Understanding the VA Home Loan Benefit
Today is the day we’ve set aside to honor those who have served our country through military service. Each of us, in our own way, has the ability to give something to show our appreciation. Because financial education is so important for all aspects of our lives, I’m sharing my insight to clarify information on using the VA benefit of home financing.
Loans guaranteed by the U.S. Department of Veteran’s Affairs (VA loans) help service members, veterans, and eligible surviving spouses become homeowners. VA home loans are provided through authorized private lenders, such as banks and mortgage companies, and are not directly available through the VA. For information on eligibility, supporting evidence, and instructions for application to receive confirmation of benefit eligibility to present to your lender, visit the Certificate of Eligibility.
VA home loans can be used to:
- Buy a home, townhome, or a condominium unit in a VA-approved project
- Build a home
- Simultaneously purchase and improve a home
- Improve a home by installing energy-related features or making energy efficient improvements
- Buy a manufactured home and/or lot
Tip: If VA financing is for you, it’s important that you seek and connect with both a realtor and a mortgage professional that are fluent in the workings of the VA home loan eligibility standards. If you fall into the hands of someone who isn’t schooled in the intricacies of VA financing, you may find yourself locked out of an opportunity.
When reviewing your loan program options with your lender, be sure to tell them if you may qualify for VA home loan benefits as nine times out of ten, this program will be the best priced, require the least out-of-pocket monies and offer the most flexibility in underwriting standards. As complex as mortgages can be, there are many additional intricacies that apply exclusively to VA loans. Here are some clarifications over common misconceptions about VA loans:
- You don’t have to be a first-time homebuyer
- You aren’t limited to a maximum purchase price of $417,000 (check loan limits in your area)
- You can reuse the VA benefit through reinstatement
- VA-backed loans may be assumable
The Benefits of a VA Loan
- Zero down payment is required for a purchase transaction when the sales price doesn’t exceed the appraised value, the amount financed doesn’t exceed four times your entitlement benefit, and the loan amount is $417,000 or less. In cases where the valuation is less than the sales price, you can choose to proceed with the purchase at the higher price as long as you make up the difference between the sales price and the appraised value.
- There is no requirement of monthly mortgage insurance premiums.
- VA loans typically provide the lowest total monthly payment when compared to FHA financing and conventional financing with mortgage insurance.
- There are no prepayment penalties.
- They are assumable by a buyer. Assumability means that the buyer may be eligible to take over payments on the VA loan regardless of whether they are civilian or military. A word of caution: Unless you obtain written approval from the VA (not the mortgage servicer), a veteran will remain liable on the assumed loan even after the sale of the property. Be sure to go through this extra step to protect yourself against possible future financial mismanagement by the buyer.
- Up to 100 percent of the valuation may be available on a rate and term refinance.
- Up to 90 percent of the valuation may be available on a cash out refinance.
- Financing is available with credit scores as low as 620.
Tip: When presenting an offer for purchase, ensure the agreement includes an addendum for the VA Option Clause. Here’s a sample of a VA Option Clause:
“It is expressly agreed that, notwithstanding any other provisions of this contract, the purchaser shall not incur any penalty by forfeiture of earnest money or otherwise be obligated to complete the purchase of the property described herein if the contract purchase price or cost exceeds the reasonable value of the property established by the Department of Veterans Affairs. The purchaser shall, however, have the privilege and option of proceeding with the consummation of this contract without regard to the amount of the reasonable value established by the Department of Veterans Affairs.”
Understanding the Intricacies of VA Loan Guaranty
The VA loan guaranty is insurance that the Department of Veteran’s Affairs provides the lender. The VA guarantees a portion of the loan, which enables the lender to provide you with more favorable terms. Guarantee simply means the lender is protected against loss in the event of a foreclosure and replaces the protection the lender would normally receive by requiring a 20 percent down payment and/or private mortgage insurance. This guarantee allows the veteran to obtain more favorable financing terms.
