When you start the process of looking to buy a new home you find out pretty quickly the financing portion of the process is the most important. There are many types of Home Loans you can look at but almost all of your loan options will end up being some version of the three major loan types Conventional, FHA, or VA.
While anybody can apply for a conventional or FHA loan, the VA loan differs. The VA loan is a special type of loan that is reserved for veterans; active duty service members including members of the Army, Navy, Air Force, Marines, Coast Guard and National Guard, military spouses, and the surviving spouse.
We work in the Colorado Springs real estate market. Because Colorado Springs is such a great military town, we have a lot of experience with the VA Home Loan. Colorado Springs is home to The Fort Carson Army Base, Peterson Air Force Base, Schriever Air Force Base, U.S. Northern Command, and the United States Air Force Academy.
This abundance of VA eligibility has taught our team how to work with VA Home Loans, military home buyers, first time military homebuyers, and military veterans. Now let’s take a look at the VA loan.
Simply put, a VA loan is a mortgage loan that is backed by the U.S. Department of Veterans Affairs (a.k.a. VA). The VA is a federal government agency established to support Veterans as well as active-duty members. Along with the GI Bill, the VA loan program was created in 1944 and signed into law by President Franklin D. Roosevelt as a benefit for active-duty military members, veterans, reservists, National Guard Members, and surviving spouses (until they remarry).
There are a couple of different types of VA mortgages. Let’s look at the various types of available VA loans.
This is the most common type of VA loan. The name VA loan can be misleading because the VA doesn’t actually loan the money for this program, they simply guarantee the money loaned by private lenders. The veterans administration acts as a backstop for the lender for loss in the event the borrower defaults on the loan. The actual loan is made by private banks, a credit union or mortgage lenders. The process is much like the conventional and FHA loans; the only difference is the VA acts as the mortgage insurer. Like other loans, the VA loan can be either a fixed rate mortgage or an adjustable rate mortgage.
In this program the VA actually loans the money acting is the lender and or bank. these loans are only available to eligible Native American Veterans looking to purchase, build, or improve a home on Federal Trust land or to reduce their current interest rate.
This mortgage product is a VA backed refinance program for eligible property owners with an existing VA loan. The interest rate reduction refinance loan allows the borrower to reduce their monthly payments, or stabilize their payments. This is a great option if you’re looking to improve your loan terms.
This is a refinance option backed by the VA that allows the borrower to replace their current loan with potentially better terms. Additionally, this is a good way to tap into your existing home equity in order to take cash out for repairs, updates, and potentially paying off other higher interest debt.
The VA does offer backing on a 0% down construction loan. Construction loans are considered risky, due to the fact that there is no existing home to foreclose on should the borrower default. Because of those few lenders are willing to take the risk associated with these loans. We generally see borrowers take out a construction loan from the home builder or a local lender and then refinance into a permanent VA loan once the home is finished.
The VA Backed loan is a benefit earned through military service and makes buying a home easier for those that qualify. The VA lowers the bar on downpayment requirements for borrowers while reducing the risk for the private lenders that make these loans. there are many additional benefits to this loan for eligible borrowers.
Once all of the pertinent debt information is established, the lender will identify and verify the income side of the DTI ratio. The lender’s job is to identify and verify there is sufficient income available to meet the following:
The lender looks for what they consider to be effective income. This means income that is determined to be verifiable, stable, reliable and is anticipated to continue into the foreseeable future. In order to determine if income can be considered “stable” the lender will look at the following:
Once all of the debt and income information is compiled the lender will divide the sum of the debt by the sum of the income in order to establish the ratio. They are looking for a number under 41 this means the monthly housing payments should not exceed 41% of gross monthly income.
It’s important to note that on a Conventional Mortgage or FHA loan two sets of ratios are used, Front End and Back End. The Front ratio looks at housing expenses only, while the back end ratio is all-inclusive, taking into account both housing expenses and major monthly debt. The VA only uses the back-end debt to income ratio.
On a VA Home Loan, lenders will take a more comprehensive look at your finances, especially when compared with loans underwritten for conventional guidelines. It is not uncommon to see VA underwriters accommodate debt-to-income ratios in excess of 60% when using the second tier of qualification, residual income.
Residual income is any remaining discretionary income after a homeowner has fulfilled their monthly credit obligations. While the VA guidelines state that a VA borrower’s DTI should not exceed 41% the VA can grant an exception, additionally if the applicant’s residual income is more than the VA’s minimum residual income guidelines by 20% or more, DTI can become a non-factor.
Refinance Options – In addition to the VA-backed purchase loan there are two popular options for refinancing your property as well. The first is The “Interest rate reduction refinance loan” also known as IRRRL. This is for VA borrowers that have an existing VA-backed home loan but are interested in reducing their monthly mortgage payments. The IRRRL allows the borrower to replace their current loan with a new one under more favorable terms.
Lower Interest Rates – Low rates and flexible mortgage options are two important characteristics of this type of mortgage. Because the VA loan is backed by the government, it is less risky than other loan types. This is why VA lenders are able to offer such competitive mortgage rates. According to mortgage data provider ICE Mortgage Technology when they examined 30-year fixed-rate loans closing in November of 2020, VA loans had an average rate of 2.72%, compared with 2.99% on a conventional mortgage for the same term.
Flexibility after Bankruptcy and Foreclosure – VA loans do offer you the ability to qualify for your VA loan benefit even after bankruptcy or foreclosure. In many cases, you will have a much shorter waiting period than you would for a conventional loan. You may be eligible for a VA Loan in two years after a Chapter 7 bankruptcy is discharged, and one year after filing for a Chapter 13 bankruptcy. It generally takes two years after a foreclosure but some lenders have no required waiting period after a short sale.
