Originally part of the Servicemen’s Readjustment Act of 1944, commonly referred to as the G.I. Bill, the VA home loan benefit was introduced along with a host of programs designed to assist service members returning from World War II.
This special program is hands-down the best mortgage program in the marketplace for those who qualify. The VA home loan requires zero money down from the borrower, common sense credit guidelines and reduced closing costs as well.
And while a VA loan has no down payment requirement, the interest rates are as competitive as any and there is no monthly mortgage insurance payments compared to other reduced down payment mortgage programs. VA loans come with a government-backed guarantee on all VA mortgage programs and have the highest performance rate of any mortgage product in the industry.
No down payment, reduced closing costs and easier qualifying is why more than 20 million have taken advantage of this very special home loan.
Eligibility is determined by a review of your Certificate of Eligibility, obtained directly from the Department of Veteran’s Affairs. This certificate is obtained by completing the DOD form 26-1880 and can be mailed directly to the VA, received in person by visiting the nearest regional VA center, making an online request or have your VA lender get it for you. VA approved lenders have access to ACE, the Automated Certificate of Eligibility portal, which can retrieve your certificate of eligibility in a matter of seconds.
Generally, those eligible for the VA home loan are:
• Honorably discharged veterans
• Active service members with at least 181 days of continuous service
• Members of the National Guard or Armed Forces Reserves with at least six years of service
• The surviving spouse of an eligible veteran who died as a result of service related injuries
VA mortgage loan programs offer the traditional mix of both fixed and adjustable rate mortgages. Fixed rate loans have a single rate throughout the term of the loan that will never change. VA loan terms for fixed rate mortgages can be found in 10, 15, 20, 25 and 30 year terms. The longer the loan term, the lower the monthly payment yet also carry higher long term interest compared to shorter term loans.
Adjustable rate mortgages, or ARMs, have interest rates that can change throughout the term of the loan based upon a predetermined set of rules. VA ARMs today are hybrid loans, where the initial rate is fixed for a preset period before changing into an annually adjusting rate. Hybrid loans are offered as 3/1, 5/1, 7/1 and 10/1 programs, where the initial number reflects the length of the fixed rate. A 3/1 is fixed for three years before changing into a 1 year adjustable rate mortgage, for example.
Your loan officer will review the available loan programs and offer guidance on the best VA loan for your individual sitatuation and may be used to both purchase a home and refinance an existing mortgage.
VA loans may be used to replace an existing mortgage, called “refinancing.” A VA refinance may be used to reduce an existing interest rate, change loan terms or a combination of both. The most common reason to refinance is to lower the monthly payment. A borrower may take out a VA loan then later see that interest rates have fallen and are lower than an existing rate. By refinancing, the borrower can replace the old loan with a new one to obtain the lower rate and subsequent lower mortgage payment.
A refinance can also make sense when changing loan terms such as switching from an adjustable rate mortgage to a fixed rate or adjusting the term of the loan to save on interest charges.
The Interest Rate Reduction Refinance Loan, or IRRRL is commonly referred to as the VA “streamline” refinance program. This is a special VA loan to VA loan refinance that requires very little documentation to obtain an approval. Some of the features of the VA streamline are:
• No appraisal needed
• Income or employment is not verified
• No credit review
• Closing costs may be rolled into the loan amount
As long as you’re reducing your current mortgage payment, not taking any cash out or switching from an adjustable rate mortgage to a fixed rate loan, you may qualify for this unique program and you don’t have to use your existing VA lender in order to benefit from the VA streamline mortgage.
Cash out refinance loans allow the borrower to pull out equity in the home in the form of cash during the course of a refinance. While the VA doesn’t establish a maximum loan amount, most VA lenders do place limits on the loan based upon the current value of the property and the final loan amount. Lenders may limit any cash out loan to 80 or 90 percent of the property’s current value. If taking cash out of your home is needed and you have sufficient equity in your home, it may be better to obtain a home equity loan or refinance into a conventional mortgage.
Comparing Rates and Fees
When shopping for interest rates, it can be a very confusing process. However, there are a few things you can do to make sure you’re getting the best combination of rates and fees for your situation. The VA doesn’t establish mortgage rates nor fees and each VA lender can provide quotes that can vary slightly. But compare you must, as just the difference between one-eighth of one percent can add up to thousands of dollars over the life of the loan. Here are a few rules you must follow when comparing rates.
