How to Use a VA Mortgage

The VA Home Loan program is one of the most popular non-medical military benefits you can use. Only the GI Bill rivals the VA loan program in terms of its visibility and usefulness, but some of the VA loan program’s options aren’t as well-understood.

For example, did you know that when you are approved for a VA mortgage you have the option to refinance the loan later with a Streamline Refinance? These refi loans feature no VA-required credit check or appraisal and typically must result in a benefit to the borrower like a lower mortgage payment.

The no-credit-check option for such loans is a very important one, and many borrowers aren’t even aware of this option when they request a VA Certificate of Eligibility to get started. What other features of the VA Home Loan program could help you along the way?

How to Use a VA Mortgage: Build a Home

Some borrowers don’t realize you can use a VA loan to buy existing homes or use a VA mortgage to build a home from the ground up. VA Pamphlet 26-7, the VA Lender’s Handbook,  has a section in Chapter Three that states VA loans can be used to “purchase or construct” a residence you want to use as your home.

You can use your VA loan to build the home, but you can also use part of the loan to purchase the land the home is built upon. You also have the option of using your VA loan benefits to build on land you already own. What you cannot do is buy “unimproved land” with a VA mortgage without plans to build upon it. VA mortgages cannot be used to purchase land alone.

You can use a VA mortgage to build a home with up to four living units plus one “business unit” according to Chapter Three; more units may be possible in cases where two or more veterans are using their VA loan benefits together in a “joint loan”. Ask your loan officer about this option if you need to consider it.

 

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How to Use a VA Mortgage: Buy A Mobile Home Or Manufactured Home

VA mortgages include options for manufactured homes, modular housing, and mobile homes. In all cases, the housing must be mounted on an approved foundation in its final disposition. That is a condition of loan approval and no property is eligible for a VA mortgage unless it can be classified legally as real estate. That is true even if the property is not taxed as such.

A home without a permanent foundation does not qualify for a VA mortgage. In cases where a modular or manufactured home is purchased and delivered, it must be fixed to an approved foundation according to a time frame you and the lender agree upon (or one that is imposed by lender standards).

Recreational vehicles (RVs) and houseboats cannot be placed on permanent foundations, so they do not count as eligible properties you can buy with a VA mortgage.

How to Use a VA Mortgage: Buy A Condo, Townhome, Or Duplex

You can buy a condo unit with a VA mortgage. You can also buy a townhome or duplex. All three property types fall into those generally approved for a VA loan but each property type must meet VA standards. For example, if you buy a condo unit your condo owner’s association agreement cannot restrict you from freely selling or transferring the property anytime you wish. Some condo owner association bylaws may include something called the Right of First Refusal, which means the condo association gets to approve or veto the sale of an individual unit.

VA loan rules do not permit your ability to sell or transfer your home to anyone you wish, so any such clause would have to be struck from your legally binding agreement in order to qualify for a VA home loan.

How to Use a VA Loan: Refinance An Existing Mortgage

Not all VA borrowers are first-time borrowers. Do you already own property? Do you need to refinance that mortgage? VA mortgages are government-backed loans which may mean lower interest rates if you refinance using one (depending on circumstances).

You can use a VA Cash-Out Refinance for any type of non-VA mortgages such as an FHA or conventional loan. Lender standards may apply but in general, you may find credit standards and interest rates on government-backed loans more competitive than some conventional equivalents.

There is also the option to refinance an existing VA mortgage; borrowers can apply for a Streamline Refinance (see above) or VA Cash-Out Refinances but with VA Cash-Out Refinance loans a credit check and appraisal are always required.

How to Use a VA Loan: Buy And Improve A Home At The Same Time

The VA Lender’s Handbook, Chapter Three, says VA mortgages can be used to simultaneously buy and improve a house. There may be multiple ways of doing this but one option that is popular among VA borrowers?

The VA Energy-Efficient Mortgage add-on allows extra loan funds for your VA purchase or a VA refinance loan. These extra funds are used specifically to add energy-saving upgrades to the home. These upgrades must be approved and you may be required to hire an energy consultant as part of the process.

