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 and costs similar to those of conventional loans.
And they're widely available. Many lenders offer this type of mortgage.
Millions of veterans, as well as anyone on active duty and those in the National Guard and reserve units, are eligible. A recent change in guidelines expanded eligibility for surviving spouses as well. (Find the full eligibility requirements at www.benefits.va.gov/homeloans/elig2.asp.)
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.
There are 4 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 more debt. Borrowers can spend up to 41% of their pretax income on debts, including student loans, credit card bills and auto loans. Most other loans have a 36% limit.
VA guidelines will even qualify borrowers who discharged a Chapter 7 bankruptcy just two years prior to their application or a Chapter 13 bankruptcy just a year prior, as long as they can show a record of on-time payments over the last year.
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 Department of Veterans Affairs protects borrowers from taking on too much debt.
The 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 special assessments, homeowners association fees, home maintenance costs, utilities, debt payments, child support and alimony.
Federal guidelines enacted in 2011 also make it easier for lenders to modify loans for struggling borrowers, which could help prevent foreclosure if you experience financial problems.
For example, if you’re a reservist suddenly called to active duty, VA guidelines encourage lenders to provide forbearance, a loan extension, re-amortization or an interest rate reduction to help you keep your home if your deployment causes severe financial hardship.
Benefit 3. You don't need money for a down payment.
This 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%. The funding fee is 0.25% higher for members of the reserves or National Guard.
The VA will reduce your funding fee by 0.65% with a down payment of at least 5% and by an additional 0.25% if you put down 10%.
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.
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 if you had a 760 credit score and a 20% down payment.
You also don’t have to pay the monthly mortgage insurance premiums normally charged to low-down-payment borrowers.