Compare the same mortgage program under the same terms. Before shopping, decide beforehand the loan program you want and stick with it. It’s impossible to compare a 15 year fixed rate with Lender A and a 25 year program from Lender B. And when you get the quote, ask for the quote for a predetermined period, say 30 days and with no points. This way you can truly compare apples to apples.
Compare at the same time of day. Don’t rely on mortgage rate advertisements, even those so-called “live” rate quotes online. Mortgage rates can vary throughout the day so when you collect quotes, call all your selected lenders in the morning or in the afternoon but get the information as close together as possible.
Get fee quotes that the lender can charge you. The VA restricts the types of closing costs a veteran may pay so ask the lender to quote lender fees that you may be responsible for such as an appraisal or credit report charge.
Ask the same question. When getting quotes, your question will sound something like this: “What is your 30 year rate with no points good for 30 days on a loan amount of $200,000? I have excellent credit.”
Remember to quote mortgage rates as well as fees to get an accurate, fair quote.
The annual percentage rate, or APR, is a number that is required to be disclosed to you when a lender accepts a complete loan application or advertises its interest rates to the general public. It’s an oft-confused number but is best described as the cost of money borrowed expressed as an annual rate and is a combination of the note rate – the rate upon which your monthly payment is based – and certain finance charges needed in order to close the loan.
The APR is best used to compare identical loan offerings between multiple lenders. The lower the APR, the better the offering. Three lenders may all offer the same note rate but have different fees that you may be responsible for. The greater the variance between your note rate and the APR indicates more closing costs.
For example, three lenders quote a 5.00 percent fixed rate with no points on a 30 year mortgage loan amount of $100,000. Lender A has $500 in finance charges, Lender B $1,000 and Lender C $2,000. The APR in this example calculates to:
• Lender A 5.04 %
• Lender B 5.12 %
• Lender C 5.31 %
By comparing the APR, you can tell that while all have the same interest rate, Lenders B and C have higher closing costs associated with the loan.
There are one-time closing costs paid to various parties in the course of approving a VA loan request. VA lenders need certain documentation from you as well as third parties before a loan approval is granted. Yet the VA only allows specific closing fees that may be paid by the borrower, reducing the amount of closing costs needed on the loan program.
Fees that the borrower is allowed to pay include:
• Discount points
• Credit report fee
• Title insurance and related charges
• Origination fees
• Recording fee
• Survey or abstract charges
• Funding fee
Charges that the borrower is not allowed to pay are:
• Attorney fees
• Escrow or settlement charges
• Underwriting fee
• Loan processing fee
• Document preparation fees
• Other fees
The loan officer will provide a list of expected closing costs that you may be required to pay when you first apply for the loan and can provide different scenarios on how closing costs can be handled. Be sure you understand all listed fees, what they’re for and who pays for them.
And don’t forget, beyond the one-time fees listed here, you will also need to arrange for homeowner’s insurance and escrow and impound accounts. These accounts are payments that accrue each month that will pay the property tax bill and insurance premium renewal when they’re due.
The Funding Fee
VA loans carry an inherent government guarantee, providing lenders with a lower level of risk when evaluating a VA loan application. Even though VA home loans have the lowest delinquency rate of any mortgage product on the marketplace today, some loans end up in default. The VA guarantees 25 percent of the loan amount to the lender should this occur. This guarantee is financed with the Funding Fee.
The funding fee can vary based upon the type of loan, equity, subsequent use and borrower type. For veterans who use their VA home loan benefit for the very first time have a funding fee of 2.15 percent of the loan, for example. The funding fee may be rolled into the loan amount in all VA loans.
Funding Fee Amounts for First Time Homebuyer
|Down Payment %||Active Duty/Veteran||National Guard/Reserves|
Funding Fee Amounts for Subsequent Use
|Down Payment %||Active Duty/Veteran||National Guard/Reserves|
Funding Fee Amounts for Cash Out Refinance
|Use||Active Duty/Veteran||National Guard/Reserves|
Funding Fee Amounts for Streamline Refinance (IRRRL)
|Use||Active Duty/Veteran||National Guard/Reserves|
While VA loans don’t require a down payment and easier qualifying compared to conventional loan programs, there are still basic requirements that lenders must follow. The lender must adhere to the VA issued loan guidelines in order for the loan to be eligible for the VA loan guarantee.
