What is a VA Loan?
For those who are eligible for the VA home loan program, there really isn’t a better option when searching for a loan with both competitive rates and low settlement charges. And, it’s not just for veterans.
In 1944 Congress enacted the Servicemen’s Readjustment Act. This was a new law that provided a range of benefits specially for soldiers returning from World War II. Commonly referred to as the G.I. Bill, the benefits were designed both as a “thank you” for your service as well as to help returning soldiers more easily assimilate back into civilian life. Benefits included funds for college tuition and vocational or technical school, loans to start a business as well as a year’s worth of unemployment compensation. Yet the most enduring benefit is the one designed to help veterans buy a home with as little cash as possible.
What is the Down Payment Requirement for a VA Loan?
The VA loan program is one of two home loan programs that do not require a down payment. One of the greatest obstacles for home buyers, especially those buying their first home, is coming up with enough funds for a down payment. Back in the 1940s, lending guidelines varied widely from one bank to the next but most all mortgage loans asked for a down payment as high as 30, 40, even 50 percent or more. The zero down feature meant returning soldiers didn’t have to save up such a considerable sum and could close on a VA loan without a down payment.
What are the Closing Costs?
In addition to not requiring a down payment, borrowers are restricted from paying certain kinds of closing costs. This feature further reduces the amount of funds needed to close on a purchase. Today, the only closing costs a veteran is allowed to pay are for an appraisal, credit report, title, origination fees, recording fees and a survey or abstract where needed. Everything else must be paid for by third parties, sometimes referred to as “non-allowable” fees.
Sellers are allowed to pay for the buyer’s closing costs up to 4% of the sales price of the home. This is typically more than the buyers’ actual closing costs. Yet the key phrase here is “allowed to pay” and not “must pay.” Having the seller pay for closing costs is part of the negotiations and the sellers can agree or not agree to pay for the buyer’s closing costs.
Lenders are also ready to help with non-allowable closing costs. Common costs include a lender’s processing fee or document preparation fee or attorney charges and others. Your loan officer will provide you with a list of all potential fees and which fees the buyers are responsible for. Lenders can provide a borrower credit to help offset part or all of related loan charges. Lenders can raise an interest rate on a loan program slightly and in exchange for the higher rate the lender will provide a credit toward closing costs. This credit will appear on the final settlement statement at closing.
What is the VA Funding Fee?
VA loans also come with a guarantee to the lender should the loan ever go into default. This is a rare instance however as VA loans typically have the lowest default rate of any available loan program. Should a VA loan go into foreclosure, the lender is compensated at 25% of the loss. This compensation comes in the form of an insurance policy and financed with what is referred to as the Funding Fee. This fee varies but with a 30 year fixed rate loan, first time usage and no down payment, the funding fee is 2.15% of the sales price of the home. This fee is not paid for out of pocket as a closing cost but instead rolled into the final loan amount. For those who are receiving disability payments from the VA, this funding fee is waived.
What are the Benefits with a VA Loan?
The VA loan requires no down payment and restricts the types of closing costs the veteran is allowed to pay for. Interest rates are extremely competitive and as a plus, there is no monthly mortgage insurance payment needed. Other low down payment mortgages do have an additional mortgage insurance payment that decreases affordability.
Who is Eligible?
Eligibility for the VA loan program is determined by obtaining a copy of the buyer’s Certificate of Eligibility from the Department of Veteran’s Affairs. This certificate can be obtained by the buyers with a visit to the nearest Regional VA Center, or by faxing or mailing a request for the certificate. However, VA approved lenders have access to an electronic system called the Automated Certificate of Eligibility, or ACE, which can retrieve this important document within a matter of moments. A VA loan cannot close without this certificate in the file.
Borrowers who are eligible for this program include veterans of the Armed Forces, active duty personnel with at least 181 days of service, National Guard and Armed Forces Reserve members with at least six years of service and unremarried surviving spouses of those who have died while serving or as a result of a service-related injury.
What are the Options?
VA loans provide a wide range of financing options, much like any other program. The VA loan can only be used to finance a primary residence and cannot be used to buy an investment or rental property. The VA loan is available both as a fixed rate loan and an adjustable rate loan. Fixed rate terms range from 10 to 30 years in five year increments. Available terms are 10, 15, 20, 25 and 30 years.
Adjustable rate VA loans are also available. Adjustable rate mortgages, or ARMs, can adjust once per year or some in the form of a hybrid mortgage. A hybrid is an ARM but has an initial fixed rate period before changing into a loan that can adjust annually. For example, a 5/1 hybrid is fixed for five years before turning into an adjustable rate mortgage that can change once per year. Such loans offer slightly lower fixed rates compared with a traditional fixed rate mortgage.
How to Refinance an Existing VA Loan
VA loans can also be used when refinancing. VA loans can replace conventional loans or an existing VA loan. When refinancing from one VA loan to a new one, this is commonly referred to as a “streamline” refinance due to the reduced amount of paperwork and documentation needed to approve the new loan.
Unlike a standard VA loan approval which requires verification of income, acceptable credit and payment history, work history and other requirements, the VA streamline does not require any income verification, employment verification, assets or a credit check. The only credit requirement is to make sure there are no more than one payment made over the last year exceeding 30 days past the due date and no such late payments within the last six months. As long as the refinance provides a tangible benefit to the borrower, such as lowering an interest rate or switching from an ARM to a fixed, the streamline is an option.