FAQ: What is a VA loan

 

What is a VA Loan?

VA Loans

 

A VA loan is different from a conventional or FHA loan. A conventional loan is what most people think of when they think of a mortgage – you go to a lender, make a down payment, get offered an interest rate, and start making your payments. Conventional loans require at least a 20% down payment. FHA loans are a small step closer to VA loans but still a far cry. FHA loans are partially guaranteed by the Federal Housing Administration (FHA), and enable borrowers to buy a house if they can’t make a 20% down payment. FHA loans, however, require mortgage insurance, which can add hundreds of dollars each month to your monthly payment.

 

VA loans are better in pretty much every way. Just like the FHA guarantees FHA loans, the VA guarantees VA loans. Also, just like the FHA doesn’t actually make the loan (a normal lender does), the VA does not actually loan any money for a VA loan. A VA loan is a home loan that is guaranteed (not offered) by the Veterans Administration. VA loans are obtained through VA-approved lenders who choose to offer them. The VA will force no lender to offer VA loans, and any lender who does so has discretion as to what loan types they will offer. For example, right now it is very difficult to find a lender who is willing to offer a VA construction loan, even though the VA is perfectly willing to guarantee one. The amount of discretion given to the lender may seem odd, or even unfair, but lenders need to have the ability to make only the loans that are a safe bet for them or they’ll go out of business – or none would choose to offer VA loans.

 

The VA guarantees a portion of the loan amount to the lender in case of default to lessen the risk and enable them to offer veterans more favorable loan terms than they could otherwise qualify for. The VA does not guarantee the entire loan amount, and the percentage of the loan that they guarantee depends on how much the loan is being made for. The percentage is always between 20% and 50% – never more than 50% and never less than 20%. The percentage being guaranteed may affect the interest rate the lender offers you – but it may not; hybrid ARMs, for example, have their interest rates calculated differently and won’t really be affected by the percentage of the loan being guaranteed.

 

What’s even better, the VA does not require the borrower to make a down payment on the loan, and also does not require mortgage insurance even if the borrower does not make any down payment at all. Where the FHA loan program exists simply to make home ownership available to more people and situations, the VA loan program is intended to be a major benefit to those who choose to serve our country. As such, the VA loan program is far more concerned with making the loan as good a deal as possible for the borrower. That’s why, instead of mortgage insurance, every VA borrower pays a one-time VA funding fee. There are some who are exempt, but most borrowers are not. The funding fee gets less depending on how large of a down payment the borrower makes, and can even be rolled into the loan amount if the borrower wishes to take no money out of pocket for the loan.

 

In direct answer to the question at the top, a VA loan is a gateway to home ownership and thousands of saved dollars for eligible borrowers. Most veterans and surviving spouses are eligible for the VA loan program, and would be wise to utilize it if at all possible. A VA loan is guaranteed by the VA and funded by normal lenders who have gone through the application process to be approved by the VA to offer VA loans. The VA has strict requirements for approval for lenders, and does a great job at making sure that only ethical lenders are approved to offer VA loans. For more information on VA loans, visit our Frequently Asked Questions page or contact one of our representatives today.

 

FAQ VA Loan Use

What Can you use a VA Loan for?

 

This is one of the most common questions that get asked about the VA loan program. The VA tries very hard to focus on the purpose of the program while making the benefits available to veterans in as many situations as possible. The purpose of the VA loan program is to help eligible borrowers obtain suitable housing at better terms than they could otherwise get. The focus here  is “suitable housing”. The rule of thumb is that the property must qualify as a home and must be considered suitable to meet the veteran’s needs. Understanding the spirit of the program, you can probably hazard a guess at what sorts of purchases will be approved and what will not. You won’t be buying a vacant wal-mart with your VA loan, but you can buy a house in the suburbs.

 

What to use a VA Loan forThe VA will not allow a borrower to purchase a purely commercial property using the VA loan program. While the property being purchased can have a commercial unit, there must be a residential unit as well, and the commercial unit is not permitted to have more than 25% of the total square footage of the property. This means that for borrowers who would like to open a small shop or office in their home, the VA loan program will work, but for borrowers wanting to open a larger store, workshop, or office, they will have to look elsewhere for funding. In this way, the VA loan program stays true to its purpose while still staying open to as many situations as possible. Many borrowers, however, are more interested in using their VA loan benefits to purchase a property that they can then rent out for a small profit. While not a bad idea, the VA has restrictions on what you can and cannot do.

 

For a single borrower (joint loans are a bit different), the property being purchased can have no more than four residential units, and the borrower him/herself must occupy one of the units. The borrower is allowed to open up the remaining units for rent, at whatever rate they feel is appropriate. So at most, you could buy a four-unit property, live in one, and rent out the other three. While certainly a nice pad on your income, the mortgage and cost of upkeep on a property that large would probably limit the profitability for awhile. It is also permitted to have one commercial unit with up to four residential units on the same property, as long as the borrower is living in one of the units as their primary residence. Joint loans can be different; if more than one VA-eligible borrower is using their entitlement on the VA loan, the maximum number of residential  units increases accordingly, but there can still be only one commercial unit. Joining up with another VA-eligible borrower can be a good way to increase your income potential from renting units.

