We have recently been discussing the different types of mortgage options available for people looking to buy a home. There are many people who think they cannot afford to buy a home or are not eligible to do so, and that is certainly not the case — and we find this sentiment is common among veterans and our military servicemen and women. There are a lot of veterans, active duty military, and reservists who don’t realize they can take advantage of a VA loan to help them get a mortgage and purchase a home. Last week, we discussed the basics of the VA loan, and this week we will be diving into the multitude of advantages that the VA loan has to offer.
VA loans are assumable.
What exactly does that mean? Let’s say you bought at a really good time and you have a VA loan with a great interest rate. Another person, or another buyer, can “assume” that loan and that interest rate. If the person assuming the loan is not eligible for a VA loan, you would lose your entitlement benefits because the VA benefit stays with the mortgage, not the individual. If you were to sell to another veteran, they could not only assume your loan and your interest rate, but they can also substitute their entitlement for yours, meaning you are still able to use the VA loan again on a different home. Once the assumer is approved for the loan, you would be released from that loan, released from all liability, and able to purchase on your own.
100% Loan to Value Loans
With a VA loan, you are allowed to borrow up to 100% of the sale price, which basically means that no down payment is required for a VA purchase loan.
Furthermore, if you are in receipt of any kind of disability, you may be exempt from a funding fee. If you do have a disability due to your time in service, we would recommend you discuss that with your local VA office about to see if you are eligible for the funding exemption. If you are, you could purchase a home with no money down and no funding fee, which means you would be able to finance 100% of your home, which is a great option for our military men and women!
The VA loan has very generous guidelines and rules when it comes to obtaining a mortgage. Normally, underwriters would be looking for 2 years or more work history in the same line of work. But with the VA loan, it is understood that certain military service jobs don’t necessarily translate into success in the civilian job market and so we definitely take that into account. Even if you are starting a new job or a new career path, it is still possible for veterans to buy homes under those circumstances where it would be difficult for someone who never served to buy a home.
The VA loan also has a generous debt to income ratio. VA uses one debt to income ratio as opposed to a housing ratio and a total liability ratio. The Debt to Income Ratio is the percentage of your gross monthly income that goes to debts, e.g. car loans, credit cards, etc. For a VA loan, that ratio is 41%, but depending on how many people there are in your household, or how big your house is, underwriters will be generous and will exceed that ratio if there are compensating factors.
Finally, the VA loan is very similar to the FHA in terms of credit requirements. Underwriters also understand that many military members eligible for the VA loan might be young and just ending active duty and so they haven’t had time to establish a lot of credit or establish any depth to their credit. That is something that underwriters will look at and take into effect.
We already discussed that the VA loan allows for no down payment and potentially no funding fee, but often times all the closing costs are also covered either by the seller or through lender credit. There are certain fees that military members and veterans simply are not allowed to pay. So you could end up buying a home with essentially zero out of pocket expenses as your closing costs could be covered by someone else.
There are two types of refinance loans that are available with the VA loan that are a clear benefit. The first type is an interest rate reduction refinance which basically, reduce the payment, reduce the term, and helps the veterans overall situation. If you find that interest rates are at a low, and you want to refinance quickly, this is the way to go. There is no appraisal required, no money out of pocket, funding fees are reduced if you aren’t already exempt, no income qualifications or credit requirements.
The other type of refinancing available is a cash out to VA, and VA will go up to 100% on a cashout, which is very unusual. (A cashout loan is when the new mortgage loan is larger than the existing loan, and the borrower receives the difference between the two loans in cash.)
Furthermore, if you were using a conventional or FHA loan, you can refinance and use your entitlement, if you hadn’t been using it before or you paid off your previous one.
These are just some of the many advantages and benefits of using the VA loan for your mortgage. Next week, we are going to look at one of the biggest myths when it comes to the VA loan: the appraisal process.
*VA has specific underwriting requirements and eligibility requirements. The information in this blog and podcast are meant to be educational and do not contain all conditions or guidelines needed to meet the VA or the lenders underwriting requirements. This document is not a commitment to lend.