As the housing market appears dim due to rising rates and decreased affordability, being able…
Featuring Guest Author: John Martin, Loan Officer
What Are VA Loans?
Across the nation, brave servicemen and servicewomen have enlisted in the military and taken on a variety of high-pressure positions to protect our country. As we know, these individuals can take advantage of several benefits at their disposal, such as pension programs, low-cost medical care, education programs, and more. One benefit of tremendous value that provides long-term security is a specialized home loan known as VA Loans, a.k.a. Veterans Affairs Loans.
What makes VA loans so valuable to our heroes? Right off the bat, those who use VA loans to finance their home benefit from additional resources that trigger from the start of the mortgage process to closing and beyond.
Eligibility and Qualification
When considering a VA loan, one of the first questions you need to ask yourself is am I eligible?
Being eligible for a VA loan means you are one of the following:
- Active-duty military
- Military veteran
- Retired military
- Reserves (6 years of service)
- Coast guard
- National guard
If you fall into any one of these categories, obtaining a VA loan may be the most suitable option for you. Now that we’ve covered eligibility requirements, let’s find out how you qualify.
Although the minimum credit score will vary, an average score of 620 is recommended by most lenders, including us! Additionally, your ideal DTI (debt-to-income ratio) is a maximum of 55%. Even if your ratio is higher, RWM Home Loans may get approval through desktop underwriting on VA loans with up to 69% DTI.
Military.com says to qualify for a VA loan, you must meet a specific residual income threshold. The threshold varies depending on your family size and the area you live in. Residual income is the income remaining after all of your obligations are paid at the end of each month. When considered for qualification, residual income is a guide and should not typically decide an approval or rejection of a VA loan on its own.
What Are the Benefits of a VA Loan?
If you’re eligible for a VA Loan, these benefits are going to come as a pleasant surprise to you. Many who already use VA Loans are not fully aware of what advantages are available to them, so we hope that the following offers some clarity around how beneficial VA Loans are:
- No down payment required. Having enough saved for a down payment is one of the biggest challenges for homebuyers. You might hear that you need 3-20% down to obtain a mortgage. Well, with VA Loans, it’s entirely different. Being eligible for a VA Loan means you are not required to pay a down payment. That doesn’t necessarily mean zero closing costs, but it does remove the stress of having to save for such a large amount.
- No PMI (aka Private Mortgage Insurance). PMI is applied on any conventional loan when you don’t have the recommended 20% down payment. This fee secures the lender from taking you as a risk for a home loan. PMI typically costs 0.5 – 1% of your loan amount per year. Since VA homeowners put $0 down, PMI doesn’t apply to their mortgage. No PMI means a lower monthly mortgage payment.
- Lower interest rates. Typically, VA Loans are considered lower-risk loans by the government. Low-risk loans take advantage of interest rates significantly lower than other loan programs. Since our nation’s armed forces serve under the government, these favorable low-interest rates are likely guaranteed, which brings us to the next benefit.
- Backed by the government. Loan programs that are backed by the government, such as FHA (Federal Housing Administration) and VA Loans, are also considered the safest products in the mortgage industry. Typically, loans backed by the government are also considered low-risk.
- More refinancing opportunities. Mortgage lenders see more refinancing opportunities with VA Loans since they can cash out on their homes easier than other loan programs, especially if they have 100% LTV (loan-to-value ratio). Homeowners can also refinance with the VA IRRL (Interest Rate Reduction Refinance Loan) to lower their monthly mortgage payment, get a lower interest rate, or make mortgage payments more stable.
- No prepayment penalty. In some situations, borrowers may want to pay off their loan faster with prepayments, which can typically result in a prepayment penalty. In the circumstance of a VA loan, borrowers do not need to worry about this penalty and can pay off their mortgage at any time.
- Lower closing costs. Do VA loans have closing costs? As we mentioned, even though VA loan borrowers do not need to worry about a down payment, closing costs are still part of the equation. But in their favor, they pay as little to 1-3% closing costs, when the average for a typical first-time homebuyer is 3-5%. While there may be ways to work around this, it depends on what your chosen mortgage lender has set in place or other external factors, such as the seller offering to pay the closing costs.
- Foreclosure assistance. Foreclosure assistance may not be a situation that every borrower comes across but can be very valuable to VA loan borrowers who are in pursuit of foreclosing their current home. The Department of Veterans Affairs (VA) aims to help Veterans retain their homes or avoid foreclosure. If you are struggling to make your mortgage payments, reach out to a VA loan service like RWM Home Loans as soon as possible.
- No limits. How many times can you use a VA loan? For a long time, there were limitations to how much money one can borrow through a VA loan. Recently, the government has announced that there will be no limit cap to how much a veteran or active-duty military can borrow for a home, allowing those to borrow more money off the bat.
- Veterans Administration. VA.gov states that “eligible veterans, service members, and survivors with full entitlement no longer have limits on loans over $144,000.” This means you won’t have to pay a down payment, and they guarantee to your lender that if you default on a loan over $144,000, the Veterans Administration will pay them up to 25% of the loan amount.
