VA loans: The best mortgages
If you can qualify for a home loan backed by the Department of Veterans Affairs, you've probably found the best mortgage available.
VA loans don't require a down payment and have generous qualification standards, with costs similar to those of conventional loans.
And they're widely available. Many lenders offer this type of mortgage, from big banks to VA mortgage specialists.
Millions of veterans, as well as anyone on active duty and those in the National Guard and reserve units, are eligible. (Find the full eligibility requirements at http://www.benefits.va.gov/homeloans/purchaseco_eligibility.asp.)
Mortgage delinquency rates
|Type of loan||Delinquency|
|Prime fixed loan||3.20%|
|Subprime fixed loan||18.66%|
|Source: Mortgage Bankers Association, second quarter 2014|
There's a key reason why this loan is so attractive to banks and mortgage companies: The government covers the lender's losses for up to 25% of the loan amount if you default.
That gives the lender 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.
What's more, VA borrowers rarely default.
There are 5 ways you can benefit from this type of home loan:
Benefit 1. Qualification requirements are relaxed.
The government guarantee means you can have a much lower credit score and carry more debt than lenders would typically allow.
That being said, the government doesn't set minimum income or credit score standards. Each lender has its own qualification requirements.
For example, Veterans United Home Loans, the nation's largest dedicated provider of VA loans, says you can qualify with a credit score as low as 620.
With a score that low, you'd never be able to qualify for a conventional mortgage, which typically requires a credit score in the 700s.
You also can carry a lot of debt. Borrowers can spend up to 41% of their pretax income on debts, including student loans, credit card bills and auto loans (possibly more if you’re otherwise a low-risk borrower). Conventional loans have limits ranging from 36% to 45%, depending on your down payment and credit score.
VA guidelines will even qualify borrowers who discharged a bankruptcy just two years prior to their application or who entered Chapter 13 bankruptcy just a year prior, as long as they can show a record of on-time payments over the last 12 months.
Two additional VA lending guidelines make it easier for service members to qualify, says Greg Cook, a certified military housing specialist with 30 years of VA loan experience:
- A lender can "gross up" the applicant’s Basic Allowance for Housing and Cost of Living Allowance by up to 125% because they are not subject to federal or state income taxes. In other words, if you receive a $1,000 monthly housing allowance from the military, it can be counted as $1,250 in pretax monthly income. Gross-up calculations lower your debt-to-income ratio and make it easier to qualify for a loan.
- An applicant’s contributions to a Thrift Savings Plan — a retirement plan similar to a civilian’s 401(k) plan — may be added back to their income.
Benefit 2. The government protects borrowers from taking on too much debt.
The VA loan program does more than others to look out for borrowers’ best interests.
"In addition to using debt-to-income ratios for qualifying, VA also requires a lender to calculate residual income and has set minimum amounts based on family size," Cook says.
Residual income subtracts key expenses from your net income to make sure you can still afford to support your family after you buy a home. Outside of the monthly mortgage payment, these expenses include homeowners association fees, special assessments, home maintenance costs, utilities, debt payments, child support and alimony.
The VA also has loan technicians that can help you avoid foreclosure if you experience financial hardship. They’ve helped about 300,000 veterans to avoid foreclosure in recent years.
Benefit 3. You don't need money for a down payment.
The VA mortgage is one of only two major loan programs that still allow borrowers to finance 100% of a home's purchase price (the other is the Department of Agriculture's Rural Development mortgage). Even Federal Housing Administration loans require a 3.5% down payment.
However, there is a onetime VA funding fee. For most military borrowers — those taking out their first loan with no down payment — the fee is 2.15% of the loan. The funding fee is 0.25% higher for members of the reserves or National Guard.
The VA will reduce your funding fee if you make a down payment of at least 5%.
Surviving spouses and disabled service members typically don't have to pay the VA funding fee.
If you are responsible for a funding fee, you can roll it into the amount you're borrowing (you’ll pay interest on it, though).
VA loans also allow the seller to pay your closing costs, meaning you can move into a home having used no out-of-pocket cash.
What you'll pay in funding fees
|Type of veteran||Down payment||First VA loan percentage||Subsequent percentage|
|At least 5%||1.50%||1.50%|
|At least 10%||1.25%||1.25%|
|At least 5%||1.75%||1.75%|
|At least 10%||1.5%||1.5%|
Benefit 4. The interest rates are low, and you won't pay for mortgage insurance.
Though your credit score may be low and you may not have a down payment, a VA loan will give you the same interest rate and closing costs that you’d pay on a conventional mortgage if you had a 760 credit score and a 20% down payment.
Some lenders — Navy Federal Credit Union and USAA, for example — even offer lower interest rates and closing costs to VA borrowers than they do to prime conventional fixed-rate borrowers.
You also don’t have to pay the monthly mortgage insurance premiums normally charged to low-down-payment borrowers.
Benefit 5. Loan limits are higher than those offered by other programs.
With a VA loan, you can borrow up to $417,000 in most parts of the country.
In areas where housing is more expensive, loan limits are even higher. You can grab a loan of more than $1 million in San Francisco and a mortgage of nearly $700,000 in Washington, D.C.
With an FHA loan, you can only borrow as much as $271,050 in most places, and loan limits max out at $625,550 even in high-cost cities.
Conventional loans are limited to $417,000 in most areas and $625,500 in most high-cost areas.
You’ll still need sufficient income to qualify for the VA’s higher loan limits.