VA Funding Fee
The VA charges a funding fee to pay for this insurance. The VA funding fee is required by law and can cost you anywhere between zero and 3.3 percent of the loan amount depending on your eligibility status, whether you’ve used your VA benefit in the past, the size of your down payment (if any), and whether you qualify as a service-connected disabled veteran or are the surviving spouse of a veteran who died in service or from a service-connected disability. The fee is intended to enable the veteran who obtains a VA home loan to contribute toward the cost of this benefit, and thereby reduces the cost passed on to taxpayers. When refinancing a VA loan with a new VA loan, the new loan is eligible for a reduced funding fee of .5 percent.
The VA provides each qualified veteran with at least $104,250 in entitlement and extra entitlement in select high cost counties as determined by HUD. Entitlement requires that 25 percent of the loan amount be guaranteed to the loan. With that, a portion of the entitlement is charged to the loan as a guaranty to the lender in the event of default. All qualified veterans start out with $36,000 in basic entitlement and $68,250 in bonus entitlement or $120,375 bonus in Alaska and Hawaii. With the basic amount provided, the veteran receives $104,250 in entitlement and we count this as 25 percent of the guaranteed loan amount of $417,000. With all bonuses available, the maximum guaranteed loan amount can be as high as $1,500,000. The VA provides its yearly updated list of home loan limits online.”
For example, the 2015 VA loan limit for Miami-Dade, Florida, is $417,000. This means that if the veteran has full entitlement, the VA will provide a 25 percent guaranty on the loan up to $417,000. If a veteran has a contract to purchase a home in the amount of $480,000, the lender may require the veteran to make a down payment of 25 percent of the $63,000 difference, which would be $15,750, providing the lender a full 25 percent guaranty. In the same example, a borrower not using VA benefits and instead opting for using a conventional loan product, may have to place a traditional down payment of 20 percent of the total purchase price which in this case, would be $111,000.
Understanding entitlement benefits can be a little tricky. If a veteran purchased a home using his VA entitlement (in full or in part), the mortgage on that loan is assigned a portion of his entitlement as guaranty. Because VA loans are assumable, a veteran can sell a property and have the existing VA mortgage assumed by the new buyer. If that new buyer is an ordinary citizen with no VA entitlement benefits, the seller’s VA entitlement stays with that mortgage and the veteran is not released from liability. If on the other hand, the new buyer is active military or a qualified veteran and has entitlement benefits that he can assign to the existing VA mortgage, the seller can take back his entitlement and be released from future obligations on the existing note. With release, veterans can use the home loan benefit multiple times. Release is requested through the VA.
Restoration of Entitlement
Veterans can have previously used entitlement restored to purchase another home with a VA loan by completing VA Form 26-1880 and submitting a request through the VA Eligibility Center if one of these things happens:
- The property purchased with the prior VA loan has been sold and the outstanding loan has been paid in full.
- The property is sold to a qualified veteran-transferee (buyer) who agrees to assume the existing VA loan and substitute his or her entitlement for the same amount of entitlement that was originally used by the veteran seller.
- If the veteran has repaid the initial VA loan in full but has not sold the property purchased with his initial entitlement under a VA loan, he can still place a request for restoration and use his restored entitlement to gain the benefits of a new VA loan.
Condo Project Approval
If VA financing is the only way to go for you, be sure to not waste your valuable time by selecting a property that is not eligible for financing with a VA guaranty. Resale of existing homes doesn’t require any special approval, however, new construction, condos and PUDs will. Prior to 2009, if a condominium project was FHA certified, the VA would accept the FHA approval for VA loans. As of December 7, 2009, the VA no longer accepts newly added FHA condominium approvals in lieu of an independent VA approval. FHA and VA maintain separate approval lists on their respective websites.
