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Veterans Benefits: The VA Home Loan

Veterans Benefits: The VA Home Loan

Contributed by Alan Rohlfing

 

As members of the United States military community, we know that we have a host of benefits available to us, whether we give much conscious thought to it or not. Most of our benefits are administered by the Veterans Benefits Administration, an agency of the U.S. Department of Veterans Affairs that’s responsible for the Department’s programs that provide financial and other forms of assistance to Veterans, their dependents, and survivors. Eligibility for most VA benefits is based upon discharge from active military service under other than dishonorable conditions.

We’re most familiar with those programs that impact us personally. So many of us are well-versed in those benefits available in the healthcare arena, or in compensation and pension, or in education and training. Or perhaps it’s the insurance products, such as SGLI and VGLI, that resonate with you, or maybe it’s the burial and memorial services for which you qualify. The Veterans benefit that we’re going to spend a few minutes on now, however, is one that has a phenomenal impact on those that choose to use it…and that’s the VA home loan.

Long story short: VA direct and VA-backed Veterans home loans can help Veterans, service members, and eligible surviving spouses become homeowners (and buy, build, improve, or refinance a home). Created in 1944, the VA home loan program was part of the original Servicemen’s Readjustment Act. Also known as the GI Bill of Rights, it was signed into law by President Franklin D. Roosevelt and was considered to be part of sweeping legislation aimed to level the playing field for those who served our country during World War II. Homeownership was at the heart of those efforts, and rather than provide Veterans with a cash bonus to help with the purchase of a home, the government decided a loan guarantee was a more powerful, long-term solution. Early on, the VA guarantee was limited to 50 percent of the loan amount, not to exceed $2,000. The average home price in 1944 was about $8,600. Loans had a 4 percent interest rate cap, and the term couldn’t exceed 20 years. All loans required VA approval.

So, what’s the big deal with the VA home loan program? Well, VA loans are some of the only loans around that offer no down payment (with more conventional loans, the buyer is required to provide up to 20% down); there’s no private mortgage insurance (PMI), which can save a borrower hundreds of dollars a month over conventional loans; there is a 2-3% funding fee, but not everyone has to pay that fee (such as those with a service-connected disability); and the loan limits are pretty generous. Beginning this year, there is no maximum amount for which a home buyer can receive a VA loan, but lenders may set their own limits.

As a rule, the VA isn’t a bank or a mortgage company (except for the Native American Direct Loan Program). VA Home Loans are provided by private lenders and the VA guarantees a portion of the loan…if a VA-backed home loan goes into foreclosure, the guarantee allows the lender to recover some or all of their losses. This lets the lender view the transaction as a little less risky and give the borrower more favorable terms.

As with most benefits programs, there are some pretty tight eligibility criteria. Who’s eligible for this VA program? Well, surprising to some is that VA loans are available not only to Veterans, but also other classes of military personnel. The list of eligibles includes active-duty Servicemembers, members of the National Guard & Reserve, surviving spouses of Veterans, and a few other groups.  You’ll need a Certificate of Eligibility (COE) to demonstrate eligibility to a lender, and you’ll need to meet standard VA loan requirements, such as income and employment verifications. Just because you have a COE, however, doesn’t mean you’re guaranteed a VA loan; it just shows the lender that you’re eligible for the VA guarantee. You can obtain a COE through eBenefits, by mail, and often through your lender. Another good thing is that your eligibility never expires…Veterans who earned their benefit long ago are still using the program to buy homes.

There are several different financial products in this broad Veterans benefit. VA-guaranteed loans are available for homes that Veterans purchase for primary occupancy or to refinance, such as the Interest Rate Reduction Refinance Loan (IRRRL). The IRRRL is generally performed to lower the interest and reduce the monthly payment on the existing VA guaranteed loan. There’s also the Native American Direct Loan (NADL) Program, which helps Native American Veterans purchase, construct, improve, or refinance a home on Native American trust lands; and the Adapted Housing Grants program, where the VA helps Veterans with certain total and permanent disabilities related to military service obtain suitable housing.

