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VA Loans offer a special opportunity for Veterans to become homeowners. VA Loans have more lenient requirements and often lower interest rates than conventional loans. Plus, no down payment is required. This guide will provide you with details to the unique aspects of VA Loans, explain the benefits of a VA Loan, and help you navigate the lending process. The VA Home Loan Program In 1944 the VA began assisting Veterans in the goal of becoming homeowners. Since then, the VA has guaranteed over 18 million home loans. The VA does not lend the money, rather the VA promises to repay a portion of the loan to the lender if the borrower defaults. So why should a Veteran choose a VA Loan over a conventional home loan? There are a number of reasons, but most Veterans who have used a VA Loan say the number one benefit is that there is no down payment required. Another noteworthy benefit is that VA Loans tend to have lower interest rates than conventional loans, and they are easier to qualify for as well. Recent research shows that over 80% of VA Home Loan borrowers could not have qualified for a conventional loan. The VA offers these looser qualification requirements for Veterans because of their understanding of the sacrifices Veterans have made for our country; it's a nice way of saying "thank you." Because of the guaranty from the VA lenders are also much more likely to approve higher-risk borrowers. Another reason to choose VA Loans is because borrowers do not have to pay private mortgage insurance (PMI). When the VA guarantees a loan, they are taking on the responsibility for that loan if it defaults. Since the VA has made this promise, Veterans do not have to bear the burden of mortgage insurance payments. Without a substantial down payment for their loan, many borrowers utilizing conventional financing do NOT get this great cost-saving benefit. Entitlement VA home loan benefits never expire. As long as the qualifying Veteran or servicemember uses their entitlement in the program responsibly, they man continue to get guaranteed home loans and benefit from this program indefinitely. Basically, a qualifying party can take out as many VA Loans as they want as long as each previous one has been paid off. Eligibility There are certain requirements homebuyers must meet before applying for a VA loan. The Veterans Administration has many great programs to offer veterans for buying a home, but only if you are eligible. So, who is eligible? If you served during wartime (as defined by the VA) for at least 90 consecutive days or during peacetime for at least 181 consecutive days, you are eligible for the VA Home Loan Program. If you are currently on active duty after 90 days of active service you are eligible for the program. Reservists are also eligible as long as they have served for at least 6 years, which can be non-consecutive and in different branches of the reserves. The Reserve branches that are eligible for the VA Home Loan Program are Army National Guard, Army Reserve, Air National Guard, Coast Guard Reserve, Navy Reserve, Marine Corps Reserve, and Air Force Reserve. In short, any Active-Duty military servicemember who has met the simple service time requirements above is eligible. Any Veteran who has met those service time requirements and was honorably discharged is also eligible. There are also some other people who are considered eligible for the VA Home Loan Program:
Certificate of Eligibility (COE) To be approved for a VA Loan, a Veteran must prove his or her entitlement with a Certificate of Eligibility. To receive a certificate from the VA, they must complete VA Form 26-1880. VA Form 26-1880 must be submitted to the VA to guarantee the home loan. Since the VA does not lend money to borrowers, it is beneficial to have the lender order the Certificate of Eligibility for the borrower, and they will do so directly through the VA. This takes the burden off the homebuyers and makes the process generally smoother. The form can be obtained individually, however, by visiting the VA's website or by writing to their main offices. Occupancy Requirements One of the differences between conventional loans and VA Loans is the occupancy requirement. The requirement varies for different situations, so it's important for borrowers to understand different provisions they may be entitled to. The primary requirement is that the borrower must personally occupy the home. This means that they must live in the home or intend to live in the home within a reasonable time following completion of the loan and acquisition of the property. A reasonable time is defined as 60 days after the loan closing. However, if a specific date of occupancy after closing is specified, and future events will make this date attainable, the reasonable time may be extended. Typically, anything beyond 12 months will not be considered reasonable.. For those who may need to travel often and/or for extended periods of time for business, there are certain intermittent occupancy provisions. There are also certain cases where a borrower's spouse can satisfy the occupancy requirements. For an active duty borrower, the spouse can satisfy the requirement if he or she is unable to occupy the property within reasonable time because of active duty commitments. Service members deployed from their permanent duty are considered to have temporary duty status and are considered to have already proven intent to occupy the residence. In these cases, it is not necessary for a spouse to occupy the home prior to the borrower's return. Credit Requirements Credit Score Another benefit of taking out a VA Loan is that approval is not based on credit score. The borrowers credit score also does not affect their interest rate. Since approval is based on a number of factors including income and job stability, less than stellar credit will not stop someone from getting a VA Loan. However, having a clean credit history for the past 12 months can come into play. Bankruptcy and Foreclosure Having a past bankruptcy or foreclosure does not automatically eliminate someone from taking out a VA Loan. While conventional lenders will generally not issue a loan within 4 years of a bankruptcy, the VA only makes borrowers wait 2 years. Of course, there are a number of other factors that may be considered, but if a bankruptcy took place more than 2 years ago it will not be an issue when applying for a VA Loan. The VA also has more lenient guidelines than conventional lenders when it comes to foreclosures. Three years must pass following a foreclosure for a Veteran to be issued a VA Loan. However, a borrower will be unable to qualify if the previous foreclosure was on a VA Loan. The Funding Fee In an effort to defray the cost of administering the VA Home Loan Program, nearly all borrowers taking out a VA Home Loan are charged a funding fee. It is a one-time fee for the loan and is not refunded once the loan has been completely paid off. Funding fees are charged as a percent of the loan, ranging from 0.5% to 3.3%. There are a number of variables that determine what percent of the loan amount the fee will be. These include:
There are some situations where the fee is waived for the borrower, though they are not common. Allowable and Non-Allowable Costs Along with the no down payment requirement, there are other regulations in place that keep up front costs as low as possible for Veterans taking out a VA Loan. There are certain fees that Veterans are not allowed to pay when going through the process. A Veteran is allowed to pay for fees such as their credit report, origination, discount points, the Funding Fee, recording, NOV, title insurance, and more. The non-allowables, or costs the Veteran cannot pay, include fees for inspection, document preparation, underwriting, processing, attorneys, tax service, and escrow. These costs can be paid for either by the seller or the lender. But what if the lender or seller will not pay for the individual costs? There actually is a way for the Veteran to pay for these fees. Instead of charging for each individual service, the lender can charge the Veteran a flat fee of one percent of the total loan amount. This will be used to cover all of these services, even if the added up cost would be more than the fee you pay. Usually though, the seller will pay the different costs, though this may result in a raise in the price of the house being sold. Either way, these regulations prevent the Veteran from having to pay too many upfront costs. VA Loan Limits When the VA guarantees a loan, it makes a promise to repay 25% of the loan amount if the borrower defaults. Until recently, the VA would only guarantee $60,000. This meