VA Home Loans Vs. Other Mortgage Options

The VA home loan is an important military benefit. The ability to apply for a mortgage with no down payment and no VA-required mortgage insurance premiums are two major financial incentives to choose a VA mortgage. But how do VA loans compare with other types of mortgage loans?

When comparing government loan programs such as VA, FHA, and USDA, certain features are common. A low or no-down payment option (depending on the loan program) could help new borrowers save more upfront on the loan than some conventional equivalents. But some alternatives to the VA home loan may cost more because of costs like mortgage insurance premiums.

VA Mortgages Versus USDA Home Loans

The similarities between these two programs are important. Both feature zero-down home loan options, and both are government-backed mortgages with potentially lower interest rates than some conventional equivalents. With two government loan programs offering no-money-down options, why doesn’t everyone consider a USDA loan? There’s no military service requirement for USDA which on the surface seems to make it far more accessible.

But USDA loans are typically approved for low-to-moderate-income borrowers and offered to those who meet household income limits (unlike VA and FHA mortgages, you can actually earn too much to qualify for a USDA home loan.

USDA loan guidelines include certain exceptions to household income limits (depending on a number of variables) if you purchase property in a targeted area. Like VA mortgages, USDA loans require occupancy; unlike VA mortgages, you may be limited in your ability to rent out unused living units in your home depending on the nature of your USDA loan.

Rules For Occupancy, Rentals

VA loans have no restrictions on you renting out an unused unit on the property you buy with the VA mortgage. But you must be an owner-occupier in typical cases. VA loan rules for refinancing these properties may vary when it comes to occupancy. Ask a participating lender about these rental issues and what the terms of your legally binding purchase contract commit you to.

USDA loans come with many of the same options as VA mortgages; you can apply for a home loan to buy new construction or existing construction homes. Both programs allow you to consider housing options like condo units, planned unit developments or PUDs, You can also purchase a modular or manufactured home using a VA or USDA mortgage.

Loan Fees

FHA loans don’t feature an exact equivalent of the VA Loan Funding Fee, but you will be expected to pay an FHA loan origination fee and an Up-Front Mortgage Insurance Premium. Unlike VA mortgages, FHA loans do not require you to apply for a Certificate of Eligibility, but you will be required to verify a minimum amount of time as an employed person. Two years is typical, but your lender will tell you what the specific requirements are.

 

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VA Mortgages Versus FHA Home Loans

FHA loans, like VA mortgages, are government-backed home loans with potentially lower interest rates than some conventional equivalents. FHA loans do not have a zero-down option, which puts them at a big disadvantage compared to the VA loan program.

To qualify for an FHA mortgage you will be required to make a minimum 3.5% down payment and unlike VA loans you are required to carry mortgage insurance for either 11 years or the lifetime of the FHA home loan, depending on your loan-to-value ratio and other factors. VA mortgages have no VA-required mortgage insurance guidelines.

Both VA and FHA mortgages allow you to apply for an add-on to the loan called an Energy-Efficient Mortgage or EEM package. This provides extra loan funds for approved upgrades and improvements that create a more energy-efficient home. For both VA and FHA mortgages, you may be required to hire an energy consultant, and the loan funds can only be used for their intended purpose, no unrestricted cash back to the borrower is allowed with VA or FHA EEMs.

Occupancy Rules And Property Types

VA and FHA loans are similar in many ways including occupancy requirements. You will be required to use the home you buy with an FHA mortgage as your primary residence. Both VA and FHA mortgages allow the purchase of properties with one to four living units. You can buy condo units, townhomes, duplexes, multi-unit homes, and even farm residences (the residence only, not a farm business) with VA and FHA loans.

VA and FHA loans both allow you to purchase mobile homes, manufactured housing, or modular homes. Both programs have specific requirements for these homes including the need for a permanent foundation. No property can be purchased with VA or FHA loans that do not meet the foundation requirement, and you cannot purchase something like an RV or houseboat that cannot be legally classified as real property.

VA Loans Compared To Conventional Mortgages

Up to this point, we’ve compared government loan programs to each other. But how does the VA loan program match up to conventional mortgages? For starters, there is no single boilerplate conventional mortgage, so a broad comparison can be helpful but you will need to know the terms and conditions of a specific conventional loan for a more accurate comparison.

For example, did you know that many conventional lenders will offer home loans without an occupancy requirement? That’s not true of FHA, USDA, or even VA mortgages. You can get a conventional loan for a residence or an investment property. The investment option is not available with a VA mortgage.

There is generally no such thing as a no-money-down conventional mortgage; in order to avoid having to pay a mortgage insurance premium, you are typically required to pay 20% down or more. That 20% rule is one reason why some have a misconception that you are required to pay 20% down on a conventional loan. It’s not required UNLESS you don’t want mortgage insurance.

Zero-Down Conventional Home Loans?

There is one circumstance where you could have an option for a zero-down conventional mortgage; if you are looking for a construction loan to build a home instead of buying an existing property you may be able to use land equity in place of a down payment. Naturally, this applies to those building a home on land they already own, not land they must purchase in conjunction with the mortgage.

VA loans are different from conventional mortgages in some important ways. There is something called the VA Loan Escape Clause, which requires lenders and sellers to abide by rules about the valuation of the home. If the appraised value comes in lower than the sale price the borrower can walk away from the deal without penalty. That includes earnest money–you cannot be required to forfeit earnest money on a VA mortgage in such cases.

Other Issues

Another difference; VA loans do not allow a penalty for early payoff of the loan or for paying more than your monthly mortgage payment minimum. You cannot be charged simply for paying off early, which makes refinancing your mortgage cheaper. It also protects you from a potentially larger final payment when the time comes.

Conventional loan fees and charges will vary greatly; VA mortgages allow certain lender fees to be passed on to the borrower. Unlike some conventional loans, there are VA guidelines about such fees. Some can never be charged to the borrower, and the way certain fees are charged is also regulated under the VA home loan program. Your participating VA lender cannot charge you more than the actual cost of pulling your credit report, for example. You cannot be charged for the lender’s legal counsel, and you cannot be charged duplicate fees for a single service.

When comparing loan options, it’s important to ask many questions. Don’t commit to a loan you do not fully understand, and don’t use a lender who seems evasive or won’t answer direct questions.

 

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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 Rule Changes

When was the last time you explored your VA loan options? If it’s been a while, some aspects of the program may be quite different for you. In 2020, there were alterations made to the VA home loan benefit thanks to legislation known as the Blue Water Navy Vietnam Veterans Act of 2019.

Some of these are major changes, others affect small-but-important groups of veterans. If you haven’t explored your VA home loan benefits in a while the following changes may be new to you.

VA Loan Funding Fee Changes

Some adjustments to the VA Loan Funding Fee were made to create parity between active duty, Guard, and Reserve fees. At one time the VA Loan Funding Fee varied depending on whether you were on active duty or in the Guard/Reserve.

Under the current rules, the VA loan funding fee is charged based on the amount of any downpayment you choose to make and that fee is currently the same for first-time use no matter if you are on active duty or not.

Another change made to the VA Loan Funding Fee rules allows Purple Heart recipients to apply for a waiver of the VA loan funding fee. This must be done while the service member is on active duty.

VA loan funding fees aren’t charged across the board. Any VA borrower who received or is entitled to receive VA compensation for service-connected medical issues can apply to have the fee waived.

However, this waiver is not automatic and if the VA has not made a final determination at the time you apply for the VA loan you may be required to pay the VA loan funding fee and apply for a refund once the VA has updated your files with its disability rating decision. This refund is not automatic and you will be required to submit supporting documentation to be approved.

No VA Loan Limit For Those With 100% VA Loan Entitlement

If you looked at your VA loan options prior to 2020, your loan choices would have been informed by the VA loan limits in your county for that calendar year. If you look at your VA loan options now and have either never used your VA loan benefit or have had your entitlement restored to 100%, you have NO VA LOAN LIMIT.

You will negotiate the loan amount with a participating VA lender. You can get a zero-down VA home loan even in high-cost markets and technically you may qualify for a zero-down VA Jumbo Loan if you meet lender standards for that larger mortgage.

The lack of a VA loan limit does not mean there are no restrictions on the loan. As the Department of Veterans Affairs reminds us, “…borrowers seeking to use their VA home loan guaranty benefit still must qualify for a loan, based on credit and income requirements set forth by VA.”

Your participating VA lender will review your credit scores, repayment history, income, and other criteria to see if you qualify for the loan and use your FICO scores to determine the interest rate.

No Loan Limit on VA Native American Direct Loans

In general, the Department of Veterans Affairs does not lend money directly to VA borrowers. Instead, the VA relies on a network of participating VA lenders who operate with the approval of the VA.

The one exception is the VA Native American Direct Loan program which at one time featured a loan limit of $80 thousand for those who were interested in and entitled to build or buy a home on Federal Trust lands. The Blue Water Navy Vietnam Veterans Act removes this loan limit.

There are approximately 100 tribes that have a memorandum of understanding with the federal government that enables this program; contact the Department of Veterans Affairs directly to learn if you may apply.

 

 

 

VA Loans, Down Payments, and Gift Funds

You may not be required to make a down payment for a VA home loan, but some borrowers choose to do so to lower the amount of the VA loan funding fee and get a lower starting balance on the mortgage. In such cases, a borrower might seek some kind of down payment help to offset the upfront cost. Can a VA borrower accept gift funds from a family member, friend, or employer to help the borrower purchase a home? In general, down payment gifts are common in mortgage loan transactions, but they tend to be heavily regulated.

Why? In most cases, it has to do with a requirement that home loan gift funds not come from third parties with a financial stake in the outcome of the loan. Such gift funds also cannot come from unapproved sources like payday loans.

Down Payment Gift Funds

There are two general “classes” of gift funds for mortgage transactions. One type of gift is the money that a friend or family member might provide to help offset closing costs or the downpayment. This money must be properly sourced; no payday loans, credit card cash advances, or pink slip loans can be used to obtain the gift funds. We’ll discuss that in more detail below.

The other “class” of gift funds is the kind you might be able to obtain from a state or local program. Most states offer downpayment and closing cost assistance programs for low-to-moderate-income applicants who meet program guidelines.

Downpayment help from these agencies may be forgivable, or it may be offered as a loan that is only repaid under certain conditions like selling the home before the loan term expires. But there may be borrower qualifications such as a household income cap or requirements that you buy a property in a “targeted area”.

Not all downpayment assistance programs have such restrictions but many do. It will be important to know what it takes to qualify and under what circumstances you might be required to repay such assistance.

Down Payment Gift Letters Are Required From Your Donor

Your lender will require a “gift letter” from the gift giver certifying the gift is not a loan in disguise; they must declare in writing in a legally binding document that the gift funds came from acceptable sources such as money saved over time, cashed-in investments or bonds, or other sources that do not involve non-collateralized loans or money that cannot be properly sourced by the lender.

Additionally, some lenders may require such gift funds to be “seasoned” or left in a bank account for a minimum period of time such as three months. This requirement may vary depending on the lender.

Contents Of The Gift Letter

VA loan rules require the gift letter mentioned above to contain the following elements:

  • The donor’s full name and contact information
  • The donor’s relationship with the VA borrower
  • The dollar amount of the gift
  • A donor statement that no repayment is expected

Does the Department of Veterans Affairs permit these gifts for a VA loan? The answer is technically yes, but the funds must meet VA loan program guidelines found in VA Pamphlet 26-7, Chapter Four.

