Veterans Day is around the corner. This is the perfect time to discuss the VA loan. Veterans need to know that their home financing options didn’t end with the collapse of the subprime market. In fact with the VA loan we can do 100% financing with no monthly Mortgage Insurance payment and at market interest rates. Additionally, for a certain group of veterans receiving military disability the VA will even waive the funding fee!
The VA loan is open to anyone who has served in various branches of the US military (including reserves). For veterans the VA loan can be a perfect loan solution.
The basic premise of the VA loan is similar to the FHA loan. At the core this loan is not credit score driven. The VA loan looks at the overall credit worthiness of the borrower in making a decision. In addition to past credit history, the VA looks at income/employment history, the borrowers liquid assets (cash/savings) and the type of property being purchased. I call these factors the four corners of a mortgage.
The First Corner
Credit: While the VA is not a credit score driven system, it does help to have a good credit history and at least a 580 score. In many cases it’s better to have no credit than to have really bad credit. The reason being that, if you have no credit, we can consider the twelve month payment history in your utility bill, cable bill, cell phone bill etc. The VA is very forgiving of late medical bill payments and also deferred student loan payments.
The Second Corner
Income/Employment: Having a good stable employment and income history is very important. This is especially true if you do not have any credit. A two year history is a must. Even if you have changed jobs a few times, as long as you’re in a similar industry and your income is similar to your previous work, then you’ll be in good shape. A pattern or decreasing income with multiple short term jobs will not help your case.
The Third Corner
Assets: VA allows 100% financing with no mortgage insurance. This means you do not need to put a down payment. However, it does help to have a few months of mortgage payments saved up. For example if you are expecting to have a $1200 monthly mortgage payment, then I recommend you have $2400 saved. This only helps you and will never hurt you.
The Fourth Corner
Property type: VA allows manufactured homes, condos and all types of single family residences. While the lender will order an appraisal on the property, the VA assigns the particular appraiser to do the appraisal. The appraisal standard is a bit tighter than normal conventional financing and the VA makes very few exceptions. In my experience, manufactured homes tend to pose the biggest hurdles for the VA appraiser and I always recommend avoiding them if at all possible.
Remember, not all lenders are VA loan approved. If you feel you are a good candidate for a VA loan but the loan officer doesn’t present that to you as a financing option then make sure you ask why it is not on the table. It would be worth your effort to then contact a VA approved lender.
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on Nov 7th, 2007 at 9:14 am
Great article Shailesh. I haven’t seen anyone use a VA loan in years, but they’re coming back lately with these tighter lending requirements. As a veteran myself, I’ve used VA loans before and they are especially good for first time buyers. The only thing I don’t like about VA loans is that you have to pay a funding fee of around 2-3% (it varies depending on your circumstances, and I haven’t kept up with it, so don’t quote me on that number!). The funding fee can be financed into the loan, so you don’t have to pay it up front. But veterans who have a service connected disability do NOT have to pay the funding fee. The funding fee goes to VA I believe, and does not go towards paying for the house in any way. If I have to pay 2-3%, I’d rather have it go towards my downpayment rather than to VA. But on the other hand, with a FHA 3% down loan, I think you still have to pay mortgage insurance, which you don’t with a VA loan (please correct me if I’m wrong Shailesh - I know you keep up to date on all the loan programs and are way more knowledgable than I!). Also, as you mentioned, the appraisal standard is a bit tighter with VA loans. VA appraisals look more closely at certain aspects of the property’s condition. The main things I see VA appraisers call out are broken windows and peeling exterior paint. When this happens, they usually make the repairs a condition of the appraisal - in other words, the appraisor says the property is worth x number of dollars IF the broken windows and peeling paint are repaired. The lender will then usually make those repairs a condition of loan approval.
on Nov 8th, 2007 at 10:13 am
Shannon,
Thanks for adding all this information on here. That’s great. I’d been meaning to do a post on more VA details.
on Nov 13th, 2007 at 10:48 am
[...] Hubbard from BlogArizona.Com left a really great comment on my post “The VA Loan: Perfect 100% Home Financing for Veterans“. I had always intended to follow upon on these points but she covered it for me. So, [...]
on Jan 15th, 2008 at 4:57 pm
Lots of Vets are staring to use va loans alot more now. the va is the best option right now I think for a lot of vets. especially if you are allready in a va loan.
on Jan 16th, 2008 at 9:58 am
The VA loan is a great option if you qualify. In the past many lenders would place VA applicants in subprime loans because of lower cost (insurance wise and upfront costs), but now with the demise of the subprime industry, VA is a strong program. It always has been, it was just neglected in favor of a glitzy alternative.
on Feb 5th, 2008 at 9:47 am
[...] Fear not. Your situation is very salvageable, even in today’s mortgage market. Just from the information you have submitted, it appears the best option for you would be the FHA loan. If you are a veteran of the US military (any branch including National Guard), then you may also be eligible for a VA loan. [...]
on Feb 5th, 2008 at 10:43 am
[...] the property. The buyer goes to a lender and applies for a mortgage. The lender then looks at credit scores, employment/income, assets and property type to make a lending [...]
on Jul 2nd, 2008 at 7:09 pm
[...] However, the article fails to mention one very important aspect of interest rates. The senators FICO score. This makes a big difference. The article states that the average loan rate for a similar program was 5.94 percent. So, supposedly he received a 30 basis point “discount”. Well considering the average credit score in Illinois is 684, if the Senators FICO score was well above 720+ then a 30 basis point difference is well within the range. So, I don’t understand why the Post is making such a big deal about a $300/month savings for a higher credit score borrower. They obviously don’t read my blog otherwise they would have read about the four corners of a mortgage. [...]