6 reason veterans consider non-VA loans

November 29, 2019 - 5 min read

When Other Options Beat The VA Loan

A VA home loan is the best loan choice on the market — usually.

There are exceptions to every rule.

VA loans come with unparalleled advantages: no downpayment, no mortgage insurance, and mortgage rates that are around 0.25% lower than those of conventional loans. But they also come with requirements that could make other financing options better.

Veterans with eligible military experience should check VA loan terms first. But not qualifying for VA is not necessarily the end of their home buying endeavors.

Here are reasons to look beyond VA loans as a veteran.

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1. You Have Good Credit And 20 Percent Down

A primary 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 upfront funding fee, which they usually choose to add to their loan amount.

The fee ranges from 1.4 to 3.6 percent, depending on the buyer’s military status, the downpayment percentage and whether the home buyer has previously used his or her VA mortgage eligibility. The most common fee is 2.3 percent.

On a $200,000 purchase, it equals $4,600. However, buyers who choose a conventional (non-government-backed) mortgage, and put 20 percent down, avoid mortgage insurance and the upfront fee. For these military home buyers, the VA funding fee might be an unnecessary expense.

The exception: Mortgage applicants whose credit rating or income meets VA guidelines but not those of conventional mortgages may still opt for VA.

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2. You Landed On The “CAIVRS” List

To qualify for a VA loan, you must prove that you have made good on previous government-backed debts, and that you have paid taxes.

The Credit Alert Verification Reporting System, or “CAIVRS,” is a database of consumers who have defaulted on government obligations. These individuals are not eligible for a VA home loan.

The lender will check the database when you apply. If your name shows up, you must clear up the problem. Usually this involves repaying the amount owed, which many are not in the position to do. Otherwise, they would have done so already.

The good news is that home buyers on the CAIVRS list can still apply for a conventional mortgage. You will need at least a 3% downpayment, and credit requirements could be tougher, but a conventional program is a viable solution.

Your first step: apply for a VA loan, which will trigger a CAIVRS check to verify your eligibility.

The exception: Some consumers end up on CAIVRS by mistake and this can be corrected. Others may fall under CAIVRS exceptions for loan assumptions, divorce or bankruptcy.

3. You Have A Non-Veteran Co-Borrower

Veterans often apply to buy a home with a non-veteran who is not their spouse.

This is okay. However, it might not be their 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.

For instance, if the proposed home payment is $1,000 per month, the veteran’s income must be able to support $500 per month, based on VA’s stated debt-to-income and residual income requirements.

In addition, only half of the guarantee can be used if one of two joint buyers isn’t eligible. That means you’ll probably have to put at least 12.5 percent down on the loan.

With a veteran-only or veteran-plus-spouse loan, the VA issues a 25 percent “guarantee” on the loan. The guarantee is not your downpayment, but an insurance policy on the loan, due to the lack of downpayment.

When a non-veteran owns half the loan, the VA only guarantees half that amount. The lender will require a 12.5 percent downpayment for the non-guaranteed portion.

The Conventional 97 mortgage, on the other hand, allows downpayments as low as three percent. Another low-downpayment mortgage option is the FHA home loan, for which 3.5 percent down is acceptable.

The USDA home loan is another option that requires zero downpayment 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.

The exception: The relative cost of conventional or other financing depends on your credit scores. Have your loan professional work up the numbers for VA and conventional programs and choose the cheaper one.

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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 home’s title or even on the mortgage.

Such states are as follows.

  • Arizona
  • California
  • Idaho
  • Louisiana
  • Nevada
  • New Mexico
  • Texas
  • Washington
  • Wisconsin

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.

The exception: You may still qualify a VA loan, even with a low-credit co-borrower. VA credit score requirements are more lenient, as are debt-to-income ratios.

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, you’ll have to get a conventional loan.

The exception: You can purchase multi-unit property (a duplex, for example) and rent out the surplus units as long as you live in one as your primary residence.

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6. You Want To Purchase A High-End Home

As of January 1, 2020 VA loan limits are repealed.

In theory, you can buy a $5 million home with a VA loan with zero down.

However, many lenders may set their own loan limits. Some lenders may allow up to the conforming limit of while others may cap at $1 million.

So if you’re looking to buy a home in a lofty price range, you may need to look into jumbo loans. Various banks across the country offer proprietary loan options for these high-priced homes.

The exception: Some lenders are willing to fund larger loans if you make a partial down payment. Check with your lender to find out its policy.

What Are Today’s VA Rates?

If you’re eligible for VA financing, you should always consider that option when you buy or refinance a home. However, sometimes a conventional loan wins out. It’s always smart to compare both options.

Get a VA loan eligibility check with a lender. You can do that below.

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Gina Freeman
Authored By: Gina Freeman
The Mortgage Reports contributor
With more than 10 years in the mortgage industry, and another 10 years writing about it, Gina Freeman brings a wealth of knowledge to The Mortgage Reports as its Associate Editor. Gina works with a team of world-class real estate and finance writers to bring timely and helpful news and advice to the audience. Her specialty is helping consumers understand complex and intimidating topics.