Advantages of VA Mortgages
If you’re a veteran or currently in the military, National Guard or Reserves, and are planning to buy property, VA home loans should be on your radar.
VA mortgages are backed by the federal government, which allows private lenders to fund 100 percent loans and charge less for them.
The program offers several advantages:
- No down payment is required
- There are no mortgage insurance premiums
- Loans are assumable
- There is no minimum credit score
- Underwriting is flexible
- Rates and fees are often lower than those of conventional loans
This benefit was designed to promote homeownership among military families and help vets returning to civilian life. VA home loans are probably responsible for the fact that 79 percent of veterans are homeowners, compared to 63 percent of the general population.
Don’t Overlook VA Home Loans
Unfortunately, not everyone eligible for VA mortgages claims their benefit.
In a 2014 survey of 2,000 members of the Iraq and Afghanistan Veterans of America (IAVA) association, just 36 percent said they had applied for a VA home loan, and many of those who did not were unaware of the program.
This could be a costly mistake — for many, VA home loans are the cheapest way to finance a house.
Who Is Eligible For VA Financing?
VA home loans are available to active servicemembers, veterans (unless dishonorably discharged), and in some cases, surviving family members. You’re probably eligible if one of the following is true:
- You’ve served 181 days of active duty during peacetime
- You’ve served 90 days of active duty during war time
- You’ve served six years in the Reserves or National Guard
- Your spouse was killed in the line of duty and you have not remarried
Your eligibility never expires. Veterans who earned their benefit in long ago are still using their benefit to buy homes.
Getting Your Certificate Of Eligibility (COE)
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 VA’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, you’ll need to provide your DD-214 form to your lender or the VA.
Qualifying For A VA Mortgage
VA mortgage underwriters evaluate your credit history, debt, income 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 don’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 will insure 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, credit cards 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 under residual income guidelines.
Type of property
The property you buy must be your primary residence, not a vacation home or rental. It can be a single-family home, condo, manufactured home (on a foundation), duplex, triplex, or four-plex.
Ineligible properties include condotels, mobile homes not classified as real property, mixed-use property, working farms and bed-and-breakfast properties.
The VA does not limit the size of VA mortgages; however, it does limit the extent of its guarantee, and most lenders restrict loan amounts accordingly.
In most locales, $424,100 is the highest loan you’ll get with nothing down. However, in higher-cost areas, that limit may go as high as $636,150. You can go over the limit by making a down payment equal to 25 percent of the difference between the home’s purchase price and the maximum loan size.
For instance, take this example of a veteran buying a $517,000 property.
- Home price: $524,100
- Local loan limit: $424,100
- Difference: $100,000
- Twenty-five percent of the difference: $25,000
In short, this veteran can purchase a half-million-dollar home with less than five percent down.
VA Mortgage Rates
VA home loan rates are generally lower than other low downpayment options, because their foreclosure rate is lower, and because of their government guarantee.
If your downpayment is less than 20 percent of the property purchase price, VA mortgages almost always offer the best mortgage rates. That’s because you pay no mortgage insurance, just a funding fee.
This fee ranges between 1.25 and 3.3 percent of the loan amount, depending on your down payment, how many times you’ve used your eligibility.
Your funding fee also depends on your status — regular military or Guard / Reserves. The fee can usually be wrapped into your mortgage, or you can opt to pay it in cash.