Understanding the VA Loan and How it Works
The VA loan is backed by the government. It is a mortgage that is guaranteed solely by the U.S. Department of Veterans Affairs for military borrowers. And just like most loans, foreclosure occurs when the borrower defaults on a loan and fails to pay the lender.
On the surface, a VA loan appears to be the same as any other type of loan. Fill out a loan application, provide documentation of your income and credit history, and show that you have enough money set aside to cover closing costs. However, there are significant differences between VA loans and conventional or FHA loans, most notably in terms of costs and fees.
Points to Know about the VA Loan
- Proof of Military Service. You must be able to show proof of military service. The VA home loan benefit is only available to qualified military borrowers.
- The VA Funding Fee. A VA fee will be charged to you. One of the drawbacks of a VA loan is the 0.5 percent to 3.6 percent VA funding fee. Even if there is no down payment, the funding fee is added to the loan amount.
- Closing Costs. Closing costs cannot exceed 1% of the total amount. VA lenders may charge up to 1% of the loan amount as a fee. As a result, VA loans are less expensive than other types of government-backed loans.
- No Federal Loan Limits. There are currently no VA loan limits in place, though some lenders may set their own, similar to conventional loan limits. The current conforming loan limit for a single-family home is $647,200.
- VA Loan Eligibility. A VA loan is not available to just everyone. You must also meet the VA’s income, asset, and credit requirements.
Minimum Service Requirements
On your DD Form 214, your military service years will be listed. You must have been able to serve for at least 90 days of active service, 90 days of war, followed by 181 days of peace.
Certificate of Eligibility (COE)
A Certificate of Eligibility (COE) proves to a mortgage lender that you are eligible for a VA loan. You can obtain a COE online or mail a completed VA Form 26-1880 to the VA processing center in your area to verify your eligibility.
Requirements to Apply for a VA Loan
Following the determination of your eligibility, additional requirements must be met in order to obtain a VA loan.
- Eligible Borrowers. When borrowing alone, with a spouse, or with another eligible veteran, there is no need for a down payment. If this is not the case, you may be required to make a down payment.
- Debt-to-income Ratio. To calculate your DTI, divide your monthly debt payments (including your new mortgage payment) by your gross (pre-tax) income. There are some exceptions to the VA’s DTI ratio guidelines if you have enough residual income.
- Residual Income Analysis. Your residual income is used to calculate monthly residual income. The bare minimum is determined by the size of your home, family, and location.
- Debt Tracking. CAIVRS (Credit Alert Interactive Reporting System) searches for prior defaults on VA or student loans.
- Credit Score. While the VA does not require a minimum credit score, many lenders do.
- Residential Conditions. To qualify for a VA loan, you must live in the home you want to finance as your “primary residence.” VA loans are not available for second homes or investment properties.
- Appraisal Specifications. VA appraisals can only be obtained from VA-approved appraisers and typically cost between $500 and $1,200, compared to $300 to $400 for a conventional appraisal.
One may be able to argue that veterans have great perks, especially when it comes to having access to take out great loans. Now more than ever, the process, its function, and its requirements have been more streamlined so that veterans and their families know what they have as an advantage. So if this is right for you and your loved ones, go right ahead and discuss it with your provider.
Contact Our Mortgage Specialist Today!
If you’re interested in VA loans in Arizona, Mortgages by Misty can show you the wonders and benefits of residing in Tempe. With Misty Garrison, you’ll find the solutions you need. Call us today at (480) 618-5358 and find out more!