What You Need to Know About Using A VA Mortgage

VA loans are not available from all lenders; only participating VA lenders are authorized to approve loans under this program. Furthermore, not all VA lenders offer all VA loan products so shopping around for the right financial institution is key. A number of variables including the nature of the local housing market, supply and demand, and lender willingness all contribute to the decisions to offer certain VA loan options like condo loans or mobile home loans.

Using a VA mortgage means the option to get a zero-down payment mortgage, which is a big advantage for borrowers who need to save more money upfront on the loan. But no-money-down isn’t always the right choice, especially for borrowers who have a priority of saving money over the full duration of the loan term.

5% Down VA Loans?

In those cases, making a 5% or 10% down payment makes sense because it lowers the VA Loan Funding Fee you must pay as part of the costs of the loan. Not all borrowers have to pay the VA loan funding fee. If you receive or are eligible to receive VA compensation for service-connected medical issues, you may apply for a waiver of the VA Loan Funding Fee.

The waiver is not automatic and you must have your VA rating in your official VA medical records in order to claim the waiver. If you apply for a VA loan and you do not have a VA decision on a disability rating you may apply for the waiver once the VA has formally listed your rating in your records.

Appraisal vs. Asking Price

Some borrowers may have to make a down payment if they are buying a house that appraises lower than the asking price. You can’t be forced to buy a home with a VA loan under such conditions thanks to something called the VA Loan Escape Clause. But if you choose to buy the home even though it sells higher than the asking price, you would be required to pay the difference between the appraised value and sale price in cash at closing time.

And finally, you should know that your VA loan benefit can be used together with a legally married spouse, but you cannot transfer your VA loan benefit to others the way you are allowed to under the Post 9/11 GI Bill with those benefits. You can apply for a VA loan with a non-VA borrower but the VA loan guarantee only applies to the veteran borrower’s portion of the loan. The non-veteran, non-spouse applicant has no VA loan benefits to use.

 

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VA Home Loan Approval: Facts You Should Know

If you are eligible for a VA home loan and want to apply to buy a home, there are some issues you should be familiar with long before you begin the process. The VA loan benefit is one of the most important options offered for some military members and veterans; the ability to qualify for a government-backed mortgage with no money down is a major advantage.

What do you need to know about the VA home loan process when compared to conventional mortgages or even other government-backed home loans? We’ll explore some important differences below, but remember that the VA mortgage program’s uniqueness starts with the fact that these loans are not open to the public, but for those with qualifying military service, certain surviving spouses, and certain members of the other “uniformed services” such as the National Oceanic and Atmospheric Administration, and the U.S. Public Health Service.

VA Home Loan Approval: FICO Scores

The government-backed FHA loan and USDA home loan programs both have specific FICO score requirements listed for many loan products. There are other qualifying guidelines for each home loan option but the FICO score issue is standard across the board. Except for VA home loans, which have no VA-specified FICO score ranges for qualifying.

Instead, those requirements are left up to the lender’s own standards. The only caveat (for the lender) is that most features of the VA home loan program are typically required to be “reasonable and customary” for similar loan products in that market.

Lender standards for government-backed mortgages tend to vary in general but typically you may find lenders looking for FICO scores ranging from 620 upward. Your experience may vary depending on the lender.

VA Home Loans vs USDA Mortgages

Both are government-backed home loans and both offer important perks for first-time homebuyers, though the VA may not specifically target those perks toward any one type of loan applicant. The zero-down option for VA mortgages is one of the most first-time-homebuyer-friendly options available.

The USDA home loan program may also offer no money down home loans, but USDA mortgages are generally intended as need-based home loans, and income limits may apply. You read that correctly, USDA loans have a maximum household income limit depending on the loan you seek and other variables.

VA mortgages are not need-based loans, they do not have income limits or require you to purchase within a targeted area for the most competitive rates and terms. USDA loan options may include better pricing, lower rates, or other advantages if you buy a home in a targeted area identified by the agency, depending on the program.

