We live in a metropolitan area that is home to four branches of the military, and that means many people are eligible for home loans backed by the Department of Veterans Affairs. A VA loan has several perks, such as:
- No down payment
- Lower interest rates than conventional loans
- No monthly mortgage insurance
- The ability to have higher debt-to-income ratios and lower credit scores in comparison to conventional loans
Although there are no limits on the amount the veteran/serviceperson may borrow, there is a limit on the amount the Veterans Administration will assume (based on the county).
The VA amount comes into play with the down payment. Lenders will typically lend up to the county loan limit without requiring a down payment.
In Hampton Roads, the loan limit is $458,850. Any amount above that requires a down payment of 25 cents on the dollar for the remaining balance. Any amount below that amount can be financed up to 100 percent of the lesser sales price or appraised value.
Also, veterans who already used their VA entitlement may still have available entitlement. The lender needs a Certificate of Eligibility to see if the borrower has remaining entitlement. The veteran can combine the remaining entitlement with a down payment for larger loan amount.
When qualifying a veteran for a home loan, the lender must assess residual income, which is the income remaining to cover day-to-day household expenses. The net income includes, but is not limited to:
- All debts included in the debt to income ratio
- Child care expenses
- Taxes – federal, state and Social Security
- Utilities and maintenance
The residual income must be over a certain threshold, which takes into account the household size. Why? The VA wants to protect veterans and make sure they have sufficient funds for everyday living and emergencies.
Military homebuyers must also understand the funding fee, a one-time upfront cost on all VA loans paid directly to the Veterans Administration.
The funding fee is based on the down payment, how many times you’ve used the VA entitlement, the kind of loan and the type of veteran you are.
A veteran or serviceperson doesn’t have to pay the funding fee in the following scenarios: The veteran receives VA compensation for a service-connected disability, or there’s a surviving spouse of a veteran who died in service or from a service-connected disability.
As an example, I worked with a client who had a disability from her time in the service. Because of the disability, she was exempt from the funding fee, which saved her $4,000 on the loan.
If you are active duty or retired, make sure you know all the options available to you when it comes to VA loans.
Featured photo: Mike Mozart (Flickr)