Mortgages
VA loans: The best mortgages
If you can qualify for a mortgage backed by the Department of Veterans Affairs, you should take advantage of it.
Simply put, it's the most generous mortgage program available.
VA loans are open to borrowers with below-average credit, require no mortgage insurance and the rates are as favorable as those given to people with stellar credit scores in non-VA loans.
Millions of veterans, including members of the National Guard and reserve units, are eligible. These home loans are also available to anyone on active duty and widows whose spouses' deaths were war-related. (You can find eligibility requirements on www.benefits.va.gov/homeloans/elig2.asp.)
To get started, you'll need to obtain a certificate of eligibility by submitting VA Form 26-1880 with proof of your service.
Once you have that, you can take it to almost any bank or mortgage company to apply for a VA loan to purchase a home in which you intend to live.
With a VA loan, the government covers the lender's losses for up to 25% of the loan amount if you default. That gives the bank or mortgage company the same protection as if you had put 25% down on the home, so they can offer lower mortgage rates on a loan for which it's easier to qualify.
Here are 5 ways you can benefit:
Benefit 1. You don't need any money for a down payment.
This is the only major loan program we know of that still allows borrowers to finance 100% of a home's purchase price. Even FHA loans require a 3.5% down payment. Nine out of every 10 applicants for VA loans take advantage of the option to buy with no cash down.
Benefit 2. There is no monthly mortgage insurance premium.
Borrowers with less than 20% equity in their homes usually have to buy mortgage insurance that protects their lenders from default. The premiums typically boost their monthly payments by $100 to $200.
Instead of that, VA loans have a one-time funding fee that ranges from 0.5% to 3.3% of the loan, depending on the type of mortgage and whether the borrower made a down payment.
For most borrowers -- those taking out their first VA loan with no down payment -- the fee is 2.15%. (For a detailed list of funding fees, see Chapter 8 of VA Pamphlet 26-7, Lender's Handbook.)
But you don't need to pay the funding fee in cash. It can be rolled into the amount you're borrowing.
The funding fee is also waived for most widows and vets with service-related disabilities. As of October 2010, the waiver also applies to vets who were receiving disability compensation but went back into active duty.
As with all mortgages, you do have to pay closing costs. However, the costs for VA loans, aside from the funding fee, are no higher than closing costs for other comparable loans.
Benefit 3. You can qualify despite damaged credit and more debt.
The government doesn't set minimum income or credit score standards for VA loans. Each bank or mortgage company has its own requirements, and the government doesn't guarantee any veteran can get a loan, nor does it force banks to lend to anyone.
However, lenders across the country say the minimum credit score to qualify for a VA loan is about 570. It's almost impossible to qualify for any other mortgage with a subprime credit rating like that.
You should still be able to show a history of making payments on time over the previous year, however.
Another thing lenders look at is your debt-to-income ratio. To qualify for a VA loan, borrowers can spend up to 41% of their pretax income on debts, including student loans, credit card bills and auto loans. That's considerably more than the 36% debt-to-income ratio limit imposed by most other types of mortgages.
Even a recent bankruptcy doesn't mean you aren't eligible for a VA mortgage.
Most VA lenders require two years' distance between the discharge of Chapter 7 bankruptcy and a mortgage application. If you filed for Chapter 13, you only have to wait one year. The lender, however, will want to see good credit re-established and a clean record of on-time payments since the discharge.
Benefit 4. The Department of Veterans Affairs won't let you pay too much -- or buy a substandard house.
The government assigns an appraiser that's been trained and approved by the VA to inspect and value any home you want to buy. Because they are not paid by the bank or real estate agency, these appraisers can give you an unbiased appraisal.
"It's the best and most accurate appraisal there is, period," says John Parker, a VA loan specialist at Supreme Lending Mortgage Banker in Dallas.
If the inspector finds significant damage or structural problem with the house, the VA requires it to be fixed before closing.
The only time that's a problem is if you're bidding on a foreclosure that has been poorly maintained or vandalized by its previous owners. Banks often want to sell those properties "as is," and are reluctant to make VA-ordered repairs.
Benefit 5. The interest rates are low.
Lenders typically charge what they would for a non-VA loan given to customers with good credit, and that's usually the best rate the bank or mortgage company offers.
With non-VA loans, borrowers pay a higher rate for every 20 points their credit score drops below 720. But with a VA loan, borrowers get the same low rate, whether their credit score is 605 or 790.
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