5 Things You Need to Know About VA Loans
VA loans have become increasingly popular since the economic recession of 2008. Historically low rates coupled with no down payment make VA loans attainable and desirable to many veterans. Getting a VA loan is not a possibility for everyone and it does have unique guidelines. Here are 5 things you need to understand about VA loans.
VA loans require special eligibility from borrowers. Veterans, active duty military members and even military reservists can be eligible for a VA loan. Spouses of a military member who died during active duty service or due to a service-connected disability are also eligible for a VA loan. Active duty members are eligible to apply for a VA loan after 180 days of service during peace time and 90 days of service during wartime. Reservists are eligible to apply after 6 years of service. Applicants who apply for a VA loan will have to obtain a Certificate of Eligibility while going through the process. Often the lender will get this documentation.
No Down Payment or Mortgage Insurance
VA loans are one of the few mortgage loan products that don’t require a downpayment or any mortgage insurance. Most loan programs require some down payment however, the Department of Veteran’s Affairs will guarantee loans with 100% financing. Additionally, other loans that allow for a small down payment also require mortgage insurance, a monthly premium that can cost a borrower an extra couple hundred dollars each month. The benefits of 0% down and no mortgage insurance are some of the biggest benefits to a VA loan.
Although VA borrowers are not required to make a down payment or pay for mortgage insurance, there is a funding fee associated with VA loans. A funding fee is a one time fee that is paid at the time of closing for the loan. The amount of the funding fee varies based on the veteran’s status and the amount of downpayment. A veteran using their VA benefit for the first time pays 2.15% for a loan with a down payment of less than 10%. If the veteran makes a downpayment of 10% or more the funding fee is reduced to 1.25%. Veterans using their VA benefit for a second time on a loan without a down payment will pay a funding fee of 3.3%. The funding fee may be at the time of closing or can be added to the loan amount.
Just like other mortgage loans, there are underwriting requirements that must be met for VA applicants as well. The Department of Veteran’s Affairs does not have a minimum credit score requirements, but individual lenders typically require that borrowers have a score of 620 or higher. Another common underwriting requirement is a maximum debt to income ratio. Typically lenders do not want borrowers to exceed a 45% debt to income ratio.
An underwriting requirement that is stipulated by the Department of Veteran’s Affairs are conforming loan limits. The VA follows the conforming loan limits that are set by the Federal Housing Finance Agency. The conforming loan limits vary by county and are determined by the cost of living in the area. To find out what the conforming loan limits are in your area check out this website from the Federal Housing Finance Agency.
The Department of Veteran’s Affairs does not determine the interest rate that is charged on VA loans. The interest rate is determined by private investors and can vary from lender to lender. Just like interest rates on conventional loans they vary depending on the current market and fluctuate on a daily basis.