If you or your spouse has ever served or is currently serving in the military, you may be eligible for a VA loan. This type of mortgage loan is guaranteed by the U.S. Department of Veterans Affairs (VA), a federal agency that focuses on assisting military families. It's designed specifically to help veterans, as well as surviving spouses, purchase a home, posing several advantages to applicable borrowers.
1. No Down Payment Needed...
VA loans do not require a down payment, although having some money to put down is always helpful. This can save you thousands of dollars, and since it greatly reduces the upfront cost of purchasing a property, buying the home of your dreams is that much easier.
2. Neither Is Private Mortgage Insurance
With various other home loans, you are obligated to pay private mortgage insurance (PMI) if you cannot afford a 20 percent down payment. This protects the mortgage lender in case you default on the loan. However, since the VA guarantees the loan, you won’t have to make monthly PMI premium payments despite not having a down payment.
Still, remember that you will probably be expected to pay a funding fee. As explained by the VA on its official website, “The funding fee is a percentage of the loan amount which varies based on the type of loan and your military category, if you are a first-time or subsequent loan user, and whether you make a down payment.” It continues, “You have the option to finance the VA funding fee or pay it in cash, but the funding fee must be paid at closing time.”
3. Minimal Closing Costs
Obtaining a VA loan limits the amount you'll have to pay in closing costs. In addition, the seller can offer to pay them for you, further saving you money.
Independent news sources Military Times breaks down the fees you cannot be charged at closing with a VA loan, referencing the VA’s Lenders Handbook. These include:
4. More Flexible Debt-to-Income Ratio Requirements
Your debt-to-income (DTI) ratio is a number that mortgage lenders look at to see how much of your monthly income actually goes to paying debts, such as credit card bills and car loans. Most lenders require a DTI ratio of 36 percent or lower. This ensures you have enough money left over each month to not only pay your mortgage, but to also pay utility bills, food purchases and other expenses. The VA loan program allows a DTI ratio of 41 percent, meaning you can get away with a little more debt and still qualify for the loan.
As discussed on the official blog of the VA, “The mortgage underwriters will make a thorough inspection of your loan application if your debt-to-income ratio is more than 41%."
"However, it does not mean that your VA loan application will be rejected straightway,” it states. You may still be eligible if your “DTI ratio is more than the permissible limit due to tax-free income” or if your “residual income surpasses the acceptable limit by around 20%.”
5. Eligibility Is Still Possible After Bankruptcy
While most traditional mortgages will not be granted if you have filed for bankruptcy in the past, a VA loan allows it under certain circumstances. If you are making consistent payments to repay debt or if the bankruptcy was more than two years ago, it will likely not affect your chances of qualifying for a VA loan. However, every person’s financial situation is unique, so it’s strongly recommended that you contact a mortgage lender to find out if you have a chance of qualifying.
6. Financial Counseling Is Available
If you have trouble making your mortgage payments, the VA may be able to negotiate with your lender. This could result in loan modifications or a repayment plan you can handle. Either way, you'll receive some help keeping your house.
The VA advises borrowers in such a situation to “let your mortgage company (servicer) know and try to work out a satisfactory plan to make up the payments missed.”
If you still find yourself in dire financial trouble, “the VA Regional Loan Centers have technicians available to conduct financial counseling. This counseling is designed to help you avoid foreclosure.”
In order to find out if you qualify for a VA loan, you need to complete the Certificate of Eligibility (COE).
Going through this process may seem overwhelming at first, which is why working with a reputable mortgage lending company is so important. Rather than being left to fend for yourself, a lender will be able to answer any questions you have and provide all the information you need. This will make the entire home-buying experience less stressful for you and your family.