A VA loan is a mortgage loan in the United States guaranteed by the United States Department of Veterans Affairs (VA).
The basic intention of the VA home loan program is to supply home financing to eligible veterans. They also help veterans purchase properties with no down payment. A VA loan may be issued by qualified lenders.
Veteran Affairs (VA) does not originate loans but sets the rules for who may qualify. They issue minimum guidelines and requirements for which mortgages may be offered while financially guaranteeing loans that qualify.
When you are selling your home, whether it is For Sale by Owner or traditionally with a real estate agent/Realtor, you will have to understand the offers presented to you and the financing they have been approved for.
Each type of financing can be different, and each have their pros and cons.
Who Can Get A VA Loan?
The program is for American veterans, military members currently serving in the U.S. military, reservists and select surviving spouses (provided they do not remarry) and can be used to purchase single-family homes, condominiums, multi-unit properties, manufactured homes and new construction.
VA Loan Benefits
The VA loan allows veterans 103.3 percent financing without private mortgage insurance (PMI) or a 20 percent second mortgage and up to $6,000 for energy efficient improvements.
A VA funding fee of 0 to 3.3% of the loan amount is paid to the VA; this fee may also be financed, and some may qualify for an exemption.
In a purchase, veterans may borrow up to 103.3% of the sales price or reasonable value of the home, whichever is less.
Since there is no monthly PMI, more of the mortgage payment goes directly towards qualifying for the loan amount, allowing for larger loans with the same payment.
In a refinance, where a new VA loan is created, veterans may borrow up to 100% of a property’s reasonable value, where allowed by state laws.
VA loans allow veterans to qualify for loan amounts larger than traditional Fannie Mae / conforming loans.
Standard VA guidelines state that the VA will insure a mortgage where the monthly payment of the loan is up to 41% of the gross monthly income vs. 28% for a conforming loan assuming the veteran has no monthly bills, although there is no hard limit to the DTI for a VA home loan.
Veterans have been known to be approved with a DTI of up to 80%, if there are other factors that strengthen their loan application. These factors include a low Loan-To-Value (LTV), sufficient residual income, additional income received but not used to qualify for the loan, good credit, etc.
Let me break down the pros and cons of this type of loan. This will allow you to get some insight on how the borrower was approved and what guidelines they will be facing.
VA Loan Pros and Cons
No Down Payment
This is the most significant benefit. Qualified borrowers can borrow as much as a lender is willing to lend, all without needing a down payment.
FHA loans typically require a 3.5 percent minimum down payment, and for many conventional loans it is a 5 percent minimum.
On a $175,000 home purchase, that is a $6,125 down payment for FHA and a $8,750 for conventional.
No Private Mortgage Insurance (PMI)
Usually required for conventional borrowers who cannot put down at least 20 percent. FHA borrowers have mortgage insurance that is at the time of purchase and another that is paid monthly.
PMI typically disappears once you have about 20 percent equity in your home. There is no PMI on a VA loan.
Higher Allowable DTI Ratio
Lenders will look at the ratio of your total monthly income to your total monthly expenses. The VA typically wants to see a debt-to-income ratio of 41 percent or less. That benchmark is higher than what you would see on conventional and even FHA loans.
It is possible for qualified borrowers with a DTI ratio greater than 41 percent to still secure VA financing.
No Prepayment Penalty
VA loans can be paid off early with no prepayment penalties.
The VA home loan program has a pair of refinance loans that can help qualified buyers lower their monthly payments or get cash back from their equity.
The Streamline refinance, also known as the Interest Rate Reduction Refinance Loan (IRRRL), is for homeowners with existing VA loans.
The VA Cash-Out Refinance allows VA and non-VA homeowners to refinance and get cash at closing to pay down debt or take care of other needs.
Refinancing may result in higher finance charges over the life of the loan.
Flexibility With Bankruptcy and Foreclosure
Some borrowers who qualify can be eligible for a VA home loan two years after a bankruptcy or foreclosure. The wait can be much longer for different loan types.
Not For Everyone
The VA loan program is a benefit you must earn, which makes it relatively rare to obtain compared to other loan products. VA home loans are only available to eligible service members who have served their country in the United States military. Spouses of veterans who have died in the line of duty or because of a service-related disability may also be eligible.
VA Funding Fee
All VA loans come with a mandatory VA Funding Fee charged by the VA. This fee goes directly to the agency and helps keep the VA home loan program running for future generations.
It is a cost you can finance into the loan, and borrowers with service-connected disabilities are exempt from paying the fee. But this is not something you will pay on a conventional loan or FHA loan.
You can learn more about how much the VA Funding Fee is, who pays what and who is eligible for a refund.
VA Loans Are Provided Only For Primary Residences
This is not a loan program you can use to purchase a second home or an investment property.
Sellers Are Not Always on Board
Some home sellers are not open to receiving offers from VA borrowers. A lot of this undoubtedly has to do with some of the myths and misconceptions surrounding VA loans.