According to 75 percent of military families, owning a home is one of the most important things to service members upon returning from service. However, only one in four veterans has a thorough knowledge of government programs that are available for those who have served or are serving.
The truth is, in fiscal year 2013, the median assets of veterans were $8,670. Unfortunately, this is not enough for most down payments, and because of this, 84 percent of veterans in FY2013 looking to buy a home could not use the conventional loan option.
While a full 11 percent of veterans who purchased a home had no knowledge of the VA loan benefits, only half of real estate professionals discussed the VA home loan option with their military clients!
These are numbers that need to change. Stop to consider these numbers. Literally thousands upon thousands of military service members and their families went without buying homes in that one year alone – simply because they didn’t know they had another option.
Today’s America is filled with veterans and military members who are eligible to purchase homes, and this number continues to grow. While the Department of Veterans Affairs and the mandatory exit counseling for service members work diligently to inform veterans about VA loans, we hope to do the same.
Compared to conventional loans, VA guaranteed loans offer:
• Less stringent credit requirements
• Lower closing costs
• Lower interest rates
• No down payment required
•More flexible underwriting standards
The VA home loan program was created in 1944, part of the original Servicemen’s Readjustment Act, better known as the GI Bill of Rights. This sweeping legislation aimed to level the playing field for those who served our country during World War II, and in many ways it reshaped the course of America. VA loans played a critical role in that development.
Seventy years later, this government-backed mortgage program is more popular than ever. VA loan volume has soared 370 percent since 2007, driven by lower interest rates and a tough lending climate. The program’s less stringent credit requirements, coupled with the ability to purchase with no money down, have made VA loans a lifeline for military borrowers, many of whom would otherwise struggle to secure home financing.
Starting in 2020 and thanks to the Blue Water Navy Vietnam Veterans Act of 2019, there will be no VA home loan limits. VA loan limits are the maximum loan amount the Department of Veterans Affairs can guarantee without borrowers making a down payment.
Qualified homebuyers could previously purchase up to $484,350 without a down payment in most parts of the country however, these limits no longer apply. However, the removal of loan limits doesn’t mean unlimited borrowing power without a down payment. You’ll still need to have sufficient income and meet a lender’s credit requirements to qualify for the loan amount. The 620 credit score benchmark most VA lenders instituted was — and continues to be — lower than what military buyers typically need for both FHA and conventional loans.
Advantages of the VA Home Loan Program
(1) VA Loans Require No Down Payment – VA loans offer numerous benefits to borrowers; one of these benefits is that VA loans require no down payment. This means that VA buyers can purchase a home with no money down, although they can put money down if they want to, of course.
There is an exception to the no-down payment feature. If a VA buyer purchases a home that is above the VA county loan limit, then they have to put down 25 percent of the difference between the purchase price and loan limit. County loan limits start at $484.350 and are higher in certain high-cost counties. Loan limits are updated each year.
VA mortgages may be the only option for many Veterans to buy a home and finance a mortgage, because according to the VA, 80 percent of VA buyers couldn’t qualify for conventional financing.
(2) VA Loans Do Not Require PMI – Private mortgage insurance (PMI) is a form of insurance that lenders typically require if you can’t make a down payment of at least 20 percent. PMI protects lenders against borrowers who default and also helps borrowers who can’t muster a large down payment. While this mortgage insurance is required on both FHA and conventional loans where the buyer cannot put down 20 percent of the purchase price, there is no PMI on a VA loan.
Because the Department of Veteran Affairs guarantees the VA loan, VA buyers can have 100 percent financing and avoid having to pay PMI or MIP (mortgage insurance premium, which applies to FHA loans). VA loans have no mortgage insurance. Because of this benefit, the group of Veterans who secured VA financing in fiscal year 2020will save $35 billion over the life of their loans.
The savings VA Buyers realize from not paying PMI can add up pretty quickly. As you probably know, a PMI fee ranges in cost, but typically averages between 0.5 percent and 2 percent of the outstanding balance of the borrower’s loan. That fee is then added to the monthly mortgage payment by the lender.
Let’s assume you are a buyer with a loan of $200,000. Your lender charges half a percent of the loan balance for PMI. In the first year, you will pay an additional $83.33 monthly in PMI fees.
Perhaps $83 may not seem like much of an expense, but in the first year PMI charges add up to roughly $1,000. As a prospective new homeowner I’m certain you can think of better things to do with that extra $1,000.
