Why a VA Loan?
by Peter G. Miller
Since the end of World War II the US has had an extensive benefits program in place for those with military service. The benefits include healthcare, help with college tuition and home loans.
The VA mortgage program is the single best form of real estate financing available because qualified individuals can purchase with nothing down and there's no annual mortgage insurance premium.
To get a VA loan you must be able to demonstrate qualifying federal service. Since 1990, according to the Veteran's Administration, the rules look like this:
Service after 8/2/1990
If you served on active duty during the Gulf War, you must have:
- Completed 24 months of continuous active duty or the full period (at least 90 days) for which you were called or ordered to active duty, and been discharged under conditions other than dishonorable, or
- Completed at least 90 days of active duty and been discharged under the specific authority of 10 USC 1173 (Hardship), or 10 USC 1173 (Early Out), or have been determined to have a compensable service-connected disability, or
- Been discharged with less than 90 days of service for a service-connected disability. Individuals may also be eligible if they were released from active duty due to an involuntary reduction in force, certain medical conditions, or, in some instances, for the convenience of the Government.
Active Duty Service Personnel
If you are now on regular duty (not active duty for training), you are eligible after having served 181 days (90 days during the Gulf War) unless discharged or separated from a previous qualifying period of active duty service.
Selected Reserves or National Guard
If you are not otherwise eligible and you have completed a total of 6 years in the Selected Reserves or National Guard (member of an active unit, attended required weekend drills and 2-week active duty for training) and
- Were discharged with an honorable discharge, or
- Were placed on the retired list, or
- Were transferred to the Standby Reserve or an element of the Ready Reserve other than the Selected Reserve after service characterized as honorable service, or
- Continue to serve in the Selected Reserves
Individuals who completed less than 6 years may be eligible if discharged for a service-connected disability.
You May also be determined eligible if you:
- Are an unremarried spouse of a veteran who died while in service or from a service connected disability, or
- Are a spouse of a serviceperson missing in action or a prisoner of war
Note: Also, a surviving spouse who remarries on or after attaining age 57, and on or after December 16, 2003, may be eligible for the home loan benefit. However, a surviving spouse who remarried before December 16, 2003, and on or after attaining age 57, must apply no later than December 15, 2004, to establish home loan eligibility. VA must deny applications from surviving spouses who remarried before December 6, 2003 that are received after December 15, 2004.
Eligibility may also be established for:
- Certain United States citizens who served in the armed forces of a government allied with the United States in WW II.
- Individuals with service as members in certain organizations, such as Public Health Service officers, cadets at the United States Military, Air Force, or Coast Guard Academy, midshipmen at the United States Naval Academy, officers of National Oceanic & Atmospheric Administration, merchant seaman with WW II service, and others.
The VA Loan limit is generally set at $417,000. However, the amount available to qualifying military personnel may be higher in selected "high cost" counties and in Alaska, Hawaii, Guam and the Virgin Islands. (In some areas loans for as much as $1,094,625 are available.) Check the loan limits page for the latest information.
The VA Funding Fee
The government guarantees the loan's repayment to a lender, an incentive that greatly benefits borrowers because lenders will finance a home with little down if a borrower is backed by VA insurance.
To obtain a VA-insured loan it follows that one must pay a premium called a funding fee equal to 2.15 percent of the loan amount for regular military personnel. There's no annual insurance premium with the VA loan program, just the one-time charge upfront.
If you borrow $150,000 and pay an upfront funding fee of 2.15 percent the cost will be $3,225. This fee can be financed with the mortgage, meaning you do not have to pay it in cash at closing. Instead, the upfront funding fee is added to the loan amount.
Be aware that there may be different funding fees for National Guard and Reserve personnel and that the funding increases if the VA loan program is re-used. For specifics, speak with a VA counselor or with a lender.
How To Get Started
The first step is to complete VA Form 26-1880. This is a Request for a Certificate of Eligibility. Once completed, says the VA, "send this form to the Winston-Salem Eligibility Center, along with proof of military service. In some cases it may be possible for VA to establish eligibility without your proof of service. However, to avoid any possible delays, it's best to provide such evidence."