VA Loan Rules For Down Payment Assistance And Gift Funds

As mentioned above, VA Pamphlet 26-7, Chapter Four is the source for guidance about gift funds and down payment help. The first thing you’ll notice about this portion of the VA loan rulebook is that there is a consistent requirement to document the funds, when they are deposited, and the status of that money once it is transferred.

The other rule that plays a big role in how gift funds can be used involves where this money comes from. We already discussed rules about payday loan funds and other non-collateralized loans, but the VA also has strict rules about who can offer these gifts. You are not permitted to provide gift funds for a VA loan if you have any association with the loan as a third party:

  • Builders
  • Developers
  • Real estate agents
  • “Any other interested party” to the VA loan

You may not be permitted to provide gift funds if you have an association with any of the above or the lender determines you are otherwise financially affected by the outcome of the transaction.

When gift funds are being provided the lender is required under VA loan rules to “verify that sufficient funds to cover the gift have been transferred to the borrower’s account”, or that the money will be received at closing time.

When the transfer is made the lender needs proof that the deposit was sent (a copy of the check or transfer receipt) and that it was received (a copy of the deposit record for the gift money).

 

VA Home Loans Fact & Fiction

What do you need to know about VA mortgages before applying for one? Sometimes half the battle is knowing the facts and ignoring the myths and half-truths.

VA Loan Facts: Many Housing Types Are Possible

You can use a VA loan to buy, refinance, or renovate a suburban home, condo unit, mobile home or manufactured home, or even a duplex or multi-unit property. You can also buy a farm residence with a VA mortgage, but you cannot use a VA loan to buy a farm BUSINESS. A VA loan can be approved for residential property that is taxable as real estate, which means that RVs and houseboats don’t qualify. Nor does a mobile or manufactured home that won’t be placed on a permanent foundation.

VA loan rules do allow borrowers to consider a mixed-use or mixed zoning property as long as it is primarily residential and the non-residential use of the home does not interfere with it being a home.

It may be tougher to get VA loan approval for residential homes that don’t have any comparables on the housing market. You may not find a lender willing to offer home loans for tiny houses or other “fad architecture” properties. The age of the property may or may not be a factor in some cases; VA loans can be used for existing construction or new construction but an appraisal is required and the home’s “remaining economic life” may be a factor in loan approval.

VA Loan Fiction: Loan Limits

If you have 100% of your VA loan entitlement you do NOT have a VA loan limit the way conventional mortgages and FHA home loans do. That does not mean you can borrow any amount you want, you will need to discuss your purchase with a VA loan officer to determine what the upper limit of the mortgage will be in your case. Remember that you cannot apply for more home loan than you need with the expectation of getting cash back at closing time. VA loans like other residential mortgages, generally do not permit this except in the form of refunds for money paid upfront.

If you do not have 100% VA loan entitlement, you will be subject to a VA loan limit as established per county in each zip code.

 

Get a free, no-obligation consultation regarding your VA Loan!

 

VA Loan Facts: Loan Entitlement

If you pay off a VA loan, you can apply for a one-time restoration of your VA loan entitlement without selling the home you purchased with your previous VA mortgage. If you refinance a VA loan with a VA Cash-Out Refinance, you have your loan entitlement restored because you paid the original loan off in full as part of the refinance process. If you are still paying on a VA mortgage but have remaining entitlement, you can use that amount for a new VA mortgage but keep in mind that the new loan will require occupancy as a condition of loan approval.

VA Loan Facts: Occupancy Rules Can Be Satisfied With Family Members

VA loans, like most government-backed home loan programs, require occupancy. The VA loan program recognizes that military borrowers are subject to deployments, permanent change of station moves, and other circumstances that may take them away from the home for extended periods of time. A spouse or dependent child who meets VA requirements can occupy the home in the borrower’s place to fully meet the VA occupancy requirement. VA loans don’t penalize the borrower for being deployed or reassigned.

VA Loan Facts: No Down Payment

While it IS true that VA home loans do not typically require a down payment, you could be required to make one of you choose to buy a home that has a sale price higher than the appraised value. Some borrowers may be asked to consider a down payment as a compensating factor for lower FICO scores, but that is a lender standards issue and not a VA home loan rule.

VA Loan Fiction: Mortgage Insurance

Conventional loans require private mortgage insurance. FHA mortgages have a mortgage insurance premium. VA loans, on the other hand, do not require either one. Remember that mortgage insurance is not the same as homeowner’s insurance or hazard insurance. Some people assume a typical mortgage might require you to put 20% down, but this is true of conventional loans where the borrower wants to avoid paying mortgage insurance.

VA Loan Facts: You Can Refinance A Non-VA Loan With A VA Cash-Out Refinance

Non-VA mortgages can indeed be refinanced using a VA Cash-Out Refinance loan. Non-VA loans cannot be refinanced with a VA Streamline Refinance loan which is intended for existing VA mortgages only and must result in a tangible benefit to the borrower.

VA Loan Fiction: You Can Buy Investment Property With A VA Loan

VA loans cannot be approved for Air b-n-b operations, bed-and-breakfasts, sorority or fraternity houses, vacation homes, second homes, time shares, or other properties you don’t intend to use as your home address. You cannot purchase a business with a VA mortgage, nor can you buy a non-residential property. There is a very easy way to understand VA loan rules for occupancy. If you do not intend to live in the property you buy with a VA purchase loan, you won’t be approved for the VA mortgage. Occupancy is a requirement to buy a home with a VA mortgage.

VA Home Loan Facts About Loan Eligibility

It is true that VA loans have different eligibility requirements depending on when you joined. Most people serving today on active duty as new recruits will need 90 continuous days of military service before applying for a VA Certificate of Eligibility or VA COE.

You can apply for your VA COE through the VA eBenefits portal, you can also get your loan officer to help you. But if you apply via your loan officer, don’t expect to get your Certificate if you apply before your minimum time in uniform has passed.

That may seem fairly obvious to some, but it’s easy to forget that for new troops serving on active duty today, 90 days of continuous service does not start counting down while in boot camp or advanced training such as Advanced Individual Training.

VA Loan Facts: Counting Down To VA Loan Eligibility

Your eligibility starts when you have graduated from the training phase and move into your first active duty assignment. For some troops, this may be a few weeks or months, but for some who require advanced training such as at the Defense Language Institute, the wait could be longer.

Your eligibility for the VA loan benefit is NOT the same as loan approval. One of the myths about VA home loans you should know is directly associated with this–when you get your VA Certificate of Eligibility you have not yet been approved for a mortgage. All applicants must credit-qualify.

VA Loan Fiction: There Are No Credit Scores Needed To Qualify

It is true that the VA does not specify a credit score range for loan approval but that does not mean there are no credit score standards. Those will be up to your lender to set. FICO scores may play a part in whether or not you get the most competitive interest rate which is an important aspect of the true overall cost of your mortgage.

VA Loan Fiction: VA Loan Interest Rates

The VA does not tell the lender what rates to set for its mortgage loans. Interest rates are a very important aspect of your VA home loan, and while your FICO scores may be used by the lender to establish what rates you may qualify for, the VA official policy is that the agency does not set mortgage rates in any way except to require them to be reasonable when compared to similar loans that are not VA mortgages.

Interest rates play a big part in the terms of your loan and lender requirements are not identical between all financial institutions. It pays to shop around for the best rates and it pays to find a participating lender who is willing to work with your FICO scores and other financials.

VA Loan Fact: VA Loans Cannot Be Used By Other Family Members

Some newcomers to the VA home loan program learn they may apply for a VA mortgage with a spouse even if the spouse is non-military. And while it is true that this type of VA loan is processed by the VA without regard to the spouse’s military affiliation, the spouse cannot apply for a VA mortgage on their own if they are not entitled to the VA loan benefit.

There IS an exception. Surviving spouses who meet VA loan criteria may apply for a VA loan, but they must apply according to VA rules and in general VA loan rules at press time state the spouse is only eligible for a new VA loan if they have not remarried. Certain exceptions may apply, you will need to speak to a VA loan representative to learn what the specific requirements are at that time.

VA loans are, generally speaking, only for the military member or veteran to use. You cannot transfer VA loan benefits to a dependent like you can with the GI Bill, and while a dependent child may be allowed to occupy the home in your place to satisfy the occupancy requirement, that same child cannot use your VA loan benefit.

 

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VA Loans Versus FHA Mortgages: Which Is Better?

Which is better, an FHA mortgage or a VA home loan? Some may be confused by this article’s headline. If you have access to a no-money-down VA mortgage with no mortgage insurance requirement, why would you consider an FHA mortgage loan instead? FHA loans, after all, have down payments and mortgage insurance requirements. VA home loans typically require neither, though in some cases a borrower may want to consider a down payment to get the benefit of a lower VA loan funding fee.

There are a few good reasons to compare VA and FHA mortgages side-by-side. One is to get an idea of the similarities and differences of the two programs, but another good reason is to know your options if, for some reason (see below) you aren’t able to use your VA loan benefits, or want to save them for another time.

Reasons to Consider an FHA Mortgage

There are a few reasons why some veterans and even currently serving military members might look to an FHA mortgage instead of trying to use their VA home loan benefits. The ability to get a zero-down loan is an important one and some wish to hold that option until they find their “forever home”.

Some Might Not Qualify For A VA Loan As Soon As Others

Basic eligibility for a VA loan is an important part of the discussion. Some join the military already interested in owning a home, and if a family was in the process of house hunting before VA loan eligibility is established, it may be necessary to find a different low-down-payment mortgage instead.

What some readers are thinking here? “Why on earth would you join the military in the middle of buying a house? Won’t you just get reassigned somewhere else and have to leave your new home empty?”

The answer to that question would be more of a “yes”, but it leaves out members of the National Guard and Reservists.

When these people become eligible for their VA home loan benefit, it may come after a longer waiting period than those on active duty. So there are situations where people in uniform simply don’t have the ability to wait out that time-in-service commitment and need to purchase a home. Enter the FHA loan program as one option.

Another reason some potential VA loan borrowers might choose an FHA mortgage? They have already used their current VA loan entitlement but have not paid off the loan in full or sold the home. Those who want to purchase a primary residence in such cases may do well to consider the FHA loan option because VA and FHA mortgages have a few traits in common, as we’ll discuss below.

VA Loans and FHA Mortgages: Similarities

VA and FHA mortgages are both government-backed home loans, which means the government is offering a guarantee to the lender to pay a portion of the home loan off if the borrower defaults on the mortgage. That means less risk for the lender and the ability to offer more forgiving credit qualifying requirements for the mortgage.

Both VA and FHA loans feature no penalty for early payoff of the mortgage. VA and FHA home loans offer the ability to refinance later with no VA or FHA required a credit check or appraisal into what’s known as a Streamline Refinance. These refi loans offer no cash back to the borrower but do typically result in a benefit to the borrower such as a lower interest rate, the ability to get out of an adjustable-rate mortgage into a fixed-rate loan, and/or lower monthly payments.

VA and FHA loans for purchases typically feature no cash back to the borrower except in the form of a refund for things paid for up front but later financed into the loan.