VA borrowers must exhibit a responsible credit history, documented by a credit report. The credit report will show the credit history of the borrower as well as provide at least two credit scores. The credit score is a three digit number assigned to the level of credit risk associated with the borrower. The higher the credit score, the better the credit. The VA doesn’t establish a minimum credit score requirement but most VA lenders ask for a 620 credit score or better.
If the borrower doesn’t have a credit score or hasn’t established a credit history, some VA lenders allow for a “manual” credit approval. A manual approval means verifying at least three non-traditional forms of credit with a minimum two year history in addition to verification of a timely rent history. Non-traditional credit can be a cell phone bill, utility or cable bill. Note, not all VA lenders offer the manual approval option.
VA lenders must certify the borrower’s ability to repay monthly debt. This is performed by calculating debt-to-income ratios, represented as a percentage of a borrower’s gross monthly income. VA loan requirements ask for a debt ratio to be no greater than 41 percent of gross household income. Although the ratio is not a strict limit, some VA lenders adhere to this number and will only allow a slightly higher ratio of say 42 to 44 if the borrower has an excellent credit history or significant cash reserves.
VA loans are intended for purchasing a primary residence only and cannot be used for investment property.
It’s important to use a VA lender that has been approved by the VA. Some mortgage companies who accept VA loan applications send the VA loan to yet another lender for approval. While VA loans are easier to qualify for, they have their own internal “quirks” that make the approval process a bit different compared to other loan types. Lenders who are not familiar with VA loans may stumble with a VA loan, extending the loan approval process unncesscarily or worse, having the loan declined needlessly.
Approved VA lenders have been fully vetted by the Department of Veteran’s Affairs and must meet strict VA loan experience guidelines and exhibit minimum financial net worth requirements.
The Lender Appraisal Processing Program, or LAPP, is a streamlined method of ordering and evaluating a property appraisal. Lenders without this special authority must order the VA appraisal directly from the Department of Veteran’s Affairs, adding unnecessary time to the loan approval.
VA approved lenders have access to ACE, the Automated Certificate of Eligibility. By providing your VA loan application and authorization forms to your VA approved lender, your certificate of eligibility can be requested and obtained almost instantly by the lender.
Non-Supervised Automatic Authority
This designation allows a VA approved lender to evaluate and approve the entire VA loan package with no VA involvement. This allows a lender to streamline the loan approval process and close loans quickly.
1. Get Prequalified Your very first step is getting prequalified. A prequalification is obtained by speaking with a VA-approved lender and reviewing your current financial picture with a loan officer. The loan officer will ask questions about your gross monthly income, current debt and your overall credit profile.
This conversation will tell you how much you may qualify for, what your monthly payments might be and how much money you’ll need to bring to the closing table. Knowing your price range will give you and your real estate agent a starting point when you begin your home search.
2. Gather Your Documentation Now it’s time to start gathering the paperwork necessary to start your VA loan process. You’ll be asked to provide your most recent pay check stubs covering at least 30 days, your two most recent W2 forms and your most recent bank and investment statements. If you’re self-employed, you will need to provide the past two years personal and business income tax returns and a year-to-date profit and loss statement
3. Your Certificate of Eligibility The certificate of eligibility is a document generated by the Department of Veteran’s Affairs validating your eligibility for a VA loan. You can obtain your certificate of eligibility by visiting your nearest regional VA center, mailing in your request or obtaining a copy online. To request your certificate, you’ll need to complete the DOD form 26-1880 and have a copy of your DD-214 as well. Yet the easiest way to obtain your certificate of eligibility is having a VA-approved lender request it for you.
4. Get Pre-approved A pre-approval is an upgrade from a prequalification. A pre-approval is issued after you apply for a VA loan and provide the necessary documentation to your VA lender. Once your credit report is pulled, your application will be reviewed and submitted for an automated approval. The only thing missing at this stage is the property address.
Your lender will then provide you with your pre-approval letter which verifies that you have completed an application and documented your loan and all you need to do next is find a property.
5. Go Shopping Now the fun part begins! Find a real estate agent that is familiar with the VA loan process. VA loans require zero money down but you should also negotiate to have the seller pay your closing costs for you. An experienced real estate agent can help guide you through the negotiations to get the right house at the right price.
