Understanding and Using Your
VA Mortgage Loan
*As of Jan 2020*
Given that a home is the largest purchase most people will make in their lifetime, the VA mortgage guarantee is one of the most valuable benefits available to veterans, comparable only to education benefits that provide the opportunity to invest in your long-term earning potential. There are actually multiple VA loan programs, and the eligibility rules vary based on the nature of your service, so it is important to understand exactly what is available to you and how to qualify.
VA Loan Eligibility
Eligibility for the VA loan guarantee varies based on whether you served in peacetime or wartime or were separated from service. If you are a current member of the active component, you become eligible after 90 days of continuous active duty. If you are a current member of the reserve component (Reserve or National Guard), you become eligible after six years of service.
If you previously served in peacetime, you must have attained 181 days of service, while for wartime service in World War II, Korea, or Vietnam, the typical requirement is 90 days of service. In either case, you must have received an other-than-dishonorable discharge. If you were separated from service, the 181-day requirement does not apply if you were discharged for a service-connected disability.
Additionally, the spouses of service members who were killed in action or died from a service-connected disability are eligible.
You can find specific eligibility requirements based on your dates of service on the VA website. In order to apply for a VA loan, you will need to provide a Certificate of Eligibility (COE) from the VA to your lender. Many lenders have the ability to obtain your COE directly using the VA Web LGY system. If not, you can obtain the COE yourself online via the eBenefits portal.
VA Loan Programs
There are actually four separate VA loan programs. The primary and best-known is the VA purchase loan, which is used for the purchase or refinance of a primary residence.
If you have an existing VA loan, you can refinance it (normally to a lower interest rate) with a streamlined process called the Interest Rate Reduction Refinance Loan (IRRRL). The IRRRL does not require an appraisal or credit underwriting, and these loans typically do not require any money out of pocket because the lender adds the closing costs into the new loan balance. However, you are not permitted to receive any cash from the loan proceeds.
The Native American Direct Loan program (NADL) is for veterans who are Native Americans. It can be used to purchase, refinance, build, or improve homes that are located on Native American trust lands. The main requirement is that the tribal organization must participate in the program.
Finally, Adapted Housing Grants are designed to assist totally and permanently disabled veterans obtain housing designed to accommodate their specific disabilities. The Specially Adapted Housing grant is for home purchases, and the Special Housing Adaptation grant is for the modification of an existing home.
How the Program Works
The VA home loan guarantee is based on what the program calls entitlements. The basic entitlement is 25 percent of the mortgage amount up to $36,000. This is the amount the government will guarantee in the event you default on the loan, so in general lenders will lend up to four times the entitlement.
Because most homes today cost more than $144,000 ($36,000 x 4) — the 2018 median home price was $315,000 —VA also provides bonus or second-tier entitlement. The bonus entitlement used to be based on the Federal Housing Finance Agency conforming loan limit, which in 2020 is $510,000 and in some high-priced housing markets is increased to 150 percent of the base limit ($765,600 for 2020). *However, the new Blue Water Navy Vietnam Veterans Act for 2019 eliminates the 'loan limits' as of Jan 1, 2020. See below for more on the act and a link to the VA site.
The VA Funding Fee is a federally mandated fee associated with the VA Home Loan to help lower the coast of the loan for U.S. taxpayers. The amount of the fee varies on total amount of the loan, your military category (active/reserve/veteran), first or more instance usage of the loan, and down payment amount of any. The fee can be included in the loan (financed) or paid in full at closing.
An example from the 2019 rates: A first time veteran or active duty user with a loan of $300,000 and zero-down payment would expect a 2.15% fee or $6,450. If the a 5% down payment was available, then their fee would be 1.5% or $4,500.
Factors that may excempt you from the VA Funding Fee:
Receiving VA compensation for a service-connected disability
Eligible to receive VA compensation for a service-connected disability, but you’re receiving retirement or active-duty pay instead
The surviving spouse of a Veteran who died in service or from a service-connected disability
The act became effective Jan 1, 2020 and includes an update to the VA Home Loan.
A slight, temporary increase of the home loan funding (user) fee rates for certain loans closed on or after January 1, 2020.
An across-the-board reduction of funding fee rates for Reservist and National Guard borrowers to align them with fees paid by ‘regular military’ borrowers.
An exemption from paying the funding fee, for active-duty Purple Heart recipients.
A removal of the ‘effective loan limits’ for VA-guaranteed loans, closed on or after January 1, 2020. This may be especially of interest to Veterans seeking to obtain what are commonly referred to as “jumbo” loans, or to Veterans living in higher-cost markets, as VA borrowers with full-entitlement may now obtain no-down payment VA guaranteed home loans in all areas of the country, regardless of housing prices
Previously you had to pay 25% down on anything above your loan limit
Advantages of VA Loans
When a lender gives you a mortgage on a property, it has to allow for the fact that you might default on the loan. If that happens, it has to recover the amount you still owe by selling the property. Since any number of things can prevent the lender from selling the house for what you paid — from market conditions to wear and tear or outright damage — there has to be a margin of safety. Typically, lenders often require either a 20% down payment or private mortgage insurance (PMI) if the down payment is less than 20 percent of the purchase price.
The VA provides a guarantee for lenders through its mortgage program. Because that guarantee is 25 percent (subject to the limits discussed previously), no down payment or PMI is required. This alone is a huge benefit for veterans given how long it can take to save up anywhere from five to twenty percent of a home’s price and given the typical cost of PMI — about $100 a month.
Because of the 25 percent guarantee, another benefit of VA loans is that they typically have some of the lowest interest rates available. Consider that the total interest on a $200,000 30-year mortgage at 3.5% is a little over $123,000, while at a 4.0% rate it is almost $144,000, and you can see the impact that even a modest difference in rates can make. Equally importantly, the principal and interest payment at 3.5% is about $898 a month versus about $955 a month at 4.0%.
There are a couple of additional advantages that are more minor or specialized but can be a real benefit in some cases. For one, VA loan closing costs tend to be lower because the VA establishes limits on the fees lenders can charge. For another, if you sell a home financed with a VA loan to another veteran, the buyer can assume your existing loan. This is a significant advantage when mortgage rates are rising because the buyer can assume a loan at a lower rate than they would get for a new mortgage.
Limitations of VA Loans
There really aren’t any significant disadvantages of VA loans compared to other types of mortgages. The main one is that you can only use a VA loan for your primary residence, not a vacation house or rental property. Also, you have to occupy the financed property within 60 days, although that occupancy can be satisfied by your spouse in many cases if you are serving on active duty and even sometimes by a minor child.
As with any loan, there are financial standards you must meet, but even here, standards are generally more flexible than with other mortgage types. Most lenders are looking for a FICO score of 620 or higher, and most require a total debt-to-income ratio of 40 percent or less.
If you suffer a foreclosure or bankruptcy, you must wait one to two years before receiving a VA loan.
Many different lenders offer VA loan options, so you can shop around for the best deal available. Pay close attention to fees, especially on IRRRLs; sometimes lenders take advantage of the ability to roll closing costs and fees into the loan to charge borrowers larger amounts (subject of course to VA limits). Look not just at how much your monthly payment will be but also the total interest paid over the life of the loan.
The VA loan guarantee can be one of the most important benefits your military service earns you, and it definitely gives you home purchase options not available to the non-veteran population. Be sure to take full advantage of your benefit when you’re ready to buy a home.
*Written in Coordination with Daniel, Army Veteran*
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