Both VA and FHA mortgages also feature an escape clause that allows the borrower to walk away from the mortgage with no penalty if the appraised value of the property is lower than the asking price.

FHA mortgages and VA loans both are guided not by VA and FHA loan guidelines, but also by state law, lender standards, and changes in federal law. When it comes to lender standards, there are some things your lender cannot do with a VA or FHA mortgage.

One of those is to charge the borrower for the lender’s operating costs like hiring an attorney (for the lender to use). Your lender cannot charge you excessive fees that aren’t considered “reasonable and customary” for that housing market.

VA Mortgages Versus FHA Home Loans: Differences

FHA loans differ from VA mortgages in many ways. The first of those differences? Credit score requirements. VA loans have no government-specified FICO score standards and it will be up to the lender to set those.

FHA mortgages have an FHA minimum FICO score range for the lowest down payment. FICO scores at 580 or better technically qualify for a 3.5% downpayment. Those with FICO scores between 500 and 579 technically qualify for an FHA mortgage but with a 10% down payment.

Lender standards will also apply, FICO score requirements may be higher depending on the lender.

Down Payments

Then there is the down payment requirement. FHA mortgages require a minimum borrower investment of 3.5% whereas VA mortgages have no down payment requirement in typical cases. There are exceptions for situations where the purchase price exceeds the appraised value of the home.Mortgage Insurance

FHA mortgages differ from VA loans when it comes to mortgage insurance. There is no VA requirement for mortgage insurance premiums on VA home loans, but FHA mortgages will require you to pay an Up Front Mortgage Insurance Premium and a monthly payment that’s part of your mortgage. This is paid for either 11 years or the lifetime of the loan depending on your loan term and other variables.

VA mortgages allow seller concessions to help the borrower pay for closing costs, but those concessions are capped at an amount lower than the FHA.

Which Is Better, VA Mortgages or FHA Home Loans?

It’s not hard to spot the advantages of a VA mortgage over an FHA home loan. The zero-down payment option alone makes the VA loan program an important benefit. The lack of mortgage insurance is another factor. The fact that you can get a VA mortgage without a down payment OR an up-front mortgage insurance premium to deal with makes it the best option if it is available to you.

But if you don’t yet qualify or don’t want to use your VA loan benefits just yet, the FHA home loan option may be worth exploring. In general, you’ll find articles from government sources such as the Consumer Financial Protection Bureau that encourage borrowers to explore both government-backed home loans and conventional mortgages because borrowers with higher credit scores may find conventional loans easier to qualify for and more affordable overall.

But there are trade-offs. With a conventional loan, you will deal with both a down payment and a mortgage insurance requirement if your down payment is lower than 20%. The loan may cost less overall but you may wind up paying more up front. And FHA loans provide an advantage in those upfront costs. If your goal is to save more out of pocket and pay less monthly, the FHA option may be worth exploring as a VA mortgage loan alternative.

You can talk to a participating VA and/or FHA lender (some offer both) to get side-by-side comparisons of loan options, terms, conditions, and costs. You’ll want to decide what your loan priorities are; do you want to save more out of pocket at the front end of the mortgage or do you want to save money over the entire term of the loan?

Those are important choices to make and will definitely have an effect on your decision-making. VA home loans and FHA mortgages are both important government programs but your specific circumstances will dictate which one winds up being best for you.

 

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What Current Military Members Applying For a VA Mortgage Need to Know

Ever wonder what a loan officer is really looking for when you apply for a VA home loan? There are some very obvious issues including FICO scores, loan repayment history, and credit utilization. You can read about those issues on a VA loan website or blog. But what about the things people don’t talk so much about?

For example, you may wonder what specific VA credit score requirements are for loan approval, but the VA Lender’s Handbook, VA Pamphlet 26-7, does not specify credit score ranges. It leaves that up to the lender. That is a reason to shop around for a VA lender all by itself.

For currently serving military members there are some important details that sometimes get lost in the shuffle, but you’ll soon discover that certain documents and information are crucial for getting your VA mortgage approved.

Your main concerns as someone still serving and interested in using your VA mortgage benefits will include being able to show you have enough time remaining in your current contract or are reenlisting. Or retiring. The paperwork you’ll need depends greatly on your anticipated status in uniform within the next year or so. Soon-to-be military retirees will have a paperwork burden far different than a member of the National Guard or Reserve component.

VA loan rules may not be the only guidelines that apply to your loan. State law, changes in federal programs, or even changes in the VA loan program itself may affect any or all of these requirements in the future.

Your Military Service Commitment

Believe it or not, this can be a factor in VA home loan approval. Veterans and military retirees don’t have to worry about this once they are back in the civilian world, but if you are still serving at the time you apply for the VA mortgage, you will find this is definitely a factor.

Why? Because in order to approve a VA mortgage, your loan officer has to determine the nature of your current employment, how long you have been working there, and whether or not that employment is likely to continue.

If you are a service member in good standing and have plans to apply for a VA mortgage, the time remaining on your military service commitment counts. VA loan rules instruct participating lenders to ensure applicants have more than 12 months remaining before they are due to retire or separate.

Documentation Required

For all VA loans, military members must provide a Leave and Earnings Statement, preferably the most recent, but one that is not more than 120 days old from the date of closing the deal. This time frame is longer for construction loans–you have 180 days if you are having a home built on your own lot using a VA construction loan. You’ll also need to show documentation that officially reports your military service commitment.

If you apply for a VA mortgage with less than 12 months remaining on your current commission or enlistment, the lender will require one of the following:

Proof of:

  • re-enlistment or otherwise extending the enlistment beyond the 12 month period
  • a civilian job offer
  • eligibility for military retirement pay

Not all applicants may be able to provide the documentation listed above, In such cases the lender may require “a statement from the servicemember that he/she intends to re-enlist or extend his/her period of active-duty service to a date beyond the 12-month period”.

Borrowers who choose this option must also provide a written statement from the applicant’s command support staff “confirming that the servicemember is eligible to re-enlist or extend his/her active-duty service as indicated”.

There is also the option of providing the participating VA lender with documentation” of other unusual strong positive underwriting factors” including a 10% down payment, six months of cash reserves, and/or “evidence of strong ties to the community coupled with a non-military spouse’s income so high that only minimal income from the active-duty servicemember is needed to qualify”.

First-Term Military Members And VA Mortgages

If you are a first-term military member (those on their very first enlistment) and are wondering about your ability to qualify for the loan itself (not the basic eligibility for the VA loan program), be aware that VA loan rules generally require you to have a minimum of 12 months of employment on the books in order to be considered for VA loan approval.

This may not affect older service members who have plenty of employment history, but first-term soldiers, airmen, sailors, Marines, Coast Guard members and Space Force Guardians should know this VA loan rule in the VA Lender’s Handbook:

“Generally, employment less than 12 months is not considered stable and reliable. However, the lender may consider the employment stable and reliable if the facts and documentation warrant such a conclusion.”

VA loan rules instruct the lender to, “Determine whether the borrower’s past employment, training, and/or education equipped him or her with particular skills that relate directly to the duties of their current position.”

Military Income

When applying for a VA loan, the lender needs to review your income. For civilian workers, there is a whole different set of issues related to pay and employment.

For example, if you are a civilian and you are paid as a contractor or earn commissions, VA loan rules require you to have earned that type of income for a minimum period of time. Lender standards will also apply in this area. If you switch from being a salaried employee to being a contractor, that type of work also requires a minimum amount of time on the job with that type of earnings before your income may be counted.

But when you serve, your basic pay is your qualifying income in addition to any benefits the lender and VA loan rules find acceptable. Military allowances and benefits may be accepted as income if they are likely to continue, which is why your housing allowance (BAH) is acceptable as income for VA loan approval. The same goes for your annual military clothing allowance and certain other benefits.

One type of benefit you cannot use to qualify for a VA loan? GI Bill housing stipends — they have a limited duration and are not likely to continue.

Guard and Reserve Income

VA Pamphlet 26-7, Chapter Four tells the lender, “If an activated Reserves/National Guard member applies for a loan, they must present orders indicating their current active duty tour is not to exceed 12 months.” That’s the start of the slightly different application process for these applicants.

Guard and Reserve pay is a tricky issue when it comes to qualifying for a VA mortgage. In general, the lender wants to know how much you earn from civilian employment and won’t necessarily use Guard/Reserve pay for those who are activated for full-time as qualifying income.

An example is given to lenders in the VA Lender’s Handbook, in Chapter Four:

  • The VA loan applicant has full-time civilian employment with $3,000 per month income.
  • The borrower’s current income from the Guard Reserves $3,500 per month because of the activation (with orders for 12 months)
  • Chapter Four tells the lender, “Since the borrower’s full-time civilian employment is only $3,000 per month, the $3,000 should be used to qualify the borrower.”

RELATED:  VA Loan Eligibility Expanded for National Guard

Non-Military Income For Military Members

VA loans also consider non-military employment as income if the income meets VA standards. That may generally mean part-time employment in the traditional manner, but would not necessarily include options like selling goods on eBay or Etsy as a maker, artist, or reseller. In all cases the lender won’t be able to simply take your word for it when it comes to this type of earning, employment verification will be needed. Be prepared to submit employer contact information and turn over pay stubs or other proof of employment and income from the part-time job.

 

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Avoiding Foreclosure on a VA Mortgage

If you have a VA mortgage and experience financial issues that make it hard to keep up with your mortgage payments, you are not alone. The good news is that the sooner you act, the more options you may have to keep your home and avoid foreclosure. What should a VA borrower do in tough financial times to avoid defaulting on their mortgage?

Get Help from the Department of Veterans Affairs

Some borrowers don’t realize they have financial counseling options through the VA, and those options apply regardless of the type of mortgage you have. You can have a VA loan or a non-VA mortgage and get assistance from a VA counselor. Financial advice and homeowner counseling can be a big help in the early stages of financial difficulty.

Why? Because you’ll need to know what your rights and responsibilities are in advance. Don’t let a missed payment happen before you reach out to get more information and help. You’ll be glad you didn’t wait.

If you have a VA loan, you can contact the VA to ask for the help of a VA loan technician. If your mortgage falls past due longer than 60 days, you will have a VA loan technician automatically assigned to you. Be advised, this is one of the VERY FEW times you will have something done for you automatically in this process. Be proactive and don’t assume any help with your home loan aside from the technician being assigned to your case as automatic.

Get assigned a VA loan technician by calling the Department of Veterans Affairs at 877-827-3702. You can also email the VA for this type of help at LGYLANational.VBACO@va.gov. You will need to include your name and address as it is displayed on your home loan documentation.

Contact Your Loan Servicer

It’s crucial to contact your loan servicer as soon as you experience the financial difficulty that could later interfere with your mortgage payments. The longer you wait, the fewer your options may be. Your lender can work with you to make arrangements before you miss a single payment, though some foreclosure avoidance options are only available at certain stages of the problem. Your lender cannot help you if you do not contact them to make arrangements.  You may be offered a loan forbearance, a loan modification, or other options that can help you keep your home.

Beware of Scams

When you reach out to your lender for help, keep in mind that you should never sidestep your loan servicer for any reason. A common foreclosure avoidance scam involves convincing the homeowner to make payments to someone other than your lender, or to make arrangements about the loan without notifying the lender. These are all scams, never fall for this trick. Sidestepping the lender is not how foreclosure avoidance works. The same rules are true if someone asks you to, as a foreclosure avoidance measure, sign the title of your home over to someone else.

