VA Home Loans. Are You Eligible? Multiple Use? Credit Score Friendly! How It Works.

VA Home Loans.  Are You Eligible?  Multiple Use?  Credit Score Friendly!  How It Works.

VA home loans have been around for a long time but, in my opinion, they are under utilized for the following reasons:

1.      Realtors® and the public in general don’t understand the program.

2.      There is a misconception among sellers and realtors® that VA appraisals have more repair requirements.

3.      Some think it’s more difficult for borrowers to qualify for VA credit underwriting.

4.      VA purchase contracts are much more expensive to the seller in terms of closing costs.

5.      Many Veterans mistakenly believe they can only use their home loan benefits once.

6.      The VA Funding Fee is a negative when compared to FHA MIP or conventional PMI.

What is a VA Home Loan?  Simply stated, a VA Home Loan is a mortgage that has been guaranteed by the Department of Veterans Affairs to be repaid in the case of default by a borrower.  In general, eligible veterans may apply for loans up to $417,000 (including the VA Funding Fee) assuming they meet VA qualifications.   In most cases, the veteran has no down payment.

Who is eligible?  The best way to answer this is for you to click the following link, VA Eligibility Criteria .   What you’ll find are general guidelines that describe VA home loan eligibility.  Once you’ve determined that you’re eligible or have any questions, contact a lender who can assist you in securing your eligibility certificate.  You might be surprised to learn that certain National Guardsmen and Reservists may be eligible as well. Your eligibility certificate is the VA document that proves your home loan eligibility.  In most cases, all you’ll need is a copy of your DD214.  If you can’t locate your DD214, go to the following link, National Personnel Records Center.  Here you can request a copy of your military records on line.

What are the VA credit qualifying guidelines?  VA home loans, as with FHA and conventional loans, have criteria used to determine a Vet’s approval.  Most lenders require a minimum credit score of 620 and a maximum debt ratio.  It’s the debt ratio guideline that gets most people confused.  VA specifies that a veteran’s total debt ratio should not exceed 41% of their gross monthly income.  However, there is another calculation used that is more important than the debt ratio.  It’s called the “Residual Income”.   Residual Income means the vet’s gross monthly income less, monthly revolving payments, monthly installment payments, social security and federal income tax withheld from gross pay, and finally a figure for upkeep and maintenance of the property.  After subtracting all of this from gross pay, what you are left with is VA’s residual income.  VA has a chart for what is required for residual income that’s based on the geographic region the vet is located in and the number of members in the vet’s household.  Once the lender estimates the residual income, they match it against the chart.  The vet’s residual must meet or exceed what VA requires for the region and number of family members.   What’s interesting is that if the vet’s residual income exceeds the chart requirements by 20% or more, the 41% debt ratio is allowed to go as high as 50 or 51% of gross monthly income.  That’s very important to remember in light of debt ratio requirements on FHA and conventional loans that have been reduced significantly.  Don’t forget, there is no required down payment.

Do VA appraisals require more repairs?  My experience is that they don’t and the only reason I can think why realtors® in general would think they so is because they do few VA transactions.   Consequently, if they have one transaction where more repairs were called for, they have a tendency to view VA transactions negatively.  In the present appraisal environment, where lenders must adhere to HVCC requirements on FHA and conventional loans, VA is no different.  Perhaps realtors® should become familiar with VA’s property condition rules and use that knowledge to prepare the seller and buyer for the possibility of repair requirements and how this might affect negotiating a VA contract.  If you are a seller or buyer and have questions about VA required repairs, please contact John Shellington at John Henry Properties.

Are VA contracts more expensive to the seller?  They are slightly more expensive because VA rules prohibit the vet from paying some costs which are typical for the FHA or conventional buyer to pay.  In general, the additional costs to the seller would fall somewhere between $1300 and $1700 depending on the lender’s fees.  Should this be a deal killer?  I don’t think so.  It should simply be incorporated into the process of negotiating a sales contract.  In most cases, I really can’t see why a seller would want to reject a VA offer over $1300 to $1700.  Why not negotiate on price?  One other important point for the VA buyer is that they can also ask the seller to pay up to 4% of their normal closing costs and prepaid items.  On most FHA and conventional loans this is limited to 3%.  So don’t hold back a VA offer, just negotiate a little harder and keep the seller and buyer informed.  At John Henry Properties, we’ll use our experience and knowledge to assist the seller or buyer in putting together a successful transaction.

VA home loan benefits can be used more than once.  A vet who has previously purchased a home with the VA Program, may use it again and again provided his previous VA home loan was paid in full or he has sufficient VA guarantee left to use on another home.  Let’s say the vet’s previous VA loan was assumed by someone else or the vet still owns it and, in either case, the loan still has a balance.
Do the math:  Purchase Price of New Home:  $200,000 + $6600 VA Funding Fee= $206,600 Requested VA loan amount.  In your previous loan, you used $36,000 in guarantee benefit if the previous home loan was for $144,000 or less.  How much guarantee do you have left for your purchase if the previous VA loan is still on the books?  $417,000 X 25% = $104,250 maximum VA guarantee - $36,000 you’ve already used = $68,250 available guarantee X 4 = $273,000 Maximum VA loan amount with 0% down payment.  So even though your prior home loan has not been paid in full, you may still have enough guarantee for another home loan up to $273,000.

What is the VA Funding Fee?  The VA charges the veteran a funding fee which is usually financed into the loan amount.  For veterans who have never used their benefits, the fee is 2.15% of the base loan amount (2.4% if you are a qualified Reservist or National Guardsman) and, if you are using your benefits the second or more times, the funding fee is 3.3% of the base loan amount.  When considering the cost the VA funding Fee has on your principal and interest payment, remember that an FHA loan now carries a 2.25% Mortgage Insurance Premium added to the loan amount plus a monthly MIP cost in the payment.  Conventional loans can have a substantial PMI cost added to your payment if your credit scores are below 720 and higher still if they are between 680 and 700 credit score (not to mention the hit to your interest rate).

Comparison of a 30 yr fixed rate with a 680 credit score:
VA Loan/1^st Use @ $200,000 Base Loan Amount (0% Down)
$200,000 X 2.15% Funding Fee = $204,300 Financed = 4.875% = $1081.17 P&I

FHA Loan @ $200,000 Base Loan Amount (3.5% Down)
$200,000 X 2.25% Upfront MIP = $204,500 = 4.875% =$1082.23 P&I + 91.67MIP= $1173.90

Conventional Loan @ $200,000 Base Loan Amount (5% Down)
$200,000 = 5.25% = $1104.41 P&I + $156.57 PMI = $1260.98**
** higher credit scores at the 700 or 720 level would have provided a rate similar to VA/FHA

Selecting the right type of financing for your purchase is based on many details but, if your eligible, don’t leave VA financing out of the equation.   Do the math and, if you’re a little uncertain of the direction to take, select a realtor® that will bring years of experience, knowledge, and service to your sale or purchase. 

Whether listing or buying a home, John Shellington is your real estate expert.  Contact John Shellingtonat John Henry Properties  for the knowledge and service you deserve.