What is a VA Home Loan?
A VA home loan is mortgage that's backed by the US Department of Veteran Affairs (VA). These loans were created in 1944, so servicemembers returning from the second world war could purchase homes more easily. The VA guarantees 25% of the loan, and if the borrower is unable to repay their loan, the VA will pay the insured percentage to the lender. This guarantee makes VA home loans lower risk, which help lower credit requirements as well as rates. VA home loans are unique among mortgages because they are one of the few housing loans which require no down payments. VA home loans are only available to those with VA entitlement.
You cannot get a VA home loan unless you qualify for VA entitlement. To get VA entitlement, you must have served in the military for at least 181 days during peacetime, or 90 days during wartime. You also qualify if you were discharged from active duty for a service-related disability. The spouses of deceased veterans may also get VA entitlement, in certain circumstances. Since the VA does not provide loans directly, eligibility requirements are set by individual lenders, so there is some variation. However, VA home loans typically have lower credit requirements than conventional mortgages. Most VA home loans have a minimum credit score of 620, which is notably lower than the minimum for a conventional loan that is often around 740. The Debt to Income Ratio (DTIR) needed to qualify is also more lenient for VA home loans than for conventional loans. A VA loan requires a DTIR of 41% or lower, whereas the average conventional loan asks for a DTIR of 34% or lower. To find your DTIR, you take your monthly debt obligations and divide it by your monthly income.
The individual lenders set rates for VA home loans, so they are not quite universal, it is worthwhile finding the rates of several different lenders. Rates can be affected by the size of the loan, the duration of the repayment period and the credit score of the borrower. Typically the APR for VA home loans ranges between 4-5%. These rates compare favorably to most conventional home loans because VA loans are guaranteed which lowers the risk for the lender.
Since the creation of the VA home loan, only 10% of their loans have needed any down payments. However, a down payment is necessary for certain circumstances. The VA guarantees 25% of the loan, up to whichever is larger of $417,000 or 125% of the median cost of a home in the area. However, this amount is not a cap on the size of the loan. If the borrower takes a loan for more than the guaranteed value for their area, then that borrower needs to make a down payment of the unguaranteed portion. For example, if a borrower takes a loan for $500,000 in an area which is only guaranteed up to $430,000, then the borrower needs to make a down payment of $17,500. 25%X($500,0000-$430,000)=25%X$70,000=$17,500 Even in these cases, the down payment is much lower than it would be for a conventional loan.
First Time Home Buyer
While the advantages of VA home loans apply to all borrowers, they are most evident for first time home buyers. First time home buyers have, on average, less credit history than people buying their second or third home. This lack of credit history can be an obstacle when it comes to obtaining a conventional mortgage. VA home loans tend to have lower credit standards, so this obstacle is reduced. After the borrower gets their first mortgage, the payments on the mortgage help establish their credit. There is also the Veterans United Lighthouse program to help veterans to improve their credit rating, which can help them obtain their first home. When buying a new home, borrowers often use some of the revenue from the sale of their previous home to make the down payment on their new mortgage. First-time homeowners do not have this option and usually need to save for a long time to afford their first down payment. However, VA home loans for under $417,000 do not require any down payment. To make purchasing a first home easier, a borrower's first VA home loan has a lower funding fee than their subsequent loans.
For a Second Home
While the VA home loan is an excellent option for financing a second home, there are a few things to take into consideration. VA home loans cannot be used to purchase real estate that is not the primary residence of the borrower, such as a summer home, or investment property. For these sorts of purposes get a conventional mortgage. There is no limit to the number of times a qualified borrower can take a loan. However, if there is outstanding debt on a previous VA loan, it will count towards the amount of entitlement the borrower is using. The amount of guaranteed debt a borrower is entitled is at least $417,000 or 125% the cost of the median home in their region. For example, if a borrower is entitled to $417,000 and they have $100,000 still owed for a previous VA home loan, the VA can only back $300,000 of the next loan. When an old loan is paid off the borrower's entitlement is fully restored.
Mobile (Manufactured) Homes
Manufactured homes (sometimes called mobile homes) are a much cheaper housing option that many potential homeowners should consider. It should be noted that VA loans have some different rules for manufactured homes. For a manufactured home to qualify for a VA home loan, it must be classified as real property. While in transport a manufactured home must be licensed as a vehicle. When it is placed on a lot, the owner can go through a process called title elimination. If a manufactured home has not gone through title elimination, it will still be classified as a vehicle and will not qualify for a VA home loan. A manufactured house must be permanently attached to a foundation to qualify for a VA home loan. The home must be at least 20 feet wide and 700 square feet to qualify as a double wide and 10 feet wide and 400 square feet to qualify as a single wide. The home must be on land that is owned by the borrower. In addition to these requirements, some VA partnered lenders do not make loans for mobile homes at all. Loan repayments are also structured differently. The maximum term for most VA home loans is 30 years, but for manufactured homes, the maximum term is 25 years or less.
How to Get a VA Home Loan
The first thing you should do before getting a VA home loan is to find a real estate agent and decide on a budget. Knowing your budget will help you to determine how large of a loan you will need. Next, you will need to find a lender that suits your needs. As VA home loans are not universal, it is important to compare different lenders. Once you’ve decided on a lender, you can begin the prequalification process. This process will help determine the size and types of loans that you can qualify for. Then you will need to get your Certificate of Eligibility (COE), which proves your entitlement to the VA’s backing. To get this certificate, you must provide documents which show that you are either a veteran, an active service member, or a surviving spouse. A list of accepted documents can be found here. At this point, you can start shopping for a new home. When you find a home, get your realtor to add a clause which allows you to escape if your VA home loan falls through. After you have signed a home purchasing agreement, your lender can proceed with formalizing your loan. Once you are approved, you can close on the property.
If you're interested in applying for a VA home loan but aren't sure where to start, there's lots of info online or to help you find out what you need to know. Talking to an expert is another effective way to make sure you're on the right track towards getting the best loan for your situation.