Never ever do this.

Timeline to Foreclosure

How long until your home is foreclosed upon? Your loan servicer must generally contact you a little over a month after your first missed VA loan payment or your first incomplete VA mortgage payment.

45 days later, if you are still delinquent, the lender is required to continue to try contacting you for loan modification or other foreclosure avoidance options. After 120 days, the lender has the option to start foreclosure but is not required to if you have already started working with them to save your investment. At 120 days delinquent, the lender cannot foreclosure on you if you are in the process of being evaluated for a loan modification or other foreclosure avoidance measures.

The longer you wait to get assistance, the fewer your options may be. And keep in mind that the longer the delinquency period goes on, the more unforgiving the process may be. A good example? The foreclosure process may be initiated anew if you miss payments under any foreclosure avoidance program

VA Loan Foreclosure Avoidance Measures Your Lender May Offer You

According to the Department of Veterans Affairs, there are some basic ways to avoid foreclosure. They include, but may not be limited to:

  • A VA Loan Repayment plan for those who have already missed payments. The repayment plan allows you to resume monthly payments at a higher amount to cover those that were missed. This is one reason we urge people to act as soon as possible on their VA loans if those payments are in jeopardy. Wouldn’t  you rather pay extra to cover just one missed payment instead of more?
  • A VA Loan “special forbearance allows you extra time to make up the missed payments in full.
  •  VA Loan modification may be an option; this works by adding the missed payments to the total loan balance and readjusting the loan term.
  • Selling the home to avoid foreclosure may be an option.
  • A VA Loan short sale is an option for those who owe more than the home is worth. With the lender’s participation you may be allowed to sell the property for less than you owe with the lender accepting the total amount of the sale as full payment of the mortgage. A VA loan short sale could result in a loss of future VA loan benefits, ask your lender or contact the Department of Veterans Affairs to learn more about when this may apply.
  • Deed in lieu of foreclosure is the one time you should consider signing the deed of your home to someone else, but in this case it is ONLY the loan servicer who should receive the deed. Do NOT sign the deed to your home over to a third party. Discuss this option with your loan servicer as it may result in a reduced VA loan benefit or loss of your VA loan benefit in the future.

What Happens If Your VA Mortgage Goes Into Foreclosure?

Much depends on when your VA home loan is closed, but in general, you should know that a VA loan foreclosure results in a debt to the government that you may be required to repay. If your VA mortgage closed before January 1, 1990, you are required to pay back the full amount that the government paid to satisfy the lender. This is typically not the full amount of the loan.

For VA mortgages that closed on or after 1 January 1990, you’ll be required to pay your loan back if the VA finds evidence of fraud, purchasing in bad faith, or misrepresentation.

What’s Next?

If you are in trouble financially and worry about your ability to make your VA mortgage payments, contact your loan servicer before missing a single payment. Ask the lender about foreclosure prevention options such as loan forbearance, loan modification, or other adjustments. The sooner you act, the more options you have but don’t fall prey to scammers who ask you to sidestep your lender, sign the deed of your home over to a third party, or make payments to someone other than the bank.

If you are currently serving, remember that financial responsibility issues extend to VA loans–it’s not just about proper use and payment of your government-issued travel card and maintaining adequate financial support of your family (where applicable).

If you need to pass a security clearance review or obtain a new clearance, home loan issues may be included in that review. Get help early to avoid your VA mortgage loan from becoming a stumbling block to your military career. It’s better to be able to report that you had some financial difficulty but resolved the issue because you were proactive than to admit that you didn’t seek assistance in a timely manner to prevent the issue from becoming a bigger liability.

 

 

 

Considerations For Using Your VA Loan Benefits as a Veteran

If you have never used your VA home loan benefits and are planning to retire or separate from the military, there are some issues to consider. For example, if you are not retiring, but separating from the military, buying a home may be more complicated if you don’t have a job lined up at loan application time. This is not a problem in all cases, but for some applicants, it is a factor to consider.

Why? VA loan rules have minimum employment and income guidelines. Not necessarily a dollar amount, but instead minimum time on the job may be required depending on the nature of the employment and other variables. And what about the applicant who has separated but is still searching for work?

Your lender will need income to verify for the loan and if your job hunt winds up taking longer than you anticipate, that might be a complicating factor when it comes to loan approval. It’s smart to consider talking to a loan officer long before you actually decide to retire or separate if you want to buy a home after becoming a civilian again.

Your lender may have requirements to certify how much time you have remaining in your current enlistment or commission; the lender may not be able to approve a home loan without a minimum service commitment or evidence that you have accepted a job that will begin after you retire or separate.

Applying For a VA Loan as a Veteran

Getting a VA loan as a retired or separated military member involves some different requirements than for those on active duty. One example? Retired and separated applicants will be required to show proof of discharge by providing the lender with a copy of DD Form 214 or the Guard/Reserve equivalent. You will need to provide this along with a VA Certificate of Eligibility.

 

Get a free, no-obligation consultation regarding your VA Loan!

 

Veterans (as opposed to those currently serving) may have VA-rated disability ratings awarded after retirement or separation. Any veteran who receives or is eligible to receive VA compensation for service-connected medical issues may apply for a waiver of the VA loan funding fee, which can amount to a savings of thousands of dollars.

The waiver is not automatic and must be applied for. It is not available until you have been formally awarded a VA disability rating, and your lender may require you to pay the VA loan funding fee if the VA hasn’t made a decision at application time. The good news is that you can apply for the funding fee refund once your VA rating is official. The refund, like the waived fee itself, is not automatic and must be applied for.

VA Loan Considerations

Your future plans can play an important part in the decision-making process for a home loan. Some might want to own a home and go to college using their GI Bill benefits. The Post 9/11 GI Bill offers a housing stipend to qualifying GI Bill users equal to the housing allowance for an E5 with dependents.

It would be easy to assume you could qualify for a VA mortgage using that housing stipend as income, but that would be the wrong assumption to make. The VA Loan program specifically instructs lenders not to accept GI Bill housing payments as income because those payments are limited to a specific amount of time and are not “likely to continue”.

You can’t draw the housing stipend indefinitely, it is only paid when you actually attend class, and your lender can’t count on that as verifiable income under VA loan program rules.

Some veterans transition from military life into a civilian career with few problems. Consider the Air Force pilot who moves into a civilian airline job right out of the military. A VA loan for a highly-skilled employee like a pilot or engineer would not be as difficult to approve because the borrower has the ability to compete for lucrative, hard-to-fill opportunities.

But what happens to the military member who leaves the service with the goal of starting her own business? Lenders typically want to see two years of income from self-employed applicants, plus business paperwork like profit-and-loss statements, taxes, etc. If you haven’t been self-employed for two years at application time you may have difficulty getting a loan approved.

The same is true for those who want to work on a commission basis, operate as freelancers or independent contractors, etc. In short, the nature of the work you pursue outside the military could affect your home buying plans, especially if you want to purchase right away after getting out of the military.

House Hunting

Depending on the branch of military service, mission demands, staffing issues, and other variables, you may be allowed to request permissive TDY to go house hunting before you retire or separate.

This can be especially important for those who, due to circumstances, must separate from an overseas location. If your final out-processing is accomplished overseas, you may wish to use permissive TDY for house hunting to help ease the transition. Ask your command support staff, First Sergeant, Command Sergeant Major, or Detailer about the TDY option and what it may require to be approved.

Using a real estate agent in such cases may be a very good idea. If you want to get help narrowing down your choices while still serving (especially overseas) an agent could become your best friend in the house hunting journey.

And if you do choose this option, consider getting pre-approved for a VA mortgage loan to help home sellers take you more seriously as a buyer. Pre-qualifying and pre-approval are often viewed as two separate steps in the home loan process. What you want to do first is to fill out the basic pre-qualification form, get an estimated loan amount, and talk to the lender about preliminaries.

With a pre-qualification letter in hand, you and a real estate agent can work together to find a suitable home even if you are still assigned overseas when the process begins.

This is a stage that leaves you vulnerable to fraud, hacking, and scamming if you aren’t careful. Beware of replying to unsolicited offers, don’t respond or click on links in email or text messages. Be especially wary of any communication asking you to initiate or receive a wire transfer. Many lenders state specifically that they will never ask you to participate in a wire transfer by email.

Why the concern? Scammers use wire transfers because they are easy ways to take your money and disappear. It’s one of the most common features of a scam–the inability or refusal to accept payment in any way except a wire transfer.

Things to Remember About the VA Loan Process

Everything about the VA loan application process will require details about your current status. If you don’t have a DD Form 214, or if you do not have a retirement/separation date yet, a loan officer may not be able to help much. The same is true for things like the waiver for the VA loan funding fee; if your records show your current status as awaiting a VA decision, the lender can’t act on future updates to your records. They must take the data that is shown in your records as current at face value.

That is one reason why it is smart to talk to a VA lender long before you apply–knowing when to submit your application (based on status updates and other factors) may change your mind about the speed of the entire process. In the same way that it’s better to wait to apply for a home loan until you have a solid 12 months of on-time, every time payments on all financial obligations on your credit report, it’s also a good idea to wait in some cases until you have had your status updated, received your separation date, etc.

For some, that wait may not be an option, but if it is, consider the timing of your loan. It could wind up being an important factor.

 

Get a free, no-obligation consultation regarding your VA Loan!

 

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VA Loan Rules for Mortgage Approval: Employment and Income

VA home loans are government-backed mortgages. That government backing makes it easier to qualify with FICO scores, employment history, and debt ratios. But even with the government’s guarantee to repay the participating VA lender in case of home loan default, the borrower must still financially qualify for the loan. What do you need to know about being approved for a VA mortgage?

A good portion of that information involves the lender having to find ways to justify approving your loan. If your loan officer’s job depends on making good decisions on who to lend to, the contents of a credit report and employment history become very important.

What Does It Take to Be Approved for a VA Mortgage?

Borrowers should know that unlike some other government-backed mortgage loans such as the FHA Single-Family Home Loan program, VA loan rules do not specify a minimum FICO score. This is up to the participating lender to decide. Not all lenders will offer you the same rates, terms, and fees and not all of them have the same FICO score requirements, either.

VA and FHA loan rules do have similar features in this department; both require that the FICO score and other loan approval standards be “reasonable and customary” for loans similar to it. Your lender may not have specific instructions on FICO score numbers, but a VA loan can’t have an outrageously higher or lower requirement in this area than similar loans that may be conventional, FHA, USDA, etc.

The first thing you will need to do is to compare lenders and see who is most willing to work with you and your FICO scores. If you have had a bankruptcy or foreclosure in your past this becomes even more critical, as some lenders may have more experience dealing with such issues than others. And that experience counts.

 

Get a free, no-obligation consultation regarding your VA Loan!

 

Why does this matter so much? It’s easy to assume that there will be little variation among lenders, but that’s not always true.

You’ll want to know what kind of interest rate your lender will offer based on your FICO scores, and you’ll also want to know a lender’s requirements for loan approval in terms of employment history, debt ratios, and other details.

What does it take to be approved for a VA mortgage loan? You’ll have to qualify with your FICO scores but also with your employment history, debt repayment history, and credit utilization. Here’s where the VA no-money-down home loan gets interesting.

