The VA Loan Program: What Home Buyers Need to Know
For U.S. military personnel and veterans, the VA Loan program can be an incredible tool that opens the door to home ownership like no other. With that in mind, here are some of the most important things you should understand about the VA mortgage program if you’re considering it to buy a home.
No Money Down
In fact, the VA loan program is one of the only zero down programs currently available. After the housing market collapse of 2008-09, the Department of Housing and Urban Development (HUD) stopped approving new zero down programs as a way to put a lid on unregulated activity and protect consumers. After that, only two zero down programs remained: 1.) the USDA loan, which is only available for purchasing qualified rural properties, and 2.) the VA loan.
It is important for borrowers to understand that the VA loan is not a loan from the federal government. Instead, it is a loan backed – in other words, insured – by the United States Department of Veterans Affairs (VA). Because the loan is guaranteed by the VA, the lender is protected from any losses if the borrower were to fall behind on payments and default.
With this no-money-down program, current and former members of the military are provided with an easier path to home buying. There’s no need to save for a down payment, apply for a separate loan to obtain a down payment, or borrow a down payment from a family member. It allows veterans to purchase homes sooner and easier – and, while there are closing costs involved, the VA prohibits the lender from charging the borrower more than 1% on “non-allowables” like the escrow fee, processing fee, or underwriting fee. These non-allowables can be paid by (1) the seller, (2) by the real estate agent in the form of a credit at closing, or (3) by the lender in the form of a credit on the interest rate, sometimes referred to as “paying points”.
It Waives Private Mortgage Insurance
In other types of conventional home loans, the buyer is required to carry private mortgage insurance, also known as PMI. PMI protects the lender in the event that the borrower defaults – but because VA loans are already guaranteed by the VA, there is no need for the buyer to have such insurance. This is a great cost savings to anyone buying a home with this loan.
The typical rate for PMI is up to 1.15% of the total loan amount each year – so depending on the price of the home and how much down payment was made, PMI can easily cost homeowners up to $200 per month; moreover, they are required to pay this amount for the life of the mortgage. If you buy a home using the VA loan program don’t need to worry about it at all. What they do pay instead is a one-time funding fee, which the lender can generally finance into the terms of the loan so you don’t pay for it up-front.
It’s Easier to Qualify For
Not having to come up with a down payment is just one reason it’s easier for military home buyers to purchase with a VA loan. Another reason is eligibility requirements. Although these requirements depend on the lender the buyer is using, it is worth noting that many lenders will be more flexible with VA loan clients when it comes to requirements like job history or credit scores. Some lenders, in fact, have no minimum credit score requirement at all for their VA loan borrowers. Others may have a lowered requirement, like accepting applicants with scores ranging from 540 to 580 (rather than the conventional mortgage requirement of 620). Ask your lender for details if you are a credit-challenged military home buyer.
More VA Loan Information for Buying a Home
Here are some additional facts on VA loans from reputable, authoritative sources:
- The VA backed an all-time high of loans in fiscal year 2015, with a total of 631,142 VA loans funded in the U.S. This was a remarkable increase of 19% from 2014. Source: Department of Veterans Affairs Home Loan Guaranty Report 2015
- The VA also has a home retention assistance program to help VA loan borrowers who have fallen behind on payments. Thanks to the intervention of this program, more than 90,000 VA loan homeowners avoided foreclosure in 2015 – and over the past four years, more than 300,000 VA loan homeowners have been assisted by the program. Source: Department of Veterans Affairs Home Loan Guaranty Report 2015
- The efforts of the VA home retention assistance program have saved U.S. taxpayers money as well – an estimated $10 billion, according to the Department of Veterans Affairs.
Qualifying for a VA Loan
Some of the most frequently asked questions on the VA loan program are about qualification standards. Eligible VA loan applicants are (1) current or former military members, including active duty and reservists, (2) spouses of military members who died during active duty, and (3) spouses of military members who died as the result of a service-connected disability. Divorced civilian spouses are not eligible for a VA loan; however, a home purchased with a VA loan may be occupied by either spouse after a divorce.
A few other points to note: Active duty military members must be in-service at least six months before applying for a VA loan. Reservists and members of the National Guard must wait 6 years to apply; however, they gain their eligibility after 181 days of service if they are called to active duty sooner.
Refinancing with a VA Loan
Another common question is in regards to refinancing a home with a VA loan. It is possible to do this, even if the home was purchased with a conventional or FHA loan – and it can be highly beneficial because the homeowner can refinance up to 100% of their loan (taking into account that a conventional refinance will only finance up to 80% of the amount if the homeowner wants cash out, and only 95% for a rate and term refinance). Another advantage of refinancing with a VA loan: no PMI required, as pointed out above.
Making a Down Payment on a VA Loan
As stated, one of the most appealing benefits of the VA loan is that it does not require the home buyer to make a down payment. However, some people actually choose to make one – specifically, if they are credit-challenged and hoping to improve their chances of qualifying for the loan. Also, some people choose to make a down payment in order to have the funding fee waived. These are options that a lender can discuss with individual home buyers.
Once a home buyer is qualified to purchase with a VA loan, it’s time to start looking at homes for sale in the price range of the loan you are approved for. To do this, you should hire a trusted Realtor in your local area (or the area in which you wish to buy a home). Working with qualified professionals all around is the key to a successful home buying experience.
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