While the particulars of the home loan benefit have changed some over the years (and who’s to say there won’t be some modification next month or next year), here are some other factoids about the program, in excruciatingly little detail:

-A VA loan can be used to buy a detached house, condo, new-built home, manufactured home or duplex, triplex or four-unit property or to refinance an existing loan for those types of properties. You might also be able to borrow extra money to make repairs or improvements to the home; or, make it more energy efficient;

-You cannot use a VA loan to buy a home in a foreign country. You are only permitted to purchase homes located in the United States or a U.S. territory or possession;

– You can’t use a VA loan to buy a rental property, but you might be able to use a VA loan to refinance an existing rental home you once occupied as a primary home. An exception to this rule is the IRRRL, which can be used to refinance an existing VA loan for a home where you currently live or where you used to live, but no longer do;

– Federal regulations do limit loans guaranteed by the Department of Veterans Affairs to “primary residences” only, however, “primary residence” is defined as the home in which you live “most of the year;” and

– Lenders follow VA standards when making VA-backed home loans, such as requiring a high enough credit score or getting an updated home appraisal (an expert’s estimate of the value of your home). The VA does not set a minimum score for home loan approval, but experts say most lenders will require a score of 620 or higher.

I first used this benefit in the early 1990s, and I still have a VA-backed home loan today (different house, different loan). I’ve always viewed it as a great way to transition from home renter to homeowner, but I get that it’s not for everyone. If owning your own home is something you plan on experiencing in the near future, I encourage you to take a closer look at a VA home loan. I’ve read that the VA has backed somewhere in the neighborhood of 25 million home loans, and the program just turned 75 years last spring…I doubt it’s going away anytime soon. If you’re eligible for this benefit, it can help deliver the joys of home ownership to your doorstep, too.

 

VA Loan Credit Info

VA LOAN

By Debbie Gregory.

In years past, when a veteran wanted to use the VA home loan benefit, the VA would issue the approval, order the appraisal and set the VA interest rate for the loan.

This time-consuming process was one of the reasons many sellers would refuse an offer on a home if the buyer was using a VA loan for the purchase.

Nowadays, the VA doesn’t approve the loan, but does issue the requirements that lenders must follow if the lender expects to receive the VA loan guarantee. The approval process is completely performed by approved VA lenders.

So exactly what are the credit requirements for a VA loan?

Of course, having good credit is a great start. The Fair Isaac Company (FICO) is the largest and best known of several companies that provide software for calculating a person’s credit score. The company devised a complex analysis of payment patterns to produce a three digit number reflecting a borrower’s credit past as a way to predict the future. This number ranges from 300 to 850 and the higher the number, the better the credit.

Experian, Equifax and Transunion all use the FICO model and report their scores to a VA lender when asked. Although the numbers are rarely the same, they are usually similar to one another.

Most VA lenders require a minimum 640 credit score but others have a 620 rule. That means if your scores are low and the VA lender declines your loan because your score is 635, another VA lender might be able to approve your VA loan.

Bankruptcy & Foreclosure Don’t Necessarily Disqualify You:

While a bankruptcy or foreclosure can stay on your credit report for seven years, you don’t have to wait that long to use your VA home loan benefit. If you have a previous foreclosure, you may qualify if more than two years have passed since the foreclosure date. If you used your VA entitlement and it was involved in the foreclosure, the amount of the entitlement in the foreclosure must be redeemed.

In the case of a bankruptcy, you should begin to repair your credit as soon as possible. If two years have passed since the discharge date and your credit has improved, you can’t afford to have any late payments in those two years. Stay current with your rent, utilities and mobile phone bill. Some VA lenders will use these payments as evidence of “alternative” credit.

Military Connection salutes and proudly serves veterans and service members in the Army, Navy, Air Force, Marines, Coast Guard, Guard and Reserve,  and their families.