VA loans typically require no down payment. But if you are a borrower who has FICO scores that are lower than the lender’s standards, you could offer to make a down payment as a compensating factor. Depending on circumstances, that may help the lender justify approving the loan.

VA borrowers who make a down payment also get a benefit from a reduced VA loan funding fee, so there’s a financial benefit that goes beyond the lower principal balance you get after putting money down.

Qualifying with Employment and Income

In the paragraphs above we mention that you must qualify for a VA mortgage with credit scores, repayment history, and employment. Some may ask an important question. If the VA loan program is for military people, why is employment verification even needed? Don’t all applicants for the VA loan program have active-duty military jobs?

The short answer is no. Some may be Reservists, some may work for the National Guard, and some may be military retirees or veterans who separated from the military without hitting retirement age. And then there are those who do serve but are junior enlisted and may not earn enough money yet to be able to afford the loan.

All of those circumstances must be taken into account by a participating lender. So yes, employment verification and income verification are both crucial.

Your participating lender may want to see two years of employment history to approve your mortgage loan application. Anything less may require a waiver or a written explanation. In some cases, no exception can be made.

Verifiable Income

Not all income–including some military benefits–can be counted as verifiable income for the purposes of approving your home loan. For example, your basic military pay and allowances may be considered, because any pay that is “likely to continue” could be considered verifiable.

An annual clothing allowance may be included because it is a recurring payment. A one-time payment of a bonus may not qualify in the same way, and certain types of income (think commissions or money from self-employment) may be counted if there is sufficient history behind the payments.

If you haven’t been paid commission for a full year, you’re likely not going to be allowed to use that income for purposes of loan approval. If you’ve been earning it for more than two years, it may be countable depending on the lender, state law, and other variables. The lender wants to see indications that this income is going to continue into the loan term.

Some Income Just Doesn’t Count

Some income isn’t considered steady or reliable. Selling things on eBay or in an online marketplace, for example. There may be exceptions depending on the nature of your business but if you earn money selling online you will need to have a conversation with the lender about whether your specific business qualifies or not.

Some income cannot be counted even if it comes from a federal agency in the form of a military benefit. For example, the Post-9/11 GI Bill provides a housing stipend for those attending college under the program. The housing payment is equivalent to the monthly housing allowance of an E-5 with dependents.

And it would be very easy to understand how you would want to use that monthly housing allowance to qualify for a home loan. Yet, VA loan rules don’t permit the use of the GI Bill as income. Chapter Four of VA Pamphlet 26-7, the VA Lender’s Handbook, instructs your VA loan officer;

“Do not include temporary income items such as VA educational allowances (including the Post 9/11 GI Bill benefit) and unemployment compensation in effective income.”

You read that correctly, unemployment also cannot be used as income to qualify for a VA mortgage. Why?

The key is the word “temporary”. The GI Bill and unemployment compensation are not “likely to continue” as they have definite expiration dates which vary depending on when you use the benefits. This expiration is what keeps this income from being used to approve your loan. You can still use that income to pay for VA loan expenses like closing costs, but you cannot have it counted toward your “official” annual income for purposes of calculating the debt-to-income ratio.

What’s Next?

Loan approval standards will vary depending on the lender and other variables. You’ll want to compare at least three or more lenders together to see who offers you the best deal. Are you worried that getting mortgage rate quotes and other details may affect your credit scores?

It’s true that certain credit inquiries can temporarily lower your credit scores but if you have multiple inquiries due to shopping around for a lender, as long as those are accomplished within a certain window of time (14 days typically but may be longer depending on the credit scoring model) those multiple inquiries will only count as one.

Loan approval depends on a variety of factors and don’t forget that in addition to all of the information above you will need to avoid applying for new credit in the meantime and work on reducing your debt ratio and account balances to get closer to loan approval. It’s not just about what;s already in your credit report, but what could be coming in that report in the days and weeks leading up to loan application time.

 

>> 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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VA Loans and the Appraisal Process: What You Need to Know

What You Need to Know About the Appraisal Process for VA Loans

If you are interested in buying a home, the appraisal process is one of the most important parts of the journey toward purchasing a house. This is due to two things.

One is that your loan officer is required to ensure the home meets minimum safety and livability standards. The appraisal process does not pretend to review the entire home for all known problems but it does serve as a benchmark to make sure the home meets minimum standards.

The appraisal is also meant to help the lender establish the fair market value of the property and compare that value to the asking price of the home.

This is done by reviewing the home as-is and comparing it to similar properties in that housing market (known as “comparables”) to determine how much the home is worth. In some cases, if a borrower is buying and remodeling a home at the same time, the home’s valuation may depend on how it measures up once the work is all done and the upgrades are ready to use.

VA Appraisals: The Basics

The VA appraisal process is initiated by the lender and paid for by the borrower. The VA appraisal process does not require the person doing the work to be an expert in things like the home’s electrical system, foundation, or plumbing.

That means that your appraiser will review these systems, but may not be experienced enough to spot every issue that could be a problem with the home.

Your appraiser is not required to step out onto the roof of the home, so if there are issues there you won’t notice them without a home inspection. More on the home inspection issue below. The bottom line? The appraisal process is a tool the lender uses and is not a tool for the borrower. We’ll discuss that in-depth below.

 

Get a free, no-obligation consultation regarding your VA Loan!

 

In spite of the fact that the appraisal is not a complete top-to-bottom review of every square inch of the home, certain issues may arise that require correction as a condition of home loan approval.

This means that the appraiser has spotted a condition that is in violation of state or local building code, a violation of VA home loan Minimum Property Requirements or MPRs, or some other problem that means the home is not compliant with minimum standards.

Sometimes there are no corrections possible. The appraiser notes a condition that cannot be corrected or would cost too much to correct. A good example? An appraiser notes that a home has a high-voltage line that cuts across the property.

This is a condition that is unacceptable for more than one government-backed mortgage program including VA loans. The owner is likely to be unable to have this issue corrected, and that is a problem that could stop a loan to purchase the home.

Other issues may be corrected through repairs or upgrades. In such cases the VA appraiser will note the problem recommend the corrective action on the appraisal report, then the borrower and seller of the property must work out the details. In cases like these, a compliance inspection is likely necessary, and that is an expense you will pay as the buyer of the home.

What You Need to Know About VA Appraisals

If you disagree with the results of an appraisal, but your issue is simply that you didn’t agree with the dollar amount valuation of the home, you are not able to request another appraisal just to get another shot at a better value.

If there are what the VA calls “material deficiencies” on the appraisal, it may be contested. But if the only reason to ask for a review of the appraisal is to get another opinion you will be disappointed as this is not permitted.

The appraisal process is between lender and appraiser and you will not have direct communication with the appraiser. That does not mean you won’t get to see a copy of the appraisal report, but don’t expect to be a part of the process. That’s a lot different than the borrower-arranged home inspection, which we’ll discuss later.

Some want to know if a specific feature of a property will “pass” the VA appraisal. More specifically, some borrowers want to know if the home they want to buy is going to “pass” the appraisal because the home is served by a well, or has a septic tank. There are other issues similar to these but those two are fairly common.

VA appraisal rules do not spell out the requirements for septic and wells except to defer to the local authority on those issues. VA appraisal guidelines do not have specific parts-per-million or bacteriological specifications for health risks associated with well water.

But the state or local health authority does and that’s who VA appraisers defer to for such standards. If the well or septic situation is not in compliance with state or local health code, it is not acceptable to the VA.

In general, homes purchased with government-backed mortgages like VA home loans or FHA mortgage loans are required to connect to the local utility providers whenever feasible, but some properties cannot meet this standard and there are provisions in the VA mortgage loan rules for them.

Appraisals Versus Home Inspections

Some borrowers make the mistake of equating a VA appraisal with a home inspection. They assume that because the home “passed’ the appraisal process it must be defect-free. This is NEVER TRUE. The appraisal, as discussed above, is a tool for the lender and not the borrower.

The home inspection is a borrower-arranged, borrower-paid option that goes into much greater detail on the condition of the home. A home inspection is intended to give you the most accurate view of the home’s true condition so you can make an informed decision about whether to buy the property or not. Yes, the home inspection is optional. No, a borrower should never skip it. Some do. And some go on to find major problems with their home after they purchase it, move in, and live there for a few months to a year. Not all problems manifest themselves early in your days of home ownership.

A foundation issue, for example, may take years to show symptoms. Or you may notice trouble right away. It all depends on the age and condition of the home, and sometimes local environmental factors could play a part in the speed of a problem manifesting itself.

And the borrowers who skipped the home inspection and did not learn about the issues present in that home have no resource against the lender, the seller, or the VA if they buy a home without a home inspection and have such issues later.

One government-backed loan program, FHA Single-Family Home Loans, even has a special publication called For Your Protection, Get A Home Inspection that warns about these issues. That is how serious this issue is–even the agencies guaranteeing the loans want you to know to never skip the inspection.

Basically, buying a home without having it inspected is like purchasing a used car without ever taking it for a test drive. It is literally the same thing, and the same consequences can come as the result. It’s true that a home inspection may potentially cost about the same as an appraisal, but those who balk about paying that sum should remember one very important thing.

By spending the money on a home inspection, you are paying hundreds of dollars that could save you from paying thousands of dollars later on. And that’s a tradeoff well worth considering. And if you aren’t sure whether a home inspection is worth the trouble, it’s smart to ask a real estate agent or even a loan officer for some horror stories of those who chose not to have the home inspected and what happened as a result.

 

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What Credit Score Do I Need For a VA Mortgage?

What credit score do you need to qualify for a VA mortgage? Many potential borrowers want to know the answer to this question, and some worry that the no-money-down option might raise the FICO score requirements needed to be approved for a zero-down mortgage.

FICO Score Ranges

There are credit score ranges. Lenders use these ranges to establish degrees of creditworthiness. The higher your scores, the less of a risk you are considered to be. What do credit reporting agencies say about the FICO score ranges? Let’s see what Experian says about what constitutes good and bad credit score ranges:

  • Poor: 300-579
  • Fair: 580-669
  • Good: 670-739
  • Very Good: 740-799
  • Excellent: 800-850

How Many FICO Scores Do You Have?

There are a few things to know before we answer that basic question posed in our headline. The first is that typically, borrowers have more than one FICO score. When you have two or three FICO scores the lender may use the middle score or median score to approve your mortgage.

So if you have more than one FICO score, make sure you know which one the lender will use. It’s true that you may not see too much variation between those numbers, but in cases where you do, the middle score is one to pay attention to.

 

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What Is The FICO Score I Need To Qualify For An FHA Mortgage?

You should know that the VA Lender’s Handbook, VA Pamphlet 26-7, does not instruct the lender as to the “acceptable to VA” credit score range needed to qualify for the loan. Instead, the VA leaves it up to the lender to establish minimum credit qualifying standards where FICO scores are concerned.

That means you may need to shop around for a lender who is willing to work with your circumstances, especially if your FICO scores are below 640. Lower scores potentially mean higher interest rates and you’ll want to know whether or not making a downpayment on the VA mortgage might help you avoid a higher rate in cases where your FICO scores aren’t quite in line with lender standards for approving the mortgage.

Putting money down on a zero-down loan is, in this context, a potential “compensating factor” that can offset a lower credit score range if your lender agrees.