Tip: Narrow your property search by selecting a condo project, planned unit development, or builder of new construction that is already on the VA approved list before you enter into contract. You can search the VA database at Veterans Information Portal Condo/PUD Search Tool (https://vip.vba.va.gov/portal/VBAH/VBAHome/condopudsearch). Searching this site is not exactly user friendly. You will find that city names are abbreviated and the system is not searchable by zip code. For example, a search for condos in Rancho Santa Margarita, California, has four results; however, a search for Rancho Santa Ma, California, returns twenty-one results. Projects can be listed under original tract numbers, parcel maps, or lot lines, and the project name is often abbreviated. This can preclude the searcher from finding accurate results. Once you locate your community on the search site, you will find one of three statuses:
- Accepted without conditions: These communities are 100 percent accepted for VA loans and lenders can use the condo ID with no issues.
- HUD accepted: This community was accepted under the pre-2009 reciprocity agreement with HUD where FHA approved projects were automatically eligible for VA Guaranty. For the most part, these communities are still accepted by VA, however it is recommended that the lender call the regional VA office that is assigned to the state where the community is located to verify. Current FHA status is not relevant to HUD-accepted VA designations.
- Unaccepted: VA loans are not permitted in these communities.
VA loans aren’t exclusively for purchase transactions. A VA Interest Rate Reduction Refinance Loan (IRRRL) is a VA-to-VA loan, meaning you are only eligible for this loan program if you are refinancing an existing VA loan into a new VA loan. An IRRRL requires less documentation that provides for quicker loan decisions and carries a lower VA funding fee limited to .5 percent. When considering an IRRRL, keep in mind:
- Only the veteran and their spouse may be on loan and title.
- Nonoccupant co-borrowers are prohibited.
- Co-borrower must be married to the veteran. (Same-sex marriages are now allowed in certain states.
- The VA must approve eligibility prior to submission to underwriting.)
- In the debt-to-income calculations, we must include childcare expenses for all children under age twelve.
VA Jumbo Loan Program
The VA limits the loan amount it guarantees, but that does not mean you can’t buy a home that is valued at greater than your full entitlement benefit insures.
For counties where the VA maximum loan amount is $417,000:
- You don’t need to make any down payment on the first $417,000.
- When the purchase price is greater than $417,000, your lender may require only a 25 percent down payment on the amount that is greater than $417,000.
- For loan amounts between $417,000 and $1,000,000, you aren’t able to finance the funding fee, so it must be paid in full at closing either by you or by the seller.
In counties determined to be of high cost by HUD, when the VA loan amount exceeds $417,000, the following applies:
- You don’t need to place a down payment on the portion below the high cost county loan limit.
- You will need to place a minimum down payment of 25 percent on the portion of the loan amount that exceeds the high cost county limit.
- For loan amounts exceeding the high cost county limit and up to $1,000,000, you aren’t able to finance the funding fee so it must be paid in full at closing either by you or by the seller.
Additionally for any VA jumbo loan that exceeds the county limits set by the VA, the following overlays apply:
- Minimum credit score of 640 for loan amounts above $650,000
- Manufactured homes are not eligible
- Two-to-four unit purchase transactions are capped at $417,000
- Only fixed rate loan products are allowed
To connect with a loan officer and/or Realtor that knows and understands the intricacies of the VA Loan Benefit, seek persons who identify themselves as Military Housing Specialists. Gain a referral to a local mortgage loan originator or realtor by asking some of your comrades. Or, seek assistance from one of many public offices available to support service members and veterans. Here are a few suggestions to help you on your quest: Veteran’s Service Officers, USO, USA Cares, American Legion, and AmVets.
Sylvia M. Gutiérrez is author of Mortgage Matters: Demystifying the Loan Approval Maze. RealWorks Press: 2015. Available at Amazon, Barnes & Noble, iTunes, and independent booksellers everywhere. Distributed by Ingram.
Licensed and registered mortgage loan officer with NMLS id: 372427