 

We’ve touched on it a bit already, but we need to clarify the VA’s occupancy requirement. With multiple units, the borrower must occupy one of them, yes, but no matter what the property is that is being purchased, the borrower must certify that he or she intends to occupy the home as their primary residence. The VA will not allow you to use their guarantee on a home or other property that you are not planning on using as a primary residence. You cannot use a VA loan for a summer home, vacation home, purely rental property, or anything other than what you can use as a primary residence. The VA are also sticklers about the word “suitable”.

 

You will run into trouble if you try to purchase a mobile home with a VA loan. In order to be considered suitable for a veteran, the property must have a permanent foundation.Some manufactured homes can qualify, as long as they are on a concrete foundation. If the veteran has special needs or a disability, the home must also be considered suitable to meet their needs – for example, if the veteran is in a wheelchair, a 3-story home is probably not a good call, even if it has a way to assist the veteran from going from floor to floor. For more details and to answer any specific questions, contact a VA-approved lender.

 

FAQ VA Loan Closing Cost

Are There Closing Costs on a VA Loan?

 

Short answer: Yes. But you probably want more information than that, so we’ll cover some basic information on what closing costs can exist on a VA loan. We’ll talk about closing costs that the borrower is allowed to pay, and closing costs that the borrower is not allowed to pay. The VA does its best to protect its borrowers from unethical practices and overcharging, while still keeping up with industry standards and making VA loans attractive and profitable for lenders.Are There Closing Costs on a VA Loan?

 

The first item that will be included in closing costs for any VA loan is the VA funding fee. The purpose of the VA funding fee is to defray the cost of the VA loan program to taxpayers. With only a few exceptions, every VA-eligible borrower must pay the VA funding fee at closing. The funding fee varies based on whether the borrower served in the regular military or the Guard/Reserves, as well as how much of a down payment was made on the loan. At the moment, the highest the funding can get for a first-time use is 2.4%, and the highest for a subsequent use is 3.3%. The lowest for both first-time use and subsequent use is 1.25%. While the funding fee can either be paid in cash or financed, it is due in its entirety at the time of closing.

 

For a veteran who served in the regular military and made a 5% down payment, the funding fee would be 1.5%. On a $200,000 loan, that would be $3,000. In addition to the funding fee, the lender is also permitted to charge a 1% flat fee. In the case of this veteran, that fee would be $2,000. The veteran is also permitted to pay “reasonable” discount points as desired, and a set of itemized fees and charges, as long as those fees and charges are a reasonable amount. The VA provides a simple chart that lists and describes the allowable fees that a VA borrower can be charged:

Charge Description
  • Appraisal and Compliance Inspections
  • The veteran can pay the fee of a VA appraiser and VA compliance inspectors
  • The veteran can also pay for a second appraisal if he or she is requesting reconsideration of value
  • The veteran cannot pay for an appraisal requested by the lender or seller for reconsideration of value.
  • The veteran cannot pay for appraisals requested by parties other than the veteran or lender.
  • Recording Fees
The veteran can pay for recording fees and recording taxes or other charges incident to recordation.
  • Credit Report
The veteran can pay for the credit report obtained by the lender.For Automated Underwriting cases, the veteran may pay the evaluation fee of $50 in lieu of the charge for a credit report.

For “Refer” cases, the veteran may also pay the charge for a merged credit report, if required.

  • Prepaid Items
The veteran can pay that portion of taxes, assessments, and similar items for the current year chargeable to the borrower and the initial deposit for the tax and insurance account.
  • Hazard Insurance
The veteran can pay the required hazard insurance premium. This includes flood insurance, if required.
  • Flood Zone Determination
The veteran can pay the actual amount charged for a determination of whether a property is in a special flood hazard area, if made by a third party who guarantees the accuracy of the determination.
The veteran can pay for a charge for a life-of-the-loan flood determination service purchased at the time of loan origination.
A fee may not be charged for a flood zone determination made by the lender or a VA appraiser.
  • Survey
The veteran can pay a charge for a survey, if required by the lender or veteran. Any charge for a survey in connection with a condominium loan must have the prior approval of VA.
  • Title Examination and Title Insurance
The veteran may pay a fee for title examination and title insurance, if any.
If the lender decides that an environmental protection lien endorsement to a title policy is needed, the cost of the endorsement may be charged to the veteran.
  • Special Mailing Fees for Refinancing Loans
For refinancing loans only, the veteran can pay charges for Federal Express, Express Mail, or a similar service when the saved per diem interest cost to the veteran will exceed the cost of the special handling.
  • VA Funding Fee
Unless exempt, each veteran must pay a funding fee to VA.
  • Mortgage Electronic Registration System Fee
The veteran may pay a fee for MERS. MERS is a one-time fee for the purpose of electronically tracking the ownership of the beneficial interest in a loan and its servicing rights.
  • Other Fees Authorized by VA
Additional fees attributable to local variances  may be charged to the veteran only if specifically authorized by VA. The lender may submit a written request to the Regional Loan Center for approval if the fee is normally paid by the borrower in a particular jurisdiction and considered reasonable and customary in the jurisdiction.