FICO scores of 640 or better are typically used as minimum qualifying scores for many home loans. The fact that a VA mortgage is government-backed and therefore offers less risk for the lender offering the loan may make it possible to qualify for a VA mortgage with a FICO score lower than 640.

Comparing Qualifying FICO Scores

As a comparison, another government-backed mortgage loan program, the FHA Single-Family Home Loan program, offers the lowest downpayment (3.5%) for those with FICO scores at 580 or above.

Note that this is the FHA loan program’s minimum standard, not the lender’s. Lender standards may exceed this and often do. The bottom line? You’ll want to consider the FICO score issue carefully when shopping around for a lender. Don’t assume that all banks offer the same credit qualifying requirements, this is not necessarily true. If you worry that your scores are low, ask about making a down payment as a compensating factor.

Improving FICO Scores Before You Apply

There are ways to bring up your credit scores over time to improve your ability to be approved for a VA mortgage. The important caveat here is that you must give yourself enough time for credit improvement strategies to begin working.

They will not show results overnight, and may not show results for a few weeks or even months. But eventually, they WILL show up, and we are specifically talking about credit repair efforts you can do yourself without paying a third party to do for you.

There are three important steps you can take for free that will, over the course of a year, show results as long as you consistently apply these principles on time, every time.

These steps include paying ALL financial obligations on time with no late or missed payments for a full 12 months before you apply for your VA mortgage or VA refinance loan. You should also be working to reduce the amount of your overall debt and lower your credit card balances to well below 50% of your credit limit.

Those three things will help. But while you are doing this, you will also want to actively monitor your credit and review your credit reports for errors and other potential problems. Don’t assume that once you have read your credit report that everything is fine going forward and you never have to look again. You will want to know if your credit and personal identity have been compromised by reviewing your reports for any unauthorized activity.

Having a dispute on your credit at the time you apply for a VA mortgage, especially one that involves damage to your FICO scores, may complicate or slow down the loan process significantly. You’ll need to make sure you have no issues to deal with before your lender reviews your credit reports to approve your mortgage.

Finding such issues in your credit report takes time to deal with, and if you are facing a major mortgage deadline AND trying to dispute unauthorized use of your credit accounts, you may find that time is not on your side. It’s best to resolve all such issues as early as possible.

Should You Pay Others To “Repair” Your Credit?

Some are tempted to pay a third party to do credit repair for them. This is a choice left up to the borrower. But know this. You can repair your own credit as mentioned above over time, yourself, without paying someone else to do it for you.

That’s enough for some people to quit looking into credit repair agencies–they assume fixing credit requires some specialized knowledge to do properly. But really, all you have to know is that paying on time, lowering your balances, and avoiding too much use of credit really do contribute toward potentially higher FICO scores.

If you do choose to pay a third party to help, remember NEVER to trust someone who promises you they can remove accurate negative credit information from your report. Unless that information is outdated or expired, it will remain on your report no matter how many times it is contested. It will fall off your credit report in a matter of years, but don’t believe the hype about being able to erase accurate bad credit information.

And even if you do find a third party worth using to help you fix your credit, this process will take just as much time to resolve as if you were doing it yourself. In cases where there is inaccurate information that needs to go, there is a dispute and resolution process that cannot be hurried. If you put off working on your credit assuming a third party can help you do it faster, you may be setting yourself up for disappointment.

Once Your Home Loan Gets Started

If you get approved for a VA mortgage or a VA Cash-Out Refinance Loan, be prepared to have your credit run at least a second time by the lender during the course of the loan process. If your FICO scores change between loan approval and loan closing, your lender may be required to re-qualify you if the scores decline too much. That is one reason why borrowers are urged to completely avoid applying for other lines of credit during the home loan approval process and all the way up to closing day.

Your lender can and likely will run your credit more than once. Don’t let a bad assumption (that you only have one credit check) derail your mortgage loan; stay away from all new credit applications until after closing day. You’ll be glad you did.

 

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VA Home Loan Rules For Mobile Homes and Manufactured Housing

There are VA mortgages for a variety of loan purposes. You can buy a condo unit, townhome, duplex, and multi-unit properties with a VA mortgage. You can also use a VA loan to buy a mobile home and even the land that home is to be placed upon. VA loan rules for manufactured home purchases are a bit different than for buying a typical suburban home, but some of those differences have to do with the unique nature of manufactured housing.

Some don’t realize that VA home loans can be used to purchase mobile homes, manufactured homes, modular housing, and similar properties that meet both VA loan requirements and state/local building code. VA home loans allow buyers to consider homes that are factory-built, transported to a site for installation where they will be put on a permanent foundation.

And what do the VA loan rules say about that foundation? Basically that any manufactured home loan guaranteed by the Department of Veterans Affairs must conform to the guidelines found in the publication titled, HUD Manufactured Home Construction and Safety Standards.

If you want to buy a manufactured home with a VA mortgage, the first thing you’ll need to do is to find a participating VA lender offering these loans.

Not all VA lenders offer VA mobile home loans; the nature of the housing market in your area may or may not include them depending on location. But where they are offered, there are some important things to know about VA loans for mobile homes and manufactured housing.

 

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A Word About Modular Housing

VA loan rules observe a distinction between manufactured homes and modular housing. VA Pamphlet 26-7 Chapter 12 says of modular housing, “The appraiser will typically treat modular housing and on-frame modular housing in the same manner as conventionally built housing.”

The VA appraiser must choose “comparable sales that would be competing properties on the market which may include modular homes, conventionally built homes, or manufactured homes.”

In other words, it pays to know how the property you want to purchase is classified–modular, manufactured, or something else? Some types of modular housing are described as “on-frame” or mounted on a permanent chassis. In order to be approved for a VA mortgage an on-frame modular home must have its running gear stripped from the home and the crawl space must have a vapor barrier installed.

Mobile Homes Must Meet Certain Requirements For VA Loans

VA loan rules in Chapter 12 of VA Pamphlet 26-7 state that the manufactured home and the land where it will be placed, “must be considered a real estate entity in accordance with state law and meet all local zoning requirements for real estate.” That means no VA loan is possible for a houseboat or recreational vehicle or RV.

The real estate entity requirement may also be applicable to how the property is taxed. If the property cannot be taxed as real estate, it may not be eligible for a VA mortgage. This is true even if the state does not tax the property at all.

Some borrowers want to know if it’s possible to buy or build a tiny home using a VA mortgage. In cases where the property is classified as a manufactured home, modular home, or mobile home, there is a square footage requirement, but one reason a tiny home purchase loan may not be possible could have more to do with a lack of comparable properties that can be used in an appraisal to determine the home’s fair market value.

In other words, if you want to buy or build an unusual home that cannot be compared to other, similar properties in that housing market, a VA mortgage may not be possible due to the lack of comparables. This issue may vary depending on the housing market.

Wells, Septic Tanks, And Other Issues

Buying any type of home with a VA mortgage means understanding some loan rules that may apply to the nature of the property.

For example, there are no VA loan appraisal specifics when it comes to determining if well water from a specific source is acceptable fort loan approval. Like other government-backed mortgages, VA loans defer to the standards set by the local authority in these areas. The VA does not have a list of well water safety requirements that must be met outside of being acceptable to the local health authority.

You may find that government-backed mortgages including VA loans require a home (manufactured housing or not) to be hooked up to the local utility “wherever feasible”. Some properties cannot be connected to the local provider and well water or septic tanks may be needed.

VA home loans are not automatically ruled out in cases where a property has a septic tank and/or a well, but they must meet state standards and any applicable VA requirements.

Mobile Homes Purchased With A VA Mortgage Must Have A Permanent Foundation

The foundation issue is non-negotiable. The property must be attached to a permanent foundation that meets federal standards as a condition of loan approval. The mobile home may not start out on a foundation, but it must end up being placed on one that meets VA and other requirements.

Manufactured Homes Have A Size Requirement

A single-wide mobile home cannot have a total floor area of less than 400 feet. A double-wide cannot have floor space smaller than 700 feet.

Manufactured Homes Appraised As Proposed Construction Projects

In cases where the manufactured home is appraised as a proposed construction project the following are required by the VA:

  • Foundation plan exhibits
  • Floor plan showing room layout and exterior dimensions,
  • Elevation plans
  • Specifications for flooring, heating, plumbing, electrical equipment, appliances and other items included with the manufactured home.

VA Home Loans For Manufactured Homes And Land

VA home loans allow the borrower to choose between purchasing a mobile or manufactured home without buying land to place it on or buying both house and land. In cases where the borrower wants to buy a mobile home and put it on land they already own, VA loan rules say the loan amount may include:

  • The purchase price of the home
  • The cost of “all other real property improvements”
  • The VA funding fee

In cases where the buyer wants to purchase both home and land, the following may be included in the loan amount:

  • Purchase price of the manufactured home
  • Purchase price of the land
  • The cost of all other real property improvements
  • VA Loan Funding Fee
  • Any balance owed by the Veteran “on a deferred purchase money mortgage or contract given for the purchase of the lot”

What You Should Know About VA Home Loans For Manufactured Homes

Buying a modular home, manufactured home, or mobile home with a VA mortgage means the potential to purchase a home with no down payment and with the ability to pay the mortgage off early without penalty.

But before you commit to the purchase of a manufactured home, it’s smart to get some important details such as the age of the property, the total square footage of the floor area, and whether or not you will have to contend with issues like installing a vapor barrier in the crawlspace.

You should also consider your options in terms of buying (or not buying) the land to place your new home on. If you never considered the purchase of a parcel of land in this context, using a VA loan to do so may be a good idea thanks to the zero-down option as well as the ability to refinance the loan later on with a VA Streamline Refinance that could result in a lower monthly payment or interest rate, depending on circumstances.

VA loan rules also allow cash-out refinancing of a mobile home or manufactured home, but you will need to see if there is a participating VA lender willing to offer such an option for a mobile home.

 

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Why You Should Consider a Down Payment On a VA Mortgage

VA Loan: Where a Down Payment May Make Sense

Why should you consider making a down payment on a VA home loan? The zero-down option is one of the most appealing parts of the VA home loan program; most borrowers are thrilled to have no downpayment requirement to budget for. But there are definite advantages to making a downpayment.

Do you know the scenarios where you may want to (or have to) make a down payment? They include situations where the borrower just wants a lower loan balance to start with, a need to reduce the VA loan funding fee and even cases where the sale price of the home is higher than the fair market value of it.

And in some cases, depending on the borrower’s credit and other factors, the lender may actually require a down payment as a compensating factor for lower credit scores or for a less-than-ideal loan repayment history. This factor may vary depending on the lender, the applicant’s financial history, and other factors.

 

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Those who don’t have to make a down payment but are tempted to do so should consider one important factor before deciding; how long to stay in the home?

If you are buying a starter home or anticipate a change in family size down the road that may make you reconsider keeping the house long-term? A down payment may not necessarily be the right decision in those cases. It really does come down to your financial goals and needs in many cases.

VA Loan Down Payments: Lower Principal Balance

The first major advantage of making a down payment is the lower principal loan balance. You’ll ideally pay less for the loan over time by starting out with that lower balance. Some VA loan applicants have a goal of saving as much over the lifetime of the loan as possible; for these applicants, a down payment is an excellent idea.

