How Does a VA Loan Work?
- A VA home loan is a mortgage that is guaranteed by the U.S. Department of Veterans Affairs
- They are issued by private lenders that are approved by the VA, the VA does not offer loans, they just guarantee them
- They do not require a downpayment, you can finance 100% of the price of the home Military service persons and their spouses may be eligible
- Mortgage insurance premiums (PMI) is not required
- VA funding fee of 2.15% for first-time buyers or 3.3% for repeat buyers is needed
Who is Eligible
Basic VA Service Eligibility Requirements:
- 90 days of consecutive active duty service
- More than 180 days of active duty service during peacetime
- 6 or more years in the National Guard or Reserves
- Active-duty Military
- Cadets of the U.S. Military, Coast Guard Academy, or Air Force
- U.S. Naval Academy Midshipmen
- Atmospheric and National Oceanic Administration officers
- U.S. Public Health Service officers
* VA loans are not available to Dishonorably discharged veterans
VA Loan Advantages
- No down payment
- No mortgage insurance premium (MIP)
- Low credit scores may be approved
- Flexible requirements
- Lower rate than conventional loans
- Higher debt-to-income ratios accepted
- VA negotiates with the lender if you are facing foreclosure
- Higher loan limits than FHA loans
- Seller can pay 6% of closing costs
- Fixed-rate and adjustable-rate loan terms
Credit Score Requirements
VA home loans technically don’t have a minimum credit score. The Department of Veterans Affairs will guarantee a mortgage loan regardless of the borrowers FICO scores.
Lenders often set their own minimum credit requirements, most VA lenders want to see at least a 620 score to approved the loan application.
Some lenders may be able to approve credit scores of 580 and higher. Lenders will look at more than just your FICO score. They take into account your entire credit history.
FHA loans are also available for those with lower credit scores.
If you have a credit score below 580 it’s highly recommended that you improve your credit score before applying.
Or if you have at least a 10% down payment you may qualify for an FHA loan with a credit score as low as 500.
- 620 or higher credit score (Some lenders have bad credit VA loans with a 580 score or lower)
- No more than one late payment in the past 12 months
- No bankruptcies, foreclosures, or short sales in the past 36 months
- No mortgage rates in the past 6 months
Veterans that are also first-time homebuyers appreciate the fact that there is zero down payment and no mortgage insurance.
However, these loans are not just for first-time buyers, veterans can use a VA home loan multiple times throughout their life-time.
VA entitlement is a figure that shows how much you are able to qualify for.
If you’re a first time user your basic entitlement will be enough to qualify for a $453,100 loan, or higher in certain high-cost areas.
VA Funding Fee
Because the VA loan program doesn’t require mortgage insurance, in order to help fund the VA program there is a one time VA funding fee.
The funding fee amount will depend on the amount of the loan, and whether or not you’re using a down payment.
It needs to be paid at closing, you may be able to roll the funding fee into the loan and finance it.
Funding fee not required if you are:
- Receiving VA payments for a service-connected disability, OR
- Veteran who would be entitled to receive compensation or if didn’t receive retirement or active duty pay, OR
- Are a surviving spouse of a Veteran who died in service
VA Certificate of Eligibility
In order to receive a VA-insured mortgage loan you must have a certificate of eligibility from the Dept. of Veterans Affairs.
Cal Coast Funding can get one on your behalf, or you can visit the VA website to receive your certificate.
- W2 Income
- Overtime and bonus pay
- Seasonal positions
- Part-time income Income from a second job
- LES income
- Child support
- Self-employed income
- lottery winnings
- gambling income
- Unemployment benefits
- All one time income payments
- inconsistent sources of income
- Single bonus payment
- Income from investment properties
VA Streamline Refinance
With a VA mortgage loan you may may qualify to refinance your mortgage using a streamline refinance to reduce your interest rate and lower your monthly payment.
A 210 days after closing you are eligible to refinance your VA loan.
VA streamline refinance loans are quick and easy.
It must have a net tangible benefit in order to close. You must be able to reduce your interest or lower your payments by at least 5% to qualify.
The Department of Veteran Affairs does not state a maximum debt-to-income ratio (DTI ratio).
However lenders typically want to see a DTI ratio at or below 41%. 41% is not a hard cap, these are certain situations in which a lender will allow higher debt-to-income ratios.
Strong compensating factors for high DTI ratio
- Loan-to-value ratio below 95%
- High net worth
- Large amount of cash in reserves
- No payment shock
- High income
- Good credit score
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