If you’re actively serving in the military, are a veteran, or a spouse of a veteran, the Department of Veteran Affairs offers a special mortgage program known as the VA Loan Guaranty Program – aka the VA loan.
Without a doubt, the VA loan is one of the best mortgages available for U.S. homebuyers.
This no-down payment loan is a fantastic option for 1st time homebuyers, as well as move-up buyers.
In addition to relatively loose underwriting standards, VA mortgage loans typically offer lower rates than their counterparts.
UNDERSTANDING VA MORTGAGE LOANS
Enacted by Congress in 1944, the VA loan was designed to offer long-term home financing to eligible American veterans and their surviving spouses.
VA loans have continued to increase in popularity, with more than 20 million VA home loans being issued over the history of the program.
Despite confusion, the federal government does not actually lend money. The government simply guarantees loans made by lenders.
Eligibility details can be somewhat complex. However, if you meet one of the following criteria, it’s likely that you’ll be eligible for a VA loan:
- You served 181 days on active duty during peacetime
- You served 90 days on active duty during wartime
- You served six years in the Reserves or National Guard
- Your spouse died in the line of duty or from a service-connected disability
THE VA FUNDING FEE
VA loans fall into the category of a government-backed mortgage loan and are guaranteed by the Department of Veteran Affairs.
In the event of default, the VA lender is partially compensated by the VA.
In order to compensate VA lenders, the VA charges a funding fee. Funding fee amounts will range from 0 – 3.3% based upon the characteristics of the loan, as well as the VA borrower.
Fortunately for VA borrowers, it is not required to pay funding fees out-of-pocket. The funding fee can be financed as part of the loan amount.
When using a VA loan to purchase a home, veterans can borrow up to 103.3% of the sales price or value of the home, whichever is less.
VA LOAN ENTITLEMENT
The VA loan entitlement will vary by individual. This is because each borrower will qualify for a different loan amount, according to their income, debts, existing entitlement use, etc.
A certificate of eligibility (COE) is needed to show the VA borrower’s entitlement. The standard VA loan entitlement is either $36,000 or 25% of the loan amount.
The $36,000 home loan entitlement is based on a loan amount of $144,000 or less. For VA loans above $144,000, the VA entitlement will be increase to 25% of the loan amount.
Restrictions on the total loan amount is generally set by county. In cases where the loan amount exceed the county loan limit, the borrower must place a down payment that’s equal to 25% of the excess.
OTHER BENEFITS THAT VA LOANS OFFER
Not only do VA loans offer zero-down payment options, regardless of the down payment, VA borrowers will never have to pay mortgage insurance.
The VA loan also allows up to $6,000 for energy efficient improvements.
Another benefit of VA mortgage loans is that they are all assumable. Assumable loans can be transferred to a home buyer in the future as long as that buyer is also eligible for a VA loan.
VA loans generally have less stringent underwriting guidelines. Many lenders do not have minimum credit score requirements for their VA loans, and debt-to-income requirements are typically lower than conventional loans.
From less stringent underwriting requirements to lower interest rates, for home buyers that are eligible, VA loans are arguably the best mortgage loans available in today’s market.