Attention veterans: here’s how you can buy a home
November 10, 2017
When it comes to helping our military personnel, civilians often find themselves saying, “It’s the least we can do.” And ensuring that those who have served our country can buy homes is one of those “least we can do” things. So if you’re a veteran or on active duty and want to own a home, please take advantage of a no-down-payment, low-interest VA loan!
What is a VA loan? Some military personnel don’t even know about it, but the Department of Veterans Affairs home loan program has been around for more than 70 years. The VA sets guidelines, guarantees the loans, and oversees the program, while approved lenders provide the actual financing.
Usually, the only time a VA loan is not your best bet is if you’re lucky enough to have the magic combination of both excellent credit and a 20 percent down payment. (In which case, a conventional loan is probably best.)
What do you need? You’ll need a certificate of eligibility for your lender. Some lenders will get it for you, but you can get it online yourself from the VA.
- Veterans who meet length-of-service requirements
- Service members on active duty who have served a minimum period
- Certain reservists and National Guard members
- Certain surviving spouses of deceased veterans
And what exactly makes a VA loan so great? Here are the top eight things:
1. No down payment
You read that right: zero. This is the number-one advantage of a VA loan. No other loan program has no down payment. The only limit on this is that you can’t buy a super-expensive home. In most of the country, the VA will back a loan of up to $424,100 without a down payment (higher in some pricey areas). Here’s a national loan-limit chart.
2. Low closing costs
The VA limits certain closing costs, so you don’t have to come up with as much cash. That can be a big help. However, someone has to pay those costs. The lender, the seller, and even the real estate agents can agree to pay. Sometimes you do pay — not up front, but through a slight increase in your interest rate. As you can imagine, there’s often some negotiating involved. But other programs that help pay closing costs might let you get around all that (see “Don’t stop with the VA,” below).
3. Low interest rates
Interest rates on VA loans are usually lower than on conventional mortgages. One thing that helps is that unlike other loans, VA loans don’t base your interest rate on your credit score, so a low credit score won’t saddle you with a high interest rate.
4. More relaxed credit requirements
Conventional loans usually require at least 620, and FHA (Federal Housing Administration) loans require 580. VA loans, however, have no minimum credit score requirements. Most lenders do look for at least 620, but they’ll consider your loan profile as a whole. Even a history of bankruptcy or foreclosure isn’t a deal breaker.
5. Your debt-to-income ratio can be higher
“DTI” is the percentage of your gross income that’s going toward paying debt, including your mortgage. Conventional loans usually cap it at 36 percent, with a max of 43 percent. The VA lets you go higher, which means you can qualify for a larger loan. That can come in handy in competitive markets. If your DTI is going to go over 41 percent, your lender will have to show the VA why they think you can handle it.
Just remember that it’s all about what you’re comfortable paying, not what a lender is comfortable giving you.
6. No mortgage insurance
If you don’t have a down payment of at least 20 percent, most conventional loans require mortgage insurance. That can be a significant extra expense every month until you build up 20 percent in equity. But VA loans don’t require mortgage insurance! That’s money you can keep in your pocket — or put toward the mortgage itself.
7. The “funding fee” is low and can be rolled into the loan
The mandatory “funding fee” is one of the only drawbacks to a VA mortgage loan. It’s the price you pay for no down payment and no mortgage insurance, and it’s the main reason to look into a conventional loan if you have both excellent credit and a 20 percent down payment. Yet it amounts to less than you’d pay for a low-down-payment FHA loan, so we consider it a plus overall.
The cost varies, but it’s typically 2.15 percent of the loan amount. The proceeds help fund the program, meaning cover losses when other veteran homeowners go into default. You can pay the funding fee at closing, but it can also be rolled into the loan, so you don’t have to come up with any cash up front — another plus if you need the option.
If you’re receiving VA disability compensation, you’re exempt from this fee.
8. VA staff is there for you if you fall behind on your mortgage payments
Veterans Affairs has staff dedicated to helping you stay in your home. Most likely, you’ll never need them, but it’s a nice peace-of-mind benefit.
What about the red tape?
One potential issue to be aware of is that it takes lenders more time and effort to process a VA loan due to a bit of red tape (surprise, surprise), so some might try to steer you into a conventional loan. Don’t let them — unless you’ve done the math yourself and agree it’s the way to go. For objective advice, contact a homeownership advisor.
Another is that although VA loans close just as fast as other loans overall, the appraisal process can occasionally slow things down. The VA has its own certified appraisers, and in some areas, they’re in short supply. Plus, any home the VA backs has to meet its standards as move-in ready, safe, structurally sound, and sanitary. To minimize delays, choose a home in good condition. If you have your sights on a fixer-upper or a foreclosure property, a VA loan might not work well for you.
Don’t stop with the VA: there’s more help out there
You can pair your VA loan with other homebuyer assistance programs. And there are lots. According to Down Payment Resource, the most comprehensive database we know of, across the country there are 135 homeownership programs with special benefits for veterans or active-duty military.
Many programs target closing costs. The Military Housing Assistance Fund, for example. In a tight market, it can be important to have your closing costs covered so you don't have to negotiate seller-paid closing costs — which sellers don’t always have the patience for.
If you’re not a first-time homebuyer, keep mind that many programs waive the first-time requirement for veterans and active military personnel.
Tip: Consider a specialized Realtor for your home search
Before you start shopping for a home, consider finding an agent with a Military Relocation Professional designation (MRP) from the National Association of Realtors. Besides understanding your needs in general, a Realtor who has earned this certification knows the ins and outs of VA loans, can point you to other benefits and programs, and is ready to smooth over the concerns and misconceptions sellers sometimes have about VA buyers.
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Filed Under: For Homebuyers