(3) VA Loans Offer Lower Interest Rates – VA loan rates are generally lower than conventional mortgage rates. It’s not uncommon for VA loan rates to fall 0.5 percent to 1 percent below the conventional loan rate. This lower rate, combined with monthly PMI savings, can substantially lower a homeowner’s monthly payment.
Compare the monthly payments on a 30-year $200,000 mortgage at 5.5 percent and 6 percent.
The interest rate expenses on a monthly payment at 6.0% would be $1,199, while the monthly payment on the same house, but at the interest rate of 5.5% would be $1,136. Just that half a percentage point difference in the interest rate would save the buyer $63 a month, or $756 per year.
When compared to an interest rate of 6 percent, a rate of 5.5 percent can save a VA homebuyer $7,560 over the first 10 years of a $200,000, 30-year loan. That’s a tremendous difference, and one you’ll want to consider before choosing a mortgage and a lender.
(4) VA Loans Offer Low Closing Costs – One benefit of VA loans is the lower closing costs. Because the VA limits the closing costs paid by VA buyers, you won’t be expected to pony up as much cash at closing. This is a relief for any buyer, but it’s even more valuable for service members who make regular moves when they are transferred and may have a harder time coming up with closing costs every two or three years.
There are a number of VA non-allowable fees, which are costs you are not permitted to pay as a VA buyer.
The VA allows the seller to pay all of the buyer’s closing costs and up to 4 percent of the home’s appraised value in concessions. The buyer can pay for some closing costs.
Keep in mind that while VA rules say that a seller’s concessions can’t exceed 4 percent of the loan, only certain types of costs fall under the 4 percent rule. These costs include payment of pre-paid closing costs, VA funding fee, payoff of credit balances or judgments for the Veteran, and funds for temporary buydowns. However, if the seller pays discount points, this payment is not subject to the 4 percent limit.
There are several potential costs and fees that are “non-allowable,” which means the VA does not allow homebuyers to pay them. Minimizing closing costs remains one of the biggest benefits of the VA home loan program.
Some of those non-allowable closing costs on a VA mortgage include:
• Lender document fees
• Any recording fee above $17
• Notary fees
• Transaction coordinator fees
• Brokerage fees
• “Buyer broker” fees
• Commissions
• Termite inspection fees*
(5) VA Loans Have Lower Credit Score Requirements – While the Department of Veterans Affairs has not identified a specific minimum credit score requirement, lenders do establish minimum credit score requirements. For many lenders, this minimum score is 620, which is a much lower score requirement than is needed for conventional and FHA mortgages.
(6) VA Offers Flexible Underwriting Standards – Conventional loans are typically a better fit for homebuyers who have sterling credit and significant assets. VA loans, on the other hand, offer less stringent guidelines and are a great option for those with less-than-perfect credit.
Many buyers who can’t qualify for conventional loans end up buying their dream homes using the flexibility of the VA loan program.
VA Funding Fee – VA loans do come with a mandatory funding fee that goes directly to the VA. This fee helps to keep the program running for future generations of military homebuyers.
The VA funding fee, which is a percentage of the loan amount, varies based on the type of loan, the borrower’s military category, whether the borrower is a first-time or subsequent loan user, and whether the person makes a down payment.
The funding fee must be paid at closing time, but borrowers have the option to either finance the VA funding fee into their mortgage or pay it in cash.
The funding fee for second-time loan users who do not make a down payment is slightly higher. In addition, National Guard and Reserve service members and Veterans have to pay a slightly higher funding fee percentage than current service members.
For first-time homebuyers, the funding fee is typically:
2.3% of the loan amount for those who’ve had active duty service (starting in 2020 the funding fee is the same for regular military, reservists and National Guard)
3.6% for subsequent uses by either active or reserve, national guard
Remember that the funding fee can be reduced if the Veteran puts money down as a down payment.
The funding fee is completely waived if the Veteran has 10% or higher VA disability; the COE will state whether funding fee is waived.
Generally, all Veterans obtaining a VA loan must pay this funding fee; there are a few exceptions.
The following people do not have to pay the VA funding fee:
- A Veteran receiving VA compensation for a service-connected disability
- A Veteran who would be entitled to receive compensation for a service-connected disability if that Veteran did not receive retirement or active duty pay
- or Surviving spouse of a Veteran who died in service or from a service-connected disability.
- Veterans with pending service-related disability claims must pay the funding fee upfront, but if their claims are granted, this fee can later be reimbursed.
- Stating in 202 active-duty service members who have received a Purple Heart will be exempt from the funding fee.
(7) VA Loans Do Not Have Pre-payment Penalties – Prepayment penalties are disappearing because of new mortgage regulations, but some conventional loans can still carry a prepayment penalty, which is a fee for paying off your mortgage early.
