualify for the mortgage by yourself. The spouse's financial history and status need not be considered if he or she is not on the loan application.
5. You Want To Buy Vacation Or Investment Property
The purpose of VA financing is to help veterans and active service members buy and live in their own home. They are not meant to build real estate portfolios.
These loans are for primary residences only, so if you want a ski cabin or rental, youâ€™ll have to get a conventional loan.
6. You Want To Purchase A High-End Home
The VA loan was not meant for extravagant home purchases. Still, it can be used to purchase a home aboveÂ VA loan limits.
There are no limits to the size of mortgage a lender can approve. But the veteran must come up with a downpayment equal to 25% of the overage, for any loan size above published VA limits.
What if the service member passes away before he or she uses the benefit? Eligibility passes to an un-remarried spouse, in manyÂ cases.
For the surviving spouse to be eligible, the deceased serviceperson must have:
Also eligible are remarried spouses who married after the age of 57, on or after December 16, 2003.
In these cases, the surviving spouse can use VA loan eligibility to buy a home with zero down payment, just as the veteran would have.
These spouses have an additional benefit, however. They are exempt from theÂ VA funding fee. As a result, their loan balance and monthly payment will be lower.
Surviving spouses are also eligible for a VA streamline refinance when they meet the following guidelines.
A VA streamline refinance is typically not available when the deceased veteran was the only one of the original VA loan, even if he or she got married after buying the home.
In this case, the surviving spouse would need to qualify for a non-VA refinance, or aÂ VA cash-out loan.
A cash-out mortgage through VA requires the spouse to meetÂ home purchaseÂ eligibility requirements. If this is the case, the surviving spouse can tap into the home's equity to raise cash for any purpose, or even pay off an FHA or conventional loan to eliminate mortgage insurance.
Buying a home after a divorce is no easy task.
If, prior to your divorce, you lived in a two-income household, your now have less spending power and a reduced monthly income for purposes of your VA home loan application.
With less income, it can be harder to meet the VA Home Loan Guaranty's debt-to-income (DTI) guidelines; and, theÂ VA residual income requirementÂ for your area.
Receiving alimony or child support can counter-act a loss of income.
Mortgage lenders will not require you to provide information about your divorce agreement's alimony or child support terms, but if you're willing to disclose,Â it can count toward qualifying for a home loan.
Different approved-VA lenders will treat alimony and child support income differently.
Typically, you will be asked to provide a copy of your divorce settlement or other court paperwork to support the alimony and child support payments.
Lenders will then want to see that the payments are stable, reliable, and likely to continue for another 36 months, at least.
You may also be asked to show proof that alimony and child support payments have been made in the past reliably, so that the lender may use the income as part of your VA loanÂ application.
If you are theÂ payorÂ of alimony and child support payments, your debt-to-income ratio cane harmed. Not only might you be losing the second income of your dual-income households, but you're making additional payments which count against your outflows.
VA mortgage lenders make careful calculations with respect to such payments.
You can still get approved for a VA loan while making such payments -- it's just more difficult to show sufficient monthly income.
When you assume a mortgage loan, you take over the current homeownerâ€™s monthly payment.
VA loan assumption savings
Buying a home via an assumable mortgage loan is even more appealing when interest rates are on the rise.
As an example, say a seller-financed $200,000 for their home in 2013 at an interest rate of 3.25 percent on a 30-year fixed loan.
Using this scenario, their principal and interest payment would be $898 per month.
Let's assume current 30-year fixed rates averaged 4.10 percent.
If you financed $200,000 at 4.10 percent for a 30-year term, your monthly principal and interest payment would be $966.
Additionally, because the seller has already paid four years into the loan, theyâ€™ve already paid nearly $25,000 in interest on the loan.
By assuming the loan, you would save $34,560 over the 30-year loan due to the difference in interest rates. You would also save roughly $25,000 thanks to the interest already paid by the sellers.
That comes out to a total savings of almost $60,000!
How to assume a VA loan
There are currently two ways to assume a VA loan.
1. The new buyer is a qualified veteran who â€śsubstitutesâ€ť his or her VA eligibility for the eligibility of the seller.
2. The new homebuyer qualifies through VA standards for the mortgage payment. This is the safest method for the seller as it allows their loan to beÂ assumedÂ knowing that the new buyer is responsible for the loan, and the seller is no longer responsible for the loan.
The lenderÂ and/or the VA needs to approve a loan assumption.
Loans serviced by a lender withÂ automatic authority may process assumptions without sending them to a VA Regional Loan Center.
For lenders without automatic authority, the loan must be sent to the appropriate VA Regional Loan Center for approval. This process will typically take several weeks.
When VA loans are assumed, itâ€™s the servicerâ€™s responsibility to make sure the homeowner assuming the property meets both VA and lender requirements.
For a VA mortgage assumption to take place, the following conditions must be met:
Finding assumable VA loans
There are several ways for home buyers to find an assumable VA loan.
Believe it or not, print media is still alive and well. Some home sellers advertise their assumable home for sale in the newspaper, or in a local real estate publication.
There are a number of online resources for finding assumable mortgage loans.
Websites like TakeList.com and Zumption.com give homeowners a way to showcase their properties to home buyers looking to assume a loan.
With the help of the Multiple Listing Service (MLS), real estate agents remain a great resource for home buyers.Â This applies to home buyers specifically searching for assumable VA loans as well.
Whether you're an active-duty serviceperson, a veteran, a member of the National Guard, a Reservist or surviving spouse of a veteran; or if you're a cadet at the U.S. Military, Air Force or Coast Guard Academy, midshipman at the U.S. Naval Academy or officer at the National Oceanic & Atmospheric Administration, you may be eligible for a VA loan.
Get today's live mortgage rates now. Your social security number is not required to get started, and all quotes come with access to your live mortgage credit scores.Click to see your VA loan eligibility (Oct 23rd, 2017)
The information contained on The Mortgage Reports website is for informational purposes only and is not an advertisement for products offered by Full Beaker. The views and opinions expressed herein are those of the author and do not reflect the policy or position of Full Beaker, its officers, parent, or affiliates.
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2017 Conforming, FHA, & VA Loan Limits
Mortgage loan limits for every U.S. county, as published by Fannie Mae & Freddie Mac, the Federal Housing Administration (FHA), and the Department of Veterans Affairs (VA)