This is certainly better turn the 4 to 7 years you would need to wait before being able to fly again with a conventional loan.
| Downpayment | 1st Time VA Borrower | Repeat VA Borrower |
| < 5% | 2.63% | 3.6% |
| 5% to 10% | 1.65% | 1.65% |
| 10% or more | 1.4% | 1.4% |
The Department of Veterans Affairs (VA) establishes the basic service requirements needed to qualify for VA loan eligibility. Additionally, the loan applicant will need a valid Certificate of Eligibility (COE) and will need to meet the lender’s income and credit requirements.
The income and credit requirements are not mandated by the VA, interest rates are established by the particular lending institution you are working with. These numbers can change based on the companies tolerance for risk and factors like your credit score.
Eligibility depends on the amount of time you spent on active duty if you are a military veteran, and how you separated from the military. You can check the VA website for more specific requirements. Beyond these requirements, to obtain a VA-backed home loan, you’ll also need to meet your lender’s credit and income loan requirements.
The Certificate of Eligibility is an actual document that confirms for a VA lender that you actually qualify for a VA-backed home loan. This document also shows the amount of entitlement you have available to use.
You will need a certificate of eligibility, visit the VA website to learn more about obtaining your Certificate of Eligibility.
$144,000 is significantly below median home prices in most parts of the United States. In order for the VA to ensure veterans could still have access to homeownership, they decided to tie their guaranty amounts to the conforming loan limit for conventional mortgage financing. This decision created the secondary or bonus layer of entitlement for those needing to borrow more than $144,000.
This secondary layer looks at the conforming loan limits for the particular county you are buying in. As of 2021 the conforming loan limit for most of the United States is $548,250.
Since the VA usually commits to cover 25% of the loan amount. $137,062 would be the entitlement amount or 25% on a $548,250 loan amount. If you meet the minimum loan requirements, most lenders will loan you up to four times the amount of your basic entitlement towards your purchase price without requiring a down payment.
Your available entitlement amount will be on your Certificate of Eligibility. If you have previously used your VA Loan, the entitlement amount on your COE may be less than you expect. Any entitlement you have previously used in connection with a VA backed home loan can be restored once the property you have previously used your VA Loan for is sold, and the loan has been paid off. In the event of a loan assumption, an eligible veteran-transferee would need to agree to assume any outstanding balance on a VA loan and substitute their entitlement for the amount you had originally used on this loan. The assuming veteran-transferee would also need to meet the occupancy, income, and credit requirements of both the Veterans Administration and the private lender.
Since their inception VA loans have had a loan limit, these limits no longer apply, at least to qualified veterans that have their full VA loan entitlement. A qualified veteran with full entitlement can borrow as much as the private lender is willing to loan. On the other hand, qualified borrowers with reduced or a partial remaining entitlement would still be subject to VA loan limits. If you have a less-than-full entitlement, you probably have one or more existing VA loans. In some cases, your entitlement may have been reduced because of a default on a previous VA loan.
If you’re interested in obtaining a VA loan but have reduced entitlement, you’ll need to check with your lender to find out how much you qualify for without coming up with a down payment.
How To ApplyThe first step in the application process for a VA loan is to obtain your Certificate of Eligibility (COE). This document shows the lender you are working with that you do qualify for this benefit. If you’re a Veteran, you are also going to need a copy of your discharge or separation papers (DD214). Currently, active-duty service members will need to obtain a statement of service, this should be signed by your commander, adjutant, or personnel officer.
Once you have obtained the appropriate documentation, you need to contact a mortgage lender that is an approved VA lender. Your real estate agent can usually recommend a good VA-approved lender.
Because the lender is actually making the loan they are going to go through the same process they use for any other mortgage loan in terms of making sure you qualify. They will pull a credit report, verify your employment status, and need to look at your tax returns in order to make sure you qualify for the loan. Since the loan will most likely be sold into the secondary mortgage market, the lender needs to make sure the loan is written to those standards, otherwise, the loan becomes unsellable and the lender will need to keep it in their own portfolio reducing the money they have to lend.
The VA loan is no different than any other home mortgage loan, it has closing costs. These fees can range on average between 3% to 5% of the loan amount. Other factors like taxes and insurance can impact your closing costs as well as your choice of lender.
While the VA regulates many aspects of the cost of a VA Loan to the veteran, the interest rate is not one. Private lending institutions like banks and mortgage companies are responsible for determining their own interest rates. Your credit score will have the biggest impact on the interest rate the lender offers. VA Loans offer competitive interest rates and low to no down payment requirements because of the security of the VA’s backing of these loans. While VA loan interest rates are generally lower than traditional mortgage programs like Conventional and FHA mortgage loans, you can reduce the interest rate even further by having a strong credit history.
Credit Scores, like interest rates, are not controlled by the VA. Private lenders on the other hand will have minimum credit score requirements. Unlike a traditional loan, the VA loan program offers some flexibility in credit requirements for their mortgage products. Potential borrowers don’t need to have perfect credit scores, we generally see attractive interest rates on VA loans for borrowers with credit scores in the 650 – 750 range. If your score is below this, you may still qualify but at a slightly higher interest rate. If your credit score is in the 500’s you may have problems qualifying but don’t give up. Most lenders have programs to get borrowers with poor credit back on track and into a VA loan.
Once you understand what is a VA Loan, you begin to see that the VA loan is one of the most useful loan programs available to members of the Army, Navy, Air Force, Marines, Coast Guard and National Guard members, and an amazing benefit for eligible veterans, active duty members, and military families in general. If you have earned this benefit through your service, it certainly makes sense to take advantage of the program