Some even choose a shorter loan term in addition to putting money down on their VA mortgage, making their savings potentially larger because the term of the loan is shorter and the interest rate could be lower under the right circumstances. Basically, a shorter term means reduced risk or the lender, and a lower interest rate could be a possibility as a result.

VA Loan Downpayments: Reduced VA Loan Funding Fee

The VA loan funding fee is required for most VA purchase loan transactions unless the borrower is exempt from paying it due to receiving or being eligible to receive VA compensation for service-connect disabilities.

The funding fee varies depending on whether you are applying for your first VA loan or are a second-time applicant. The VA loan funding fee is lower for first-time use and higher for subsequent use. But those who make a downpayment on their VA mortgage will get a reduced fee. How much your fee gets reduced depends greatly on the percentage of the down payment.

For those making a downpayment of five percent or less, the VA loan funding fee for first-time use is 2.3%. Subsequent use for the same down payment is 3.6% Those putting more than 5% down but less than 10% for first-time use or subsequent use pay a VA loan funding fee of only 1.65%. Paying 10% down gets you a VA loan funding fee of 1.4% for first-time and subsequent use. These rates apply to veterans, active-duty service members, and National Guard / Reserve members.

VA refinance loans don’t feature a reduced funding fee option, the funding fee for VA refi loans is either 2.3% (first-time use) or 3.6% (subsequent use).

VA Loan Down Payments: When the Asking Price Is Higher Than the Appraisal

In cases where the seller’s price turns out to be higher than the appraised value of the home, the borrower has some choices. One is to renegotiate with the seller to bring the asking price down.

Remember, VA borrowers cannot be compelled to close the deal on a VA mortgage where the appraisal is lower than the sale price–this is sometimes known as the VA loan “escape clause”. Basically, you are free to walk away from such a situation without penalty. You can’t be required to forfeit earnest money and you cannot be compelled to purchase.

If you don’t renegotiate with the seller, you have the option of moving forward with the mortgage anyway. But in such cases, your lender will require you to come up with the difference between the asking price and the appraised value in cash at closing time.

This amount must be paid upfront and cannot be financed into the loan amount. There is sometimes a difference of opinion as to whether this actually constitutes a down payment in the technical sense, but the result is basically the same. You pay a certain amount at closing time without rolling it into the mortgage loan.

VA Loan Downpayments for Partial Entitlement

You may or may not use up all your VA loan entitlement when you get a VA mortgage. Borrowers who use some but not all of their entitlement are free to use it again even if it’s not at the 100% mark. But doing so will definitely require some form of money down on the transaction to offset the lack of the full VA loan benefit.

Who does this rule potentially affect? A number of circumstances may apply when it comes to having partial VA loan entitlement:

  • You have an active VA loan and it’s not fully paid off;
  • You paid a previous VA loan in full and still own the home and have not applied for entitlement restoration;
  • You refinanced a VA loan into a non-VA loan and still own the home;
  • You had a short sale on a VA loan but did not repay the VA in full;
  • You had a foreclosure or deed-in-lieu of foreclosure on a previous VA loan;
  • You had a foreclosure on a previous VA loan and didn’t repay the VA in full.

The list above implies that the borrower, in each of these circumstances, has some amount of the VA loan benefit remaining but not 100%. You’ll need to work with a loan officer to discover how much money down might be needed for a specific VA loan transaction under such conditions.

VA Loan Downpayments As a Compensating Factor

Another situation where a down payment might be required on a VA loan? When the borrower’s credit qualifying information, FICO scores, or other financials require a “compensating factor” in order to justify approving the loan.

Borrowers who have strong credit may not deal with this issue, but those who are working on fixing the financial mistakes of the past may (depending on how far along the credit repair journey might be) require the lender to ask for a downpayment.

This is something that is basically left up to the lender. The VA does not have a set FICO score range indicating an “ideal” applicant. Instead, the VA defers to the participating lender’s standards.

What to Consider About a VA Home Loan Downpayment

It’s easy to give generalized advice here. A downpayment that reduces your loan principal is never a bad thing for those who can afford to make that choice. Some don’t have a choice and must put money down in order to make their purchase a reality. Either way, a lower VA loan funding fee might be the result.

The complicating factor for some borrowers is the other expenses associated with the loan getting in the way of having enough money left over to make a down payment.

There are closing costs to deal with such as appraisal fees, compliance inspections, issues related to the title, even relocating expenses like movers or moving truck rentals. Not everyone can afford to put money down, but if you can afford to do so there are enough advantages that doing so may be well worth the expense.

 

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

 

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Buying a Condo Unit With a VA Mortgage

VA Loan: Buying a Condo Unit

If you are looking for a condominium unit to purchase with a VA loan, there are some important aspects of the condo loan process you should be aware of. VA mortgages have some unique rules that may affect your choices. Knowing your options, your rights, and the general rules associated with VA condo loans can help you in the loan planning process.

The VA Lender’s Handbook, HUD 4000.1, states clearly that VA mortgages may be used, “to purchase or construct a residence, including a condominium unit to be owned and occupied by the veteran as a home.” VA condo loans feature the same zero-down options as other VA mortgages.

VA Condo Loans are offered by participating lenders, but not all lenders who approve VA mortgages may offer a condo loan. Much depends on the demand in the housing market you are in, the nature of the condominiums in the area, and whether or not the project meets VA standards.

Condo Purchases Are Unique

Whether using a VA loan or not, borrowers who choose condo units should know that buying such a property comes with some added considerations you may not be subject to when purchasing a typical suburban home, manufactured home, or even a farm residence.

What kinds of considerations? The fact that a single condo unit is part of a larger community means that certain common areas may require the group to pay for upkeep and maintenance. The shared roof is an excellent example; if you buy a unit in a condo with six living units, all six tenants are likely to have to pay for repairs when the time comes.

 

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This often means that there is a condo owner’s association that votes on such issues. You may be required to join as a condition of purchase, and in such cases, you’ll want to know what the organization’s bylaws and covenants are. This will be important for the VA loan in ways we’ll examine below.

Remember that a condo project may or may not involve mixed-use or mixed-zoning residential properties. In cases where there is a combined residential and non-residential project, it must be “primarily residential” in nature according to the VA. The Department of Veterans Affairs does not have regulations about specific zoning issues, instead, it defers to the local authority. If the condo does not meet the state regulations applicable to it, the project cannot become VA-approved.

VA Condo Approval

Like other government-backed mortgage loan programs, VA condo loan rules include a requirement that the condo project be on or added to the VA-approved list. It’s the lender’s responsibility to request additions to that list where appropriate.

VA Pamphlet 26-7, the VA Lender’s Handbook has an entire chapter dedicated to condo loan procedures; it includes the following instructions to the lender for adding a project not currently on the VA’s list:

  • The lender must submit a written request to the Department of Veterans Affairs for the condo project to be added;
  • The lender must submit the condominium’s “organizational documents”
  • The submission must be reviewed by VA compliance officials prior to approval.

In cases where a condo project is on other government-backed loan program approval lists, it may only be necessary to have that approval reviewed and applied for the VA program.

VA condo unit approval is not the same as a VA appraisal nor does it act as such. The condo approval process is more about determining that the project meets VA standards, that the bylaws don’t contain restrictive clauses that are contrary to VA loan standards and policy, and that the project meets state laws and other requirements.

In other words, when the condo project is added to the VA approved list, or the lender acknowledges that the project is already on the list, a VA appraisal is still required as a condition of loan approval.

Condo Approval Caveats

If a project is already on the VA-approved list, it’s not necessary to jump through all the hoops required to get the approval done. But in cases where approval is needed, there is a major caveat. It’s one borrowers and sellers should understand going forward.

When the VA approves a project, it does so as mentioned above in part by reviewing the condo’s documentation, bylaws, etc. It is assumed that this documentation is current at the time of review. But what happens if there are changes, updates, or modifications to the rules after the condo project is VA approved?

VA Pamphlet 26-7 Chapter 16 states, “VA approval of any amendments to the declaration, bylaws, or other enabling documentation is required while the declarant is in control of the homeowner’s association. A written statement signed by an officer of the Association’s Board of Directors and submitted with VA Form 26-1844, is required as evidence of approval.”

This could be interpreted as protection against VA-compliant bylaws that could be amended after initial VA approval where the changes don’t meet VA standards. However, VA loan rules in this section add that approval is “not required” for condo project amendments “which annex additional phases to the condominium in accordance with a development plan previously accepted by VA.”

What Causes A Condo To Be Rejected By The VA?

There are a number of technical, behind-the-scenes reasons why a condo project might not meet VA approval. One would be that the project does not meet the legal requirements established by the state the condo is in.

Another is that the condo project is located in an area the VA won’t approve loans in. But the issues that are most relevant to the borrower in this area involve restrictive covenants or clauses in the condo owner’s association documents or other paperwork relevant to the project.

What does the term “restrictive clauses” mean? Simply that the condo project wants all owners to agree in a legally binding document that certain rights are subject to prior approval, or subject to “alienation”.

The VA Lender’s Handbook in Chapter 16 states that the following must not be present in any agreement for the buyer:

  • Right of first refusal;
  • Right of prior approval of either a prospective purchaser or tenant;
  • Leasing restrictions which amount to unreasonable restrictions on use and occupancy of a unit;
  • Any minimum lease term in excess of 1 year.

Notice a pattern? Most of the above refer to conditions placed on the owner that restrict her ability to freely use, transfer, or otherwise dispose of the property. The “right of first refusal” is basically a clause that prevents the individual condo unit owner from selling the unit to anyone they want. The condo owner’s association may in such cases reserve the right to approve or deny the transaction.

That is in direct contradiction to VA loan rules which state that the owner must be free to sell, transfer, or otherwise use the property as they see fit as a primary residence.

What To Know About VA Condo Loans

Buying a condo unit means participating in a collective of sorts. You may have rules that dictate what color you can paint exterior walls, the kinds of public-facing adornments to windows, doors, or porches, and you may be required to attend condo owner association meetings to decide how to pay for maintenance of common areas, parking lots, etc.

It’s true that some typical suburban neighborhoods also feature homeowner’s associations, but when buying a condo you may find them far more commonplace. There are dues associated with such organizations and those who do not meet their financial obligations to the association may be financially liable depending on the terms of the legally binding agreement you sign.

These are important issues to know, don’t be taken by surprise when you are shopping for a new place to live. You’ll want to understand what to look for in the condo owner’s association documents in terms of your obligations and your rights as the owner of the unit in a given project.

 

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VA Loans, Investment Properties, and Deployments

Investment Properties, Deployments and the VA Loan

What do VA home loan rules say about occupancy, deployments, and investment properties? These don’t sound like related topics at first, but believe it or not, the VA Lender’s Handbook, VA Pamphlet 26-7, has a lot to say about all three subjects and they do intersect.

Basically, the VA Loan program is designed for those who plan to live in the home they buy. Renting out unused portions of that home is permitted. Using the home primarily as a business is not. Buying a home and being deployed is not a violation of VA occupancy requirements, but buying one and never occupying it IS a violation of the loan agreement you’ll sign.

 

>> 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.

 

VA loans are for qualifying service members, veterans, surviving spouses, and those who serve in what are referred to as “uniformed services” such as those commissioned by NOAA and those who serve as certain types of public health officials.

