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VA Loans–
Backed by the U.S. Department of Veterans Affairs, VA loans are designed to help active-duty military personnel, veterans and certain other groups become homeowners at an affordable cost.
What Are VA Mortgage Advantages?
- No down payment is required in most cases. Conventional loans typically require a 5 percent down payment, and FHA loans require 3.5 percent.
- No monthly mortgage insurance premium to pay. FHA loans come with both an upfront and an annual mortgage insurance charge. Conventional buyers typically need to pay for private mortgage insurance unless they’re making a down payment of 20 percent or more.
- Limitation on buyer’s closing costs. Sellers can pay all of a buyer’s loan-related closing costs and up to 4 percent in concessions.
- Lower average interest rates than other loan types. VA loans continue to have the lowest average interest rates of all loan types.
- No prepayment penalties. VA buyers can pay off a loan early without any financial penalties.
- An assumable mortgage, typically subject to VA and/or lender approval. You may be able to have someone take over your mortgage payment, which can be a big benefit in an environment of rising interest rates.
- Foreclosure avoidance advocacy from the VA loan program. The VA has staff members who advocate on behalf of homeowners to find alternatives to foreclosure.
Credit–FICO Score
Income
Above and beyond credit, approvals will be issued to applicants who can provide proof of earnings which may involve some or all of the following documentation. Income verification is required to establish required Debt to Income percentages.
- 30 day’s pay stubs
- 2 year’s W2s
- 2 year’s tax returns if self-employed
- An offer letter, if not yet started
- Proof of education for new graduates
Most lenders require a two-year documentation to show a consistent earnings stream,. Maintenance, also termed alimony, can also be counted if documented in a divorce decree, along with the recurring method of payment such as automatic deposit. Seasonal income is also accepted, again with proof in a tax return.
Property
An independent VA appraiser will assess the property and point out MPR (minimum property requirements) needs. This is not to be confused with a home inspection, which isn’t required but almost always a good investment. It’s also important to note that the VA doesn’t guarantee a home is free of problems or defects.
The Department of Veterans Affairs utilizes a series of Minimum Property Requirements, or MPRs, that a home must meet in order to qualify for a VA loan. These home requirements help ensure that veterans and military families have a safe, structurally sound and sanitary place to call home.
A termite inspection will be required.
A swimming pool needs to be full and in working order.
Mortgage Insurance
Typically, lenders require you to pay for mortgage insurance if you make a downpayment that’s less than 20 percent. This insurance, which is known as private mortgage insurance (PMI) for a conventional loan and a mortgage insurance premium (MIP) for an FHA loan, protects the lender in the event that you default on your loan.
VA loans require NO mortgage insurance.
The federal government guarantees that a portion of the loan will be repaid to the lender even if you’re unable to make monthly payments for whatever reason.
Debt-to-Income Ratio
Simply put, a borrower’s DTI ratio measures the borrower’s monthly debt against his or her gross monthly income. It’s expected and common to have some debt.
Conventional, FHA and USDA home loan lenders make two DTI ratios for borrowers: one solely for housing expenses (front-end ratio) and one all-inclusive total of major monthly debts (back-end ratio). The VA ignores the front-end ratio and looks only at borrowers’ back-end DTI ratios.
The VA’s benchmark is 41 percent, but VA loan lenders are not beholden to that standard. Therefore, military borrowers will likely find different DTI ratio standards with different lenders.
Closing Costs
A common way to remember which costs a veteran is allowed to pay for is to remember the acronym ACTORS. That stands for:
- A Appraisal
- C Credit Report
- T Title Insurance
- Origination Fee
- R Recording Fee
- S Survey
There are charges that the veteran is not allowed to pay. Even though the VA lender requires a processing and an underwriting fee in order to approve the VA loan, the veteran may not pay for these charges and any other fee deemed “non-allowable.” So if the veteran can’t pay them, who does?
The seller may. Paying for a buyer’s closing costs is considered a seller concession, and is limited to four percent of the sales price of the home. The seller is not required to do this.
The lender can offset part or all closing costs with a lender credit. Lenders can offer a credit to a borrower by adjusting the borrower’s interest rate. You pay a slightly higher rate to offset this cost.
Recall that an origination fee is an allowable charge. An origination fee is represented as one percent of the loan amount.
In lieu of charging the borrower non-allowed fees, the lender can charge a one percent origination fee instead of itemized non-allowable charges for things such as attorney or underwriting charges. The buyer is allowed to pay an origination fee.
Closing costs on VA loans are indeed a different breed compared to FHA or conventional loans, especially with regard to who is responsible for any particular fee. If there are any questions about who pays for what, those questions should be asked directly to your loan officer. VA costs can be confusing, there’s no need for them to be.
Downpayment
No downpayent is required for VA buyers.
The VA Offers Funding Fee Flexibility
VA loans require a “funding fee”, an upfront cost based on your loan amount, your type of eligible service, your down payment size plus other factors. Funding fees don’t need to be paid as cash, though. The VA allows it to be financed with the loan, so nothing is due at closing.
And, not all VA borrowers will pay it. VA funding fees are normally waived for veterans who receive VA disability compensation and for unmarried surviving spouses of veterans who died in service or as a result of a service-connected disability.