VA Loans: Fact vs. Fiction
We want to make sure that your home buying experience not only leads you to your dream home but educates you along every step of the process. Being educated on the process helps debunk common myths in the mortgage industry that are widely misinformed.
What kind of questions do we hear about VA loans? Let’s look at a few.
Do VA loans take longer to close? No. RWM Home Loans processes and approves VA loans in the same timeline as conventional financing, usually in 30 days or less.
Do VA loans have higher interest rates? No. VA loan interest rates are usually as low or lower than competitive rates on conventional loans.
Can a veteran only use their VA benefits at once? No. Veterans may use their benefits many times as long as there is remaining entitlement.
Are VA appraisals more stringent than conventional appraisals? It depends. If a property is unacceptable to the VA, it won’t be acceptable to a conventional appraiser. Both have very similar guidelines.
Do VA loans require the seller to pay closing costs? It depends. Differing from a conventional transaction, the full amount of a seller’s concessions can be applied to any of the following closing costs in a VA loan: discount points, origination costs, survey, appraisal, credit report fees, etc. The remaining concessions can be applied toward escrow or funding fees, up to a limit of 4% of the purchase price or appraised value, whichever is lower.
VA Loans Vs. Other Loan Types
Now that you know more about VA Loans, how do they compare to other loan types? VA loans are frequently compared to FHA loans, as they are also government-backed.
According to HUD, FHA Loans are mortgages insured by the Federal Housing Administration and issued by an FHA-approved lender. They are designed for low- to moderate-income borrowers. While VA Loans are strictly available to veterans and active-duty military, FHA Loans typically have more flexible requirements that serve more borrowers. Consult with your mortgage lender on what is needed to qualify, as they vary depending on the circumstance.
We know that a VA loan requires no money down and does not have private mortgage insurance, a tremendous benefit for veterans. However, FHA loans have private mortgage insurance included in the overall mortgage payment no matter how large the down payment and will remain for the life of the loan. Additionally, an upfront mortgage insurance premium is taken into account which is a must-have for borrowers.
Success Story: Using VA Benefits More Than Once
John Martin, a mortgage banker who specializes in VA loans being a veteran himself, has worked with several borrowers who leveraged the several benefits of VA loans. According to John, it became a huge advantage in reaching their financial goals.
John had the opportunity to work with an active-duty Marine who lived in an apartment and thought this was the best option for him and his family. When he visited with him and his wife and showed them how much it was going to cost them to rent over the next three years vs. owning, they both were astonished. With little to no closing costs and no down payment required to obtain a mortgage, it was clear what the better option was for them financially. John talks more on the success this particular borrower had.
At the time they were paying around $1,800 a month for rent and his basic housing allowance each month was a little over $2,000. If he had continued to pay rent over the next 36 months it would have cost him approximately $65,000. Fast forward 4 years and 7 months later after closing, his house today is worth about $850,000, giving him a net worth of approximately $317,000. Due to military orders, he is not living in his home and is currently renting it out for the next three years for $3,400 a month. Over the next three years, he will profit an estimated amount of rent of $24,000.
Because his tenant is paying his mortgage, John’s client has already made plans to purchase another home using his VA benefit and will keep the current one as a rental property. Yes, remember you can use your VA benefit more than once!
Thank You for Your Service!
To summarize, VA loans are one of the most valuable loans on the market, based on the tremendous benefits that push eligible individuals toward their dream of homeownership.
John’s success story with his client is one of several examples across the nation of how renting can be surprisingly more costly than owning. If you’re interested in all the details and differences between renting and owning, our helpful rent vs. own guide can help you decide what’s best for you.
Are you a veteran or active-duty military who is looking to buy their first home? Look no further! John Martin combines his veteran experience with his originating expertise to help servicemen and servicewomen finance their dream home. Get in touch today at his website below!
About the Guest Author
John Martin began his mortgage lending career in 2004, after serving 22 years in the United States Marine Corps. John and his team have helped countless homebuyers achieve their dreams by helping them secure VA, FHA and conventional home loans. “Personalized service is a hallmark of the practice”, says John, who gives his clients a direct line to reach him at any time. Documents are hand-delivered, or e-mailed upon request, and John makes communication a priority. He understands a wide variety of mortgage loan products and takes the time to explain the benefits of specific loans his clients are seeking. He provides prompt file updates throughout the loan process. Learn more.
Financing details are for educational purposes only. All views and opinions do not constitute financial or legal advice and reflect requirements at the time of publication. Rates, program terms, fees, and conditions referenced are subject to change without notice. Not all products are available in all states for all amounts. All mortgage applications are subject to underwriting guidelines and approval. This is not an offer of credit or a commitment to lend. Residential Wholesale Mortgage, Inc. dba RWM Home Loans is an equal housing lender licensed by the CA Department of Real Estate #01174642 and CA Department of Financial Protection and Innovation under the California Residential Mortgage Lending Act. NMLS# 79445