Your VA Mortgage Loan Awaits

Getting your finances in order and qualifying for a Veteran’s mortgage loan is worth the effort. There is no time like the present!

Granted, there has been plenty of trouble in financial markets over the last few years. Traditional loan originations for that period to now have been sharply down. Ironically,  VA guaranteed loan funding actually increased by 168% since 2007, with 14% increase in the last year alone.

VA Mortgage Loans are Popular

One of the big reasons for VA mortgage loan popularity is default and delinquency rates have been the lowest of all loan packages throughout the mortgage crisis. Delinquency rates for 90-day defaults are steady at just 2.2% for VA loans, which is less than half that of all other conventional and FHA loans. Loan specialists were initially perplexed at this seeming contradiction because on paper VA borrowers are statistically a greater default risk. Or are they?

In a recent column for the Washington Post, Kenneth Harney wrote, “Michael Frueh, the VA program’s acting director, says the key to the agency’s quiet success is its almost paternalistic emphasis on servicing its 1.5 million borrowers — moving early and quickly to intervene at the slightest hint of payment problems.”

The VA objective to keep borrowers in their homes contrasts starkly to the failure of other federally backed, but commercially serviced loan assistance programs. The VA is clearly working with an ideal of respect here; they are guiding homeowners with a paternal care. The discipline and hard work that characterizes the veteran’s military roots translates as responsible and conscientious in civilian terms.

Take a second to review a few reasons why VA home mortgage loans are so attractive:

                    No down payment is required. However, even a small down payment can significantly reduce the VA fee that is associated with the loan. The loan cannot be funded for more than the appraised value and in most states the limit for funding is $417,000.

                    Closing costs paid by the borrower are limited and oftentimes even these can be covered by the seller.  Approved closing costs of up to 4% of the total can be covered by the seller at closing. Certain costs, like termite inspection, cannot be paid by the buyer.

                    Private Mortgage Insurance (PMI) is not required with a VA guaranteed loan. PMI is the extra insurance that lenders require buyers to pay when they take out a loan that is usually greater than 80% the cost of their home. If you choose a VA loan, it is backed by the Federal government and lenders cannot require you to pay PMI.

                    Without having to put any money down you do not have to save 20% of the value on a home that conventional loans require. In addition, without any PMI payments you save on your monthly payment (usually between $100-$200 a month).

VA interest rates are trending lower than traditional fixed rates as VA home loans prove to have a markedly lower rate of default through the mortgage crisis. VA loan appraisals tend to be more conservative, which can limit negotiating space to add in additional costs or fees. However, in the current real estate climate, sellers are more conducive to negotiate small changes in purchase price to allow room for the fees with the loan package.

Debt-to-Income Ratio (DTI)

Guidelines for debt-to-income ratio (DTI)  recommend a DTI of 41% maximum. Calculate DTI by adding your total mortgage payment (principal and interest, escrow deposits for taxes, hazard insurance, homeowners’ dues, etc.) and all recurring monthly revolving and installment debt (car loans, personal loans, student loans, credit cards, etc.). Then, divide it by your gross monthly income.

 

With a little planning and some genuine hard work, you can prepare to take advantage of your veteran home loan entitlement. Qualification is not meant to be automatic. But you have already proven that you can be patient, disciplined, and strategic. Start now and you’ll be in that home before you know it!

VA loans are not only attractive to the veteran lender with no or little down payment, but they are increasingly a more secure investment for lenders.

© 2021 Low VA Rates, LLC™. All Rights Reserved. Low VA Rates, LLC ™ is not affiliated with any U.S. Government Agency nor do we represent any of them. Corporate Address: 384 South 400 West Suite 100, Lindon, UT 84042, 801-341-7000. VA ID 979752000 FHA ID 00206 Alaska Mortgage Broker/Lender License No. AK-1109426; Arizona Mortgage Banker License #0926340; California DBO Finance Lenders Law License #603L038; Licensed by the Delaware State Banking Commission License #018115; Georgia Residential Mortgage Licensee License #40217; Illinois Residential Mortgage License #MB.6761021; Licensed by the New Jersey Department of Banking and Insurance, Ohio Mortgage Loan Act Certificate of Registration #SM.501937.000; Oregon Mortgage Lending License # ML-5266; Rhode Island Licensed Mortgage Lender License #20143026LL; Texas License LOCATED at 201 S Lakeline Blvd., Ste 901, Cedar Park, TX 78613; EAH061020 NMLS ID# 1109426 Consumer NMLS Access www.nmlsconsumeraccess.org. Click on these links to access our Privacy Policy and our Licensing Information. Consumer's total finance charges may be higher over the life of the loan. Consumer NMLS Access - NMLS #1109426.

*Annual savings calculator based on 2015 monthly average savings extrapolated year-to-date.