July 8, 2016 in Mortgages

Home loans for veterans: Everything you need to know

If you or your spouse has served in the military or the National Guard, chances are you’re eligible for a VA loan guaranty from the federal government. That benefit is one of the strongest ways the country can say thank you for your service.

“VA loans are a low risk for lenders and a great benefit for veterans,” says Patrick Cunningham, vice president and partner at Home Savings and Trust Mortgage in Fairfax, Virginia.

The Department of Veterans Affairs reports that more than 631,000 loans for veterans were approved in 2015, an increase of 44% over 2014.

The VA loan guaranty program, part of the 1944 GI Bill of Rights, was designed to ease the transition of veterans into civilian life while also spurring the U.S. economy, says Louise Thaxton, branch manager of Fairway Independent Mortgage Corp. in Leesville, Louisiana.

“VA loans are a right and reward for people who risk their lives for their country,” says Thaxton.

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Many veterans pay more attention to their education and medical benefits and are unaware that they may qualify for this homeownership benefit, says Joseph J. Murin of NewDay USA, a VA mortgage lender based in Fulton, Maryland.

Members of the military are eligible for a VA loan guaranty after they have actively served for 90 days during wartime or 180 days during peacetime. Murin says members of the National Guard and reservists are eligible after 6 years or, if they have been called for active service during wartime, 90 days. Surviving spouses of someone who died during active duty or due to a service-related disability are also eligible.

“The easiest way to determine eligibility is to apply online at VA.gov or ask your lender to check for you,” says Cunningham.

Criteria for VA financing also includes meeting loan guidelines for credit and income eligibility.

While Thaxton says that typically with a VA loan a co-borrower’s income can be considered only if the borrowers are married, 2 veterans who aren’t married can get a VA loan together. A veteran who wants to buy with a non-spouse, non-veteran co-borrower must make a down payment of at least 12.5%.

Loans for veterans are generally available for primary residences only, not for investment properties or vacation homes.

The main attraction of loans for veterans: Borrowers can finance 100% of their home purchase.

“Not only is there no down payment requirement, but eligible borrowers don’t pay mortgage insurance as they would with any FHA loan or with a conventional mortgage with a down payment of less than 20%,” says Cunningham.

Loans for veterans typically have interest rates comparable to the best conventional loan rates, he adds.

“There’s no rate adjustment for a lower credit score, so for someone with a low score that could mean as much as a 1% difference on a conventional loan,” says Cunningham. “The funding fee for the program pays for a government guarantee to protect lenders in case of a default.”

Funding fees range from 1.25% to 2.4% for first-time VA loan borrowers.

Thaxton says the requirements for VA loans are less restrictive than some other loan programs, allowing for a higher debt-to-income ratio, too.

“VA loans are underwritten specifically for veterans and rely on more than just a credit score,” says Murin. “We focus mostly on the disposable income of the borrowers since that’s the biggest indicator of whether someone will default.”

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You can use your eligibility multiple times, says Thaxton.

You can even have more than one VA loan at a time, depending on how much of your eligibility you used the first time.

“The funding fee will be higher when you take out a second VA loan, sometimes as high as 3.3%,” says Thaxton.

VA loans can be used for refinancing as well as for a home purchase.

“Most of our borrowers are refinancing a VA loan with a cash-out refinance to consolidate their debt,” says Murin. “Our older borrowers benefit from this opportunity to clean up their finances.”

But the 3.3% funding fee can be cost-prohibitive for veterans refinancing from an FHA or conventional loan into a VA loan, says Cunningham.

A VA loan expert can help you compare other loan options and decide whether the funding fee is costlier than paying mortgage insurance, says Thaxton. But typically a VA loan is the best option unless you want to make a 20% down payment.

While loans for veterans are available throughout the U.S. for properties with 1 to 4 units as long as the borrower lives in one of the units, the limits on the loans vary according to housing costs in your county. The VA loan limits conform to the limits for conventional financing established by the Federal Housing Finance Agency. The limit is $417,000 in most areas and up to $625,500 in high-cost housing markets.

“The ability to buy a house for as much as $625,500 in the D.C. area without a down payment is a great benefit for vets,” says Cunningham. “In addition, if you want to use a jumbo VA loan and buy a more expensive property, you just have to make a down payment of 25% of the difference between the home price and the loan limit.”

For example, buyers of a $700,000 home would need to pay 25% of $74,500 (the difference between $700,000 and $625,500), or $18,625, a significant savings compared with a traditional jumbo loan. A 5% down payment on a $700,000 loan would be $35,000.

Cunningham says VA loans are available for single-family homes, townhomes and condominiums, although condos must be on a VA-approved list.

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The first step for borrowers is to obtain a certificate of eligibility for a VA loan through the VA office or a lender. Next, borrowers need to find a lender experienced with VA loans.

“Not all lenders do VA loans because they think they are complex,” says Murin. “It’s important to find a lender experienced with VA loans who can also be an advocate for the veteran.”

Borrowers can work with a lender to decide how to pay the funding fee, which varies depending on your service and the amount of the down payment, if any.

Some disabled veterans can get the fee waived, says Cunningham.

Once borrowers have a loan preapproval, they can begin looking for a home to buy and make an offer. Loans for veterans require a VA appraisal and a VA home inspection to make sure the property is priced appropriately and is habitable.

Up to 4% of closing costs can be paid by the seller, says Cunningham, to further limit out-of-pocket costs to veterans.