Mortgage Guide: VA Home Loans Explained

By RateMarketplace.com Staff

For more than 25 million Americans, the U.S. Veterans Administration's home-loan program offers mortgages with competitive rates and unique features especially attractive to first-time buyers -- including no down payments, little or no closing costs and lenient credit-history requirements. This article offers a primer on VA housing loans, shares information on mortgage application requirements and credit qualification criteria, and provides links to additional VA mortgage resources.

Created under the GI Bill of Rights at the end of World War II, the VA mortgage loan program is open to all veterans (except those dishonorably discharged) who served a minimum of 90 days or more during wartime or 181 straight days during peacetime. It's also open to members and veterans of the Reserves and National Guard and surviving spouses under varied guidelines.

Banks and other private lenders process and extend VA home loans under a federally-backed guarantee that covers up to 25% of loan amounts up to so-called conforming mortgage loan limits, which recently stood at $417,000. In the event a borrower defaults on the mortgage, the VA would cover up to $104,250 of any loss the lender suffers as a result. That feature enables participants to borrow without the down-payment lenders typically require to protect their interest if home values decline.

Closing Cost Relief

Along with not requiring a down payment, VA mortgages also can be structured so a borrower pays little or no closing costs. The maximum loan amount is "the lesser" of either appraised value or the home purchase price. Once a borrower determines his or her closing costs -- which typically run about 4% of the sales price -- a seller can add that amount onto the sales price. So long as the property appraises for that higher amount, the closing cost get rolled into the housing loan.

Local VA offices determine what itemized fees and expenses borrowers in their area may be required to pick up as part of closing costs. They may include a credit report, appraisal fee, title exam and insurance, a property survey, flood zone check, homeowner's insurance, prepaid taxes and recording fees.

In addition to home purchase loans, the VA mortgage program also offers "cash-out refinancing," in which veterans with existing mortgages can apply for new loans at amounts higher than what they owe and take "cash out" of their home equity for general use.

To qualify for VA housing loans, prospective borrowers must meet so-called debt-to-income ratios designed to gauge their ability to repay. The maximum ratio generally allowed is 41%. To calculate your debt-to-income ratio, add up:

• The total monthly household cost of the mortgage payment
• Property taxes
• Homeowner's insurance and association dues
• Revolving and installment debt, such as payments for credit-card, auto, student and personal loans

Funding Fees

While the VA's no down-payment mortgage loan enables veterans with little savings to purchase a home, they come with one drawback -- a "funding fee" recently set at 2.15% for first-time applicants and 3.3% for second-time borrowers. Unlike a down payment that a homeowner may recoup at a time of sale, the funding fee designed to offset the cost of the VA's loan guarantee coverage is not recouped.

The fee drops to 1.5% for military veterans who put up a down payment of up to 10% and dips a bit more to 1.25% for those putting down 10% or more. All funding fees are slightly higher for members of the Reserves and National Guard.

Certain veterans and their surviving spouses are exempt from the funding fee, including those getting VA benefits for service-related disabilities; those who would be getting disability if they weren't already receiving retirement pay; and surviving spouses of those who died while on active duty or from service-related disabilities.

Credit History Requirements

As with traditional mortgages, applicants must meet certain credit-history qualifications, but the guidelines are more forgiving than for typical mortgages because of the VA's loan guarantee. For instance, applicants who've made timely payments on all consumer loans during the previous year stand a strong likelihood of approval if they meet debt-to-income ratios.

And where applicants with no credit history pay steep interest-rate premiums with traditional mortgage lenders -- if they can get a home loan at all -- the VA guidelines accommodate borrowers lacking a significant credit record if they can show a history of timely payments for rent, utilities, phone bills and other monthly costs not tracked in credit reports.

The VA program also will extend mortgage loans under certain guidelines to borrowers with recent Chapter 7 or Chapter 13 bankruptcy filings or court judgments as long as those are paid off before the closing date of the sale.

The program's credit-history leniency even extends to borrowers foreclosed upon a previous property and those in consumer-credit counseling programs -- neither of whom would stand much chance of qualifying for a traditional housing mortgage.

One stipulation of most VA-backed loans is that borrowers must certify that they plan to occupy the home as their primary personal residence.

If you have questions or comments about this article, email the RateMarketplace.com editorial staff at contactus@ratemarketplace.com.

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