Lenders can also help you establish eligibility through what is known as the WEB LGY online system. This system is quicker then using the VA form.
How Much Can You Borrow?
Lenders qualify borrowers in part on the basis of their income. In general terms, under the VA program no more than 41 percent of your gross (pre-tax) monthly income can be used for housing costs such as mortgage principal, mortgage interest, property taxes and property insurance (PITI). As much as 41 percent of your income can be used for PITI plus recurring bills such as credit card payments, auto loans, etc. These numbers are sometimes expressed as 41/41.
Let's imagine that you have two household members with a combined income of $90,000 annually or $7,500 per month before taxes. Under general VA rules, the buyers would be allowed to spend as much as $3,075 on housing costs (PITI) and as much as $3,075 for all regular monthly debt.
Notice that the debt-to-income ratios for the VA program are the same for both PITI and PITI plus other debts. In other words, if you keep down your spending for cars loans, credit cards, etc., then you can qualify for a bigger mortgage.
Every VA loan has the same terms (length, no prepayment penalty, etc.) as every other VA loan. What may not be the same is the cost: Different lenders can and will change different combinations of interest and points so it pays to shop around and compare rates. One of the best ways to compare loan offers is to ask lenders to provide a quote with "par" interest -- the rate with zero points.
How To Apply
In recent years the loan application process has been greatly simplified, however proper information from borrowers is still required. Just take these steps:
- At least three months BEFORE you finance or refinance real estate get a copy of your credit report. The reason to do this is to check and see if there's any information on your credit report which is factually incorrect or out-of-date (most negative items can stay on a credit report for seven years, 10 years for a bankruptcy). You can get a free credit report with no strings attached by going to AnnualCreditReport.com.
- Get your paperwork in order. Have in hand your last three pay stubs, your last three tax returns, and statements for all savings and checking account, mutual funds, retirement accounts, credit cards, student loans, car loans, etc. Make a file and stick the paperwork in it. You want to show ALL income and you must show ALL debts. When in doubt add it to the file.
- Ask some questions: Do you expect to receive "bonus" income now or in the future? Do you expect to receive "overtime" income now or in the future Will "other" income in addition to your salary continue at current levels? If you own your home and use it as a prime residence, what's the estimated fair market value? What's the value of all financing now secured by your current home if you're refinancing?
Because it's tough to sell home these days in many markets, some owners are willing to pay some or even all buyer closing costs. VA rules allow so-called "seller contributions" of as much as 3 percent to 6 percent of the purchase price to help offset closing costs, depending on the amount you put down. A seller contribution may be used to offset various closing costs AND the downpayment under the VA program. Speak with your real estate broker and VA lender for specifics.
Gifts are allowed under the VA program and gifts may be used to cover some or all of the downpayment. A "gift letter" from the donor will be required. This is a letter which says the money given is really a gift and that no repayment or interest will be sought. Speak with lenders for specifics.
___ You do NOT need a co-borrower to apply for a mortgage. However, the additional income represented by a co-borrower may allow you to obtain a bigger mortgage.
___ If you own rental property, lenders will generally add back the depreciation deducted each year on "improvements" such as a house, but not stoves, clothes washers, etc.
___ You are NOT required to disclose the receipt of alimony, child support payments or separate maintenance to a lender. However, disclosure of the additional income represented by such payments may allow you to borrow a larger amount.
___ In addition to the minimum down payment, you may and are likely to have other closing costs as well. Such additional costs can include prepaid expenses, points, mortgage insurance premiums paid in cash, non-realty expenses, taxes, title insurance, transfer fees, settlement charges and miscellaneous costs. Always obtain a Good Faith Estimate from any lender who offers you financing. This government-mandated form outlines the loan-related costs you will be required to pay at closing.
For more information, read VA Home Loans: A Quick Guide for Homebuyers & Real Estate Professionals, or check this list of frequently-asked eligibility questions.
Peter G. Miller is a nationally-syndicated columnist who appears in more than 100 newspapers. If you need objective information regarding real estate buying, selling or foreclosures, stop by Mr. Miller's website, OurBroker.com, one of the most comprehensive consumer sites online.
Copyright 2009 Peter G. Miller. All rights reserved.