What to expect when using the VA home loan?
As a veteran or service member, you made a commitment to your country that yielded you benefits that those that never served do not have access to. One of the most advantageous benefits is the VA home loan. This loan will enable you to finance a home loan with no mortgage insurance. Most other loan programs require mortgage insurance from the start unless you are placing 20% down payment. The rates with a VA home loan tend to be better as well. This allows you to have a more affordable monthly mortgage payment.
There is no down payment with the VA home loan in most circumstances. There are some terms for you to know about when using the VA home loan. For instance, certificate of eligibility (COE) which is a form that lets the lender know if you have eligibility for a home loan. The COE also provides information to the mortgage professional as to whether any of your entitlements have been used on prior home purchases. To gather your COE, you may reach out to the VA Regional Loan Center, or your mortgage professional can pull this for you from the VA lender portal. Many people think that if they’ve used the VA home loan benefit that they cannot use it again. This is false as you may use the VA home loan multiple times. There are situations where homeowners have used the VA home loan multiple times and still have the home that they eventually used as investment properties to rent. Another important matter to know is that if you have used most of your VA home loan eligibility that you do have access to use the VA home loan again through what they call Bonus Entitlement. Bonus Entitlement will only you to put 25% down and still finance with the home loan. You may wonder why someone would do this. Most of the times it is due to the client wanting the benefit of a better rate through the VA backed program.
The VA home loan will require you to purchase the home initially as a primary residence. After living in the home for a few years then you can buy another home and rent out the current home. There are some guidelines to be careful about. One guideline for instance is if you are buying a home using the VA home loan to upgrade for more size for your family or to move several miles away (usually 100 miles) to be closer to your job then you may use the VA home loan again.
Residual income is considered most of the time when using the VA home loan. Residual income is the income you have left over after paying your debt and the anticipated mortgage you are going into. This is based on the region of the United States you are family size. For the residual income, the VA also requires that if you pay childcare to be used as a debt against the residual income. The net income leftover is the residual amount remaining to cover family expenses such as food, health care, clothing and gasoline. The mortgage professional you are working with will walk you through this and let you know if you meet the residual income requirement as well as the entitlement available to you as the veteran.
When using the VA home loan there is another benefit. The veteran or service member has no income limit. There are mortgage products that clients use that require them not to make a certain amount each year. With the VA home loan this does not apply.
Another important item to be knowledgeable of is the VA funding fee. For each VA home loan there is a one-time funding fee you may be required to pay when buying a home. This funding fee can be financed into the loan. This will help offset any money paid at closing to enable you to transition into the new home. The VA funding fee is a one-time payment the Veteran, service member or surviving spouse pays on a VA backed home loan. Your mortgage professional will be able to find out if you are exempt or not from the VA funding fee by reviewing your COE. You will not have to pay the VA funding fee if you are receiving VA compensation for a service-connected disability, you’re eligible to receive VA compensation for a service-connected disability, you’re receiving dependency and indemnity compensation (DIC) as the surviving spouse of a veteran, you’re a service member who has received a proposed or memorandum rating before the loan close date or are a service member on active duty and provide evidence of having received the Purple Heart on or prior to closing date. The funding fee will at times be reduced if you decide to place a certain down payment on your VA home loan.
If you are later awarded VA compensation for a service-connected disability you may be eligible for a funding fee refund. The effective date of your VA compensation must be retroactive to before the date of your home loan closing. To receive the refund, you will have to reach out to the VA Regional Loan Center.
Did you know that the VA does not require a minimum credit score? Although many lenders do require a certain credit score minimum. As you are applying for a VA home loan, the mortgage professional will analyze your loan application to determine if you qualify based on your credit score. Lenders have the right to add an overlay. An overlay is an added requirement for them to finance your loan. This is why some mortgage companies will pre-approve you with a score of 580 and some as high as 640. They make this decision many times based on risk.
As you are on your journey to buying a home with the VA home loan benefit there are debt to income (DTI) requirements as well. Each lender sets what they will require when it comes to the DTI. The DTI average is usually 55% or below for most lenders. Keep in mind that STI is derived from current debt plus the future monthly mortgage payment for the home you are looking to buy. The DTI shows the lender that you can affordably afford the new home.
There are VA home loan limits, and it does change periodically. The loan limits are based on the county that you will be buying the home loan in. A great way to find this information is by visiting https://www.va.gov/housing-assistance/home-loans/loan-limits/. If you are buying a home with the VA home loan and it is above your county limit, then you are able to use the product known as the VA Jumbo loan. This still allows you to get into a home with no mortgage insurance. Nevertheless, you may be required to then pay a down payment.
The VA home loan is one of the best options when buying a home. The ability to buy with no down payment and no mortgage insurance is a good benefit. It is important when using the VA home loan to work with a mortgage professional that completely understands the loan product. As a veteran or service member the right to buy a home using the VA home loan was earned not given. Thank you for your service to our great country.
For more information, Ross Sykes can be reached at 251-509-7791 or ross@hflend.com
Thanks to Ross for providing this insight into the VA mortgage process.
Carl Gustafson – Real Estate Broker
251-533-8028
carl@thegustafsonproperties.com