VA loans are sometimes approved with non-VA borrowers in a process known as a joint loan. VA occupancy requirements only apply to those using the VA loan program for the purchase–non-VA borrowers in the same transaction are not asked to honor the VA loan rules when not using a VA mortgage. Multiple borrowers can also apply when all applicants are using their VA loan benefits–in such cases all occupancy rules apply.

VA Loan Occupancy Rules

Occupancy is a critical issue for any use of your VA home loan benefit. VA purchase loans require the buyer to certify in writing that she will use the home purchase with a VA mortgage as the primary residence or have an eligible family member who can meet the occupancy requirement instead.

Occupancy is an issue because VA home loans and VA refinance loans are intended for owner-occupied homes and while it is possible to purchase a mixed-use or mixed zoning type property with a VA mortgage, the use of that home must be “primarily residential” and the non-residential nature of the property must be “subordinate” to use of the structure as a home first.

But military members get deployed, sent TDY, experience permanent change of station moves, or go to professional military education for prolonged amounts of time. How does this affect the borrower’s occupancy status?

The short answer is that it does NOT. The owner is expected to have military duty and you do not have to live in the house every single day you own it in order to be considered using the property as your home address.

Deployments, Temporary Duty (TDY)

VA Pamphlet 26-7 Chapter Three states, “Single or married servicemembers, while deployed from their permanent duty station, are considered to be in a temporary duty status and able to meet the occupancy requirement. This is true without regard to whether or not a spouse will be available to occupy the property prior to the veteran’s return from deployment.”

There is a bit of a grey area where PCS moves are concerned. Chapter Three does not directly address whether or not a PCS move complicates the VA loan for the owner.

However, there are hints of the VA’s position on PCS moves elsewhere in Chapter Three where “intermittent occupancy” is addressed. In order to be compliant on this issue, VA loan rules say the home secured with the VA loan must be reasonably near the borrower’s job.

Whether you can legally rent out a home you buy with a VA loan after PCSing out of the area is something you may have to review your purchase contract for–any fine print or stipulation in the contract will be legally binding.

If you want to fee you are safely within the VA loan rules for renting out the home, you can always consider refinancing the mortgage with a VA Interest Rate Reduction Refinance Loan (which generally must result in some tangible benefit to the borrower) as this type of VA refi requires you certify only that you have previously used the home as your residence.

VA Loans For Investment Properties

Why do people want to turn to VA mortgages to buy bed and breakfasts, Air b-n-b operations, and other things like them? The no-money-down VA home loan is one reason. VA mortgages also have no VA-required private mortgage insurance or PMI, which is another way to save money on the loan up front.

And then there is the comparatively low interest rate on the loan. Government-backed mortgages offer an advantage in this way since the government, in this case, the Department of Veterans Affairs, is promising the lender an offset in the cost of the lender’s loss if the loan goes into foreclosure.

Buying an investment property with no money down definitely DOES have an appeal to it. But the VA loan program is for residences only. It’s true that you can use a multi-unit home purchased with a VA mortgage as an investment property when you live there, too. But buying a house without intent to occupy? That’s not permitted with VA mortgages.

And that is consistent all the way down the line with VA purchase loans. Did you know you can buy a farm residence with a VA mortgage but that only the residential value of the property is considered for the loan? There is no extra money available to buy a farm business, and no appraisal valuation for the non-residence nature of the property.

The way many investors think about investment properties–to buy, rent out immediately, and never occupy? That’s the sort of thing VA loan rules are designed to prevent–the borrower purchasing a house they do not intend to live in. So in that sense, you cannot use a VA purchase loan to buy a bed and breakfast, an Air b-n-b operation, or a house you plan to rent out to someone else.

But you are permitted under VA loan rules to buy a multi-unit home and rent out the unused units you are not living in. This type of “investment property” arrangement is 100% acceptable to the Department of Veterans Affairs as long as the borrower or borrowers live in one of the units themselves.

You can legally rent out a duplex or townhome you buy with a VA loan in this way or a multi-unit home up to four living units. But what you generally cannot do is to use your VA loan to buy (or create) non-residential, “intermittent” or transient occupancy type operations where occupancy is 30 days or less.

The Bottom Line

If you are not sure how VA loan occupancy rules affect your mortgage, have a frank conversation with your lender about what you would like to do and whether it is permitted under VA mortgage loan rules. VA loans allow you to buy and refinance a home; they also allow you to rent out the home freely if you refinance with a VA Interest Rate Reduction Refinance Loan. Some borrowers consider applying for a VA Cash-Out Refinance instead–thinking the same rules might apply.

However, VA Cash-Out Refinancing requires the borrower to again certify occupancy in writing and use the home as the primary residence. If you choose not to refinance your VA mortgage with another VA loan, know that the occupancy rules you agreed to under the original VA loan are no longer applicable and any new requirements for occupancy that may apply (FHA and USDA mortgages especially) will apply instead.

Make sure you fully understand any new occupancy requirements for a different, non-VA mortgage loan before you commit.

 

>> 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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VA Loan Basics

Basics of the VA Loan

If you are new to your VA loan benefits, it’s good to review the requirements ahead of time so you can come to the home loan process ready to make informed choices about your home loan and your VA benefit. Here’s a primer on the VA home loan benefit that can help you get started.

No matter what kind of VA mortgage you need, there are some distinct benefits. The first is the zero downpayment option.

No money down on a home loan? That’s a major up-front and out-of-pocket expense veterans and currently serving military members typically don’t worry about with the VA mortgage process.

Aside from the no-money-down mortgage option, there are other advantages including (but not limited to) the following:

  • No VA requirement for private mortgage insurance
  • No penalty for early payoff of the VA loan
  • Lower interest rates compared to some conventional mortgages
  • Limits on closing costs the borrower can pay
  • You can re-use your VA mortgage benefit multiple times
  • VA refinance options are available including VA Streamline mortgages (see below)

A Word On VA Loan Down Payments

Some VA loans may require you to pay upfront when the appraised value is lower than the asking price of the home–you are free to walk away from the purchase without penalty if that is the case.

But for those who want to purchase the home anyway, the difference between the appraised value and the asking price must be paid in cash at closing time and cannot be financed.

Qualifying For A VA Mortgage

There are basic minimum requirements to qualify for the VA loan program based on time served in the United States military or the uniformed services such as the Commissioned Corps of the National Oceanic and Atmospheric Administration, and Commissioned Corps of the Public Health Service.

These time-in-service requirements vary depending on when you joined. When you have served the minimum amount of time needed to qualify, you’ll need to apply for a VA Certificate of Eligibility (COE) which the lender will need to prove you are able to apply for a VA mortgage.

Getting your COE does NOT mean you are approved for a VA mortgage, but it does mean you are eligible to apply for such a loan with a participating lender.

 

>> 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.

 

Obtaining A VA COE

You can apply directly for a VA Certificate of Eligibility but many applicants choose to have their loan officer help them obtain it. If you want to apply directly with the VA by mail–you’ll need to fill out VA Form 26-1880 and mail it to the address listed on the form–or you can apply online using the VA eBenefits portal.

The VA official site says it’s also possible to apply through the VA LGY portal but you may need to ask your lender to help in such cases.

VA Loan Types At A Glance

There are a few basic VA loan benefits you should know about. They might seem a bit complicated at first until you get to know the program.

The first VA loan benefit you should know is the VA purchase loan, but there are also VA refinance loans, a special program for qualifying service members who want to buy land in tribal areas, and an add-on to the VA mortgage loan (purchase or refi) called the VA Energy Efficient Mortgage or VA EEM that allows extra loan funds for approved energy-saving upgrades to the home.

VA Purchase Loans

The “forward mortgage” options for VA loans. VA mortgages can be used to purchase a wide variety of properties including condo units, townhomes, farm residences (the residence only, you cannot use a VA mortgage to buy a farm business), manufactured housing, mobile homes, and even multi-unit properties up to four living units.

You should know that the requirements for a VA purchase loan include occupancy–no VA mortgage can be used to buy investment properties you don’t intend to occupy as your full-time residence. VA loan rules require you to declare in writing that the home will be your primary residence.

You can use a VA mortgage to buy a home in the United States or its territories and protectorates including:

  • Puerto Rico
  • Guam
  • Virgin Islands
  • American Samoa
  • Northern Mariana Islands

VA Refinance Loans

The VA refinance loan benefit comes in three basic forms. You can apply for a VA Cash-Out Refinance Loan which permits cash back to the borrower for any purpose acceptable to your lender.

There is a VA Interest Rate Reduction Refinance Loan (also option also known as the VA IRRRL for short.) This is a refinance loan that usually requires some tangible benefit to the borrower like a lower monthly payment or a lower interest rate.

You can also, as the third alternative, apply for a VA loan of either type and apply for the VA Energy Efficient Mortgage (VA EEM mentioned above) to include extra loan funds for approved energy-saving improvements.

The reason we list this as a “third loan” here? When applying for VA Cash-Out refinances, the EEM money cannot be used in an unrestricted way like the cash-out funds themselves. You must use any EEM loan money specifically for the approved projects you’ll be investing in to upgrade your home.

VA Direct Loans

Like the VA home loan program itself, VA Direct Loans are not offered to all applicants. These are the only VA loans offered directly from the VA itself rather than via a participating lender. In order to apply for a VA Direct Loan, also known as a VA Native American Direct Loan (VA NADL), you must either be a Native American or married to one AND meet all the following requirements:

  • You must intend to occupy the home you purchase with a VA NADL
  • Your tribal government has a Memorandum of Understanding (MOU) with the Department of Veterans Affairs;
  • You have a VA Certificate of Eligibility;
  • You meet VA income and credit requirements

VA Energy-Efficient Mortgages

The VA Energy-Efficient Mortgage or VA EEM is not a separate home loan option but rather an add-on to a VA refinance or purchase loan that provides extra funds for approved energy-efficient upgrades to the home you purchase or refinance with your VA mortgage.

VA EEMs may require the use of an Energy Consultant and the money you get with a VA EEM can only be used for the specific upgrades you and the lender agree on.

Those projects must be on the VA approved list, which includes but may not be limited to the following:

  • Solar heating and cooling systems
  • Weatherizing
  • Furnace efficiency
  • Insulation
  • Storm windows and doors
  • Heat pumps
  • Vapor barriers
  • Efficient thermostats
  • Ceiling upgrades
  • Attic or wall upgrades

Be sure to ask your loan officer about the EEM and how much adding this package to your loan will affect your monthly mortgage payment. VA loan rules state clearly that the borrower may be permitted to act as their own contractor to install certain upgrades themselves, but be advised that lenders may not permit this.

In cases where a lender does permit it, the borrower cannot use loan funds to “pay themselves” for the labor. These loan funds must only be used for materials when the borrower is doing their own work.

How much extra money is available to you via a VA EEM? The VA loan rules found in VA Pamphlet 26-7 state the VA mortgage can have the following amounts added depending on circumstances;

  • As much as $3,000 (determined only by “documented costs”)
  • As much as $6,000 IF the added loan funds do not result in an increase in monthly mortgage payment above the amount you would save on utility bills
  • More than $6,000 “subject to a value determination” by the Department of Veterans Affairs.

You don’t have to choose a VA EEM add-on to your loan, but the benefits of doing so over the long term may be worth considering.

 

Get a free, no-obligation consultation regarding your VA Loan with Veterans First!

 

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