10 Facts You May Not Know About VA Home Loans
VA home loans provide big benefits that have helped millions of families achieve their dream of homeownership. However, it is still estimated that only a fraction of eligible veterans take advantage of loans guaranteed by the U.S Department of Veterans Affairs. That percentage could be much higher. Let’s explore 10 important facts about VA loans to help you find the best mortgage solution for your life.
No down payment required.
Qualified borrowers with full entitlement and a loan amount greater than $144,000 may purchase a home without a down payment. Most loans, such as FHA and conventional, require a 3.5 percent to five percent down payment. The ability to purchase a home without a down payment is a huge benefit for military homebuyers who may have otherwise had to scrape and stockpile for years.
No private mortgage insurance required.
You also won’t have to pay monthly private mortgage insurance (PMI) or arrange for a “piggyback” mortgage to cover your down payment. Mortgage insurance is required on conventional loans with a down payment of less than 20 percent—typically, it’s also required on FHA and USDA loans. No monthly PMI payments mean VA borrowers can stretch their buying power and save.
Low interest rates.
VA loans are backed by the government, which gives lenders confidence to extend favorable rates. In fact, VA loan rates are frequently the lowest on the market. Average 30-year VA loan fixed rates have been lower than conventional and FHA since Ellie Mae, a loan software company, started keeping track in November 2014.
Relaxed credit requirements.
The Department of Veterans Affairs, the agency that oversees the VA loan program, doesn’t set or enforce a minimum credit score. However, it encourages lenders to make good judgments. Different lenders may have different standards when assessing a borrower’s risk, but generally, minimum requirements will be lower than those of conventional mortgages.
It’s important to note—VA loans are also more lenient for borrowers who are rebounding from bankruptcy, a foreclosure, or a short sale.
Forgiving debt-to-income ratios.
Your debt-to-income ratio is your monthly debt payments divided by your gross monthly income. The VA permits borrowers to have any DTI ratio, though lenders will generally want to see it at or below 41 percent. Some lenders may go higher, depending on your credit score and other financial factors. This flexibility may help VA borrowers to stretch their purchasing power.
Reduced closing costs.
One of the biggest benefits of a VA-backed loan is the reduction of closing costs. The VA permits seller concessions but requires that seller concessions do not exceed 4% of the loan amount. Seller concessions may include:
- Prepaying taxes and insurance on the home
- Interest rate buydowns
- The buyer’s VA funding fee
- Paying off judgments or credit balances on the buyer’s behalf
- Gifts (i.e. a microwave or dishwasher)
In addition, the seller can pay the borrower’s closing costs which are not part of the 4% calculation, as well as customary discount points.
Qualified veterans with full entitlement can borrow as much as their lender is willing to extend. This means that when it’s time to buy a newer or larger home, you can apply for a VA loan again.
Remember—In general, borrowers are eligible for a VA loan if they:
- Have served for 90 consecutive days in wartime or 181 consecutive days in peacetime
- Have six years of service in the National Guard or Reserves
- Are the spouse of a service member
However, eligibility requirements may differ depending on the era of service.
Surviving spouses are eligible.
VA loans are available to surviving spouses of military members who died while on active duty or as a result of a service-connected disability if they haven’t remarried. Surviving spouses may also be eligible if one of these descriptions is true:
- Their spouse was missing in action or was a prisoner of war
- Their partner had been totally disabled and then died, but their disability may not have been the cause of death (in certain situations)
Multiple loan solutions.
Some veterans are surprised to discover that there are a number of VA loan programs available, each designed to fit a specific need.
Eligible borrowers may use a Jumbo VA loan to purchase or refinance when the loan amount exceeds the conventional loan limits.
It’s important to note—Jumbo VA loans require a down payment. Typically, the amount of down payment required on a VA Jumbo loan will be significantly lower than what’s required on a conventional jumbo loan. VA Jumbo loans do not require mortgage insurance.
VA purchase loans are exactly what they sound like—a loan to buy a home. The government restricts the amount and type of closing costs that are allowed to be charged.
VA Cash-Out Refinance
A VA refinance* can be used to refinance an existing loan or multiple loans. Just like with purchase transactions, the amount and type of closing costs that may be charged to the veteran are limited.
Interest Rate Reduction Refinance Loans (IRRRLs) are streamlined loans built specifically for refinancing a property on which you’ve already used your VA loan eligibility. It does not require an appraisal.
Typically, an IRRRL lowers the interest rate on the existing VA mortgage. However, if you are refinancing from an existing adjustable-rate mortgage to a fixed-rate, the interest rate may increase. There is no cashback allowed to the veteran from the loan proceeds.
It’s important to note—the occupancy requirement for an IRRRL is different from other VA loans. For an IRRRL, a veteran only has to certify that they have previously occupied the home.
For more information about which loan is ideal for your finances, talk with one of our expert Mortgage Advisors.
You can use it to do more than purchase a home.
VA borrowers can’t use funds to purchase a second home or investment property and must certify that they intend to occupy the property as a full-time living space. However, they can use it to do more than just purchase a home. Qualifying borrowers may use the money to:
Buy a home or residential condominium
- Build a home
- Repair, alter, or improve a home
- Refinance an existing home loan
- Buy and improve a manufactured home lot
- Add energy-efficient improvements to a home
- Purchase and improve a home simultaneously with energy-efficient improvements
- Refinance an existing VA loan to reduce the interest rate
It’s important to note—Minimum Property Requirements must be met to qualify for a VA loan. These requirements ensure that veterans and military families have a safe home. They account for things like heating and cooling systems, water supply, and sewage disposal.
Do You Qualify?
If you’re a veteran, reservist, active duty member, or surviving spouse, PacRes is offering a $1,111 lender credit on all Federal VA loans started November 1 through November 30. Read more here or reach out for additional information.