VA loans will never charge a prepayment penalty. In fact, it’s actually illegal for a lender to charge a prepayment penalty on a VA loan. You can always choose to pay off your VA loan early without fear of a penalty.
There are specific service requirements to determine who is eligible for a VA loan.
A veteran or current service member must have suitable credit, sufficient income, and a valid Certificate of Eligibility (COE) to be eligible for a VA-guaranteed home loan.
If they qualify, active duty, Reserves, National Guard, surviving spouses, and even some other government employees can use the VA loan.
Even if a service member does not meet the minimum service requirements, that person may still be eligible if s/he was discharged due to hardship, the convenience of the government, a reduction-in-force, certain medical conditions, or a service-connected disability.
To obtain a Certificate of Eligibility, the Veteran must have been discharged under conditions other than dishonorable, and must meet the detailed service requirements in this chart.
Veterans can order their own COEs by visiting the VA benefits website, and scrolling to the bottom of the page, where they will be directed to the VA eBenefits portal to log in. To obtain a COE, Veterans (and current or former National Guard or Reserve members who have been activated for federal active service) may have to submit a copy of their DD214. To obtain their COEs, active duty service members only need to submit a current statement of service signed by (or by the direction of) the adjutant, personnel office, or commander of the unit or higher headquarters. (This statement of service must include the service member’s full name, Social Security Number, date of birth, entry date on active duty, the duration of any lost time, and the name of the command providing the information.)
VA home loans can only be used in specific ways.
In addition, the home must be for the Veteran’s own personal occupancy. (In other words, a Veteran cannot use a VA loan to purchase income property, or property that is going to be used in any way except for the Veteran’s own personal occupancy.)
VA home loans can be used in the following ways:
• To buy a home or a condominium unit in a VA-approved project
• To build a home
• To simultaneously purchase and improve a home
• To improve a home by installing energy-related features or making energy-efficient improvements
• To buy a manufactured home and/or lot.
Bankruptcy and foreclosure do not automatically exclude future VA homeownership.
Many people assume that once they’ve gone through bankruptcy and/or foreclosure, they can kiss their dreams of homeownership goodbye.
Thankfully, this isn’t necessarily true. While bankruptcy and foreclosure can be harrowing experiences, they don’t have to ruin a person’s financial future or dream of buying a home.
Qualifying for a VA loan after bankruptcy or foreclosure is definitely possible, even if the foreclosure was on a previous VA loan.
It’s up to a lender to determine how long someone has to wait to qualify for a mortgage, and lender guidelines may vary on how long a person has to wait.
Typically, someone who has gone through a bankruptcy or foreclosure has to wait for 2 years before using a VA loan. This is a significant difference from the waiting requirement for a conventional loan, which is seven years.
A Chapter 7 bankruptcy is known as a “liquidation” bankruptcy; it forces an individual to sell certain assets in order to repay creditors. The individual will have to wait at least 2 years from the date of a Chapter 7 discharge to qualify for VA loan approval.
A Chapter 13 bankruptcy, on the other hand, is known as a “reorganization bankruptcy,” and it creates a court-supervised plan for debt repayment. Someone who has filed for Chapter 13 bankruptcy may be eligible for a VA loan once that person is 12 months removed from filing for that bankruptcy protection. Again, remember that these numbers can vary some by lender.
If you have gone through a foreclosure, short sale, or deed-in-lieu of foreclosure, you are typically looking at a minimum two-year wait before you’ll be able to qualify for a VA loan. Homeowners who’ve experienced a qualifying financial hardship may be able to obtain financing sooner; they should discuss such qualifying hardships with a lender who is knowledgeable about VA loans.
Borrowers who’ve lost a VA loan to foreclosure will have reduced VA loan entitlement, which will limit how much they can borrow without making a down payment on their next VA loan-financed home. But that previous foreclosure doesn’t automatically preclude them from using the VA loan benefit again.
If you, or someone you know is considering Buying or Selling an Investment Property in Columbus, Ohio please give us a call and we’d be happy to assist you!
The Opland Group Specializes in Real Estate Sales, Luxury Home Sales, Short Sales in; Bexley 43209 Columbus 43201 43206 43214 43215 Delaware 43015 Downtown Dublin 43016 43017 Gahanna 43219 43230 Grandview Heights 43212 Galena 43021 Hilliard 43026 Lewis Center 43035 New Albany 43054 Pickerington 43147 Polaris Powell 43065 Upper Arlington 43220 43221 Westerville 43081 43082 Worthington 43235
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