Once your offer is accepted, your agent will provide you with a list of property inspectors who will physically inspect your new home from basement to the rooftop highlighting any issues that need to be addressed.
6. Processing and Underwriting The moment your sales contract is signed by you and the seller, the clock begins to tick. Most sales contracts allow for a 30 day closing period but may be adjusted depending upon your agreement with the seller.
Your lender will order a property appraisal to support the sales price as well as obtain a copy of the property’s title report. Your loan is now “in process” and you will work with both your loan officer and loan processor. The processor prepares the file for final underwriting.
The underwriter is the individual that manually reviews your file and supporting documentation to determine that your loan meets the required VA guidelines. Once that determination is made, your loan is forwarded to the closing department.
7. Closing and Funding The closing department prepares your loan documents and sends your loan papers electronically to your settlement agent who will oversee the closing. The settlement agent will prepare an initial settlement statement called the HUD-1. This is a form that accounts for all the charges, deposits and credits associated with your loan closing and itemizes any and all costs for which you’re responsible and tally the final amount needed from you to close
At your closing, you will review, initial and sign your final closing papers and provide the amount needed to close your VA loan. Your settlement agent will follow the closing instructions issued by your lender then forward the signed documents to the funding department.
The “funder” will make sure the settlement agent followed the instructions to the letter then release your funds to the settlement agent. Congratulations, you’re a home owner!
VA loans are hands-down the preferred choice for those who qualify searching for a competitive loan program with no money down. VA lending guidelines are similar to those with other loan types and are approved and documented in much the same fashion as conventional loans. However, VA loans do have specific requirements that make the program unique and do have additional requirements. Here is a list of some common questions.
Since the VA guarantees my loan, does that mean I’m guaranteed a VA loan?
No, the VA guaranty is to the lender approving your VA loan. As long as the lender approves your loan using established VA guidelines, should the loan ever go into default, the lender can receive compensation of 25 percent of your loan amount. Lenders will still review your income and credit amount other requirements before issuing an approval.
What are “non-allowable” closing costs?
The VA restricts certain closing costs that may be charged to and paid for by the veteran. Your VA lender can provide you with a list of these restricted fees along with other charges that you may be responsible for.
What credit score does the VA require?
Credit scores, a 3-digit number reflecting your current credit profile, are not required by the VA. However, most VA lenders do require a minimum credit score with lenders asking for a score to be at or above 640.
How do I know if I qualify for a VA loan?
VA lenders must review your certificate of eligibility to determine whether or not you’re eligible for a VA loan. However, basic requirements ask that you have more than 180 days of active duty service, an honorably discharged veteran, served six years in the National Guard or Reserves or the spouse of a service member who died as a result of a service-related injury.
What types of loans does the VA offer?
All VA lenders provide loan choices in both fixed rate and adjustable rate loans. Most lenders offer fixed rate terms of 10, 15, 20, 25 and 30 years. Adjustable rate mortgages are typically issued as hybrids, where the initial rate is fixed for a predetermined period before changing into a loan that can adjust annually.
What is a funding fee?
The funding fee is an insurance premium that finances the VA guarantee on your loan and is expressed as a percentage of the amount borrowed. This percentage can vary based upon loan type, equity and other loan characteristics but the funding fee for a first time purchase with no money down is 2.15 percent of the loan. The funding fee may be rolled into the loan amount in lieu of paying out of pocket. Most borrowers choose to roll the fee into the loan.
Do all lenders offer VA loans?
VA loans are typically offered by most lenders but it’s important to work with a lender that is an approved VA lender. An approved VA lender is authorized to process, underwrite and fund a VA loan. It’s important that you work with a lender with extensive VA experience to help you navigate your way through the VA approval process.
Can I use a VA loan more than once?
Yes, you can use a VA loan more than once as long as your original entitlement is restored. Your entitlement is restored when you sell your house and pay off the existing VA home loan.
What is my entitlement?
The entitlement issued today is $36,000 and the VA will guarantee a loan up to four times that amount, or $144,000. For loans above that, the VA guarantee will be 25 percent of the loan amount up to $417,000. In certain “high cost” areas, the guarantee and maximum loan amounts are greater.