VA Home Loans vs FHA Mortgages

There are many reasons why VA loans are different than FHA mortgages–too many to list them all here. But the most important ones you should know include the fact that FHA mortgages require both an Up-Front Mortgage Insurance Premium, and a monthly mortgage insurance premium.

VA home loans have no mortgage insurance requirement, which is another reason why VA mortgages can be an advantage for the borrower.

VA loans also have no down payment, while FHA mortgage down payment requirements start at 3.5% but could be as high as 10% if the applicant’s FICO scores are not within the FHA’s standards for maximum financing.

FHA loans and VA mortgages are similar in some respects; both offer an Energy Efficient Mortgage loan add-on so you can get extra funds to apply toward approved energy-saving upgrades to the home.

VA and FHA loan approval rules both say that the number of add-ons to your home loan may increase your monthly mortgage payments; too many additions to the loan amount can be just as tough for the lender to justify approving as trying to buy a home that has a price tag above your budget.

VA Home Loan Approval: Appraisals Required

Like FHA and USDA mortgages, VA loans require the property to pass an appraisal as a condition of loan approval. All three government-backed mortgage loan programs feature this requirement as a way to ensure the property has remaining economic life for the duration of the loan.

What does that mean? It means that the house you buy with a VA mortgage should be financially viable to sell or keep for the full term of the mortgage. What good is a home you pay for but cannot sell? VA loan rules are designed to prevent that from becoming an issue.

The appraisal process for VA mortgages is similar to the FHA appraisal; your lender will arrange it and receive the appraisal report when it is finished. You, the borrower, are entitled to know what is in the appraisal report but do not expect to communicate directly with a VA appraiser; this is generally not done.

Appraisals Lower Than the Sale Price

If your appraisal comes back with a fair market value lower than the asking price of the home, you can use something called the VA Loan Escape Clause to walk away from the deal without penalty. Federal law says you cannot be compelled to buy a home that appraises lower than the asking price with a VA mortgage. The Escape Clause is non-negotiable for the lender–they must provide you with the opportunity to walk away from the loan in such cases.

You also have the option of buying the house anyway, but you will be required to pay the difference between the asking price and the appraised value of the home in cash at closing time. It cannot be rolled into the loan amount or financed as part of the VA mortgage.

Buying a house that appraises lower than the sale price involves a risk for the buyer. What if you cannot sell the home for at least what you put into it? Expect to take a loss on such a deal and consider your options accordingly.

VA Loan Approval and Your Credit

One mistake borrowers make with VA home loans, and indeed ANY home loan program is when a home loan application is in the system and the borrower chooses to apply for another line of credit before the home loan is closed. Doing this is a big mistake,. Don’t assume your lender will pull your credit report only once during the home loan process. That is not true. Your lender will check your credit multiple times during the journey from approval to closing day.

If your credit changes too much, or if you experience other sudden financially-related changes that can affect your ability to afford the home loan, the lender may be required to re-qualify you for the mortgage. Whether that is done successfully or not depends greatly on the details involved and there are no one-size-fits-all answers, but in general, you should expect it to be much harder to remain qualified for the loan in such cases.

Learn to Think Like a Lender

Learning to think like a loan officer can be a big help when it’s time to decide what to do about your credit, your loan repayment history, your credit utilization, and other important factors. Remember that your lender must justify you as a good credit risk and that making a mistake in that area can be career-threatening. A lender’s caution in approving or denying a home loan is a lot more understandable knowing that’s a factor when you are ready to start the journey toward homeownership.

Are you ready for a VA mortgage? If you know your credit scores and what your credit reports say, you’re a lot closer than some. If you already know what kind of down payment you might like to make (if any), have a price range for the homes you want to consider, and know your debt repayment history has been reliable over the last 12 months, you’re likely a lot closer to being ready than you might think.

 

>> Interested in a no PMI, zero down payment possible home loan?  For a no-obligation, free consultation regarding your VA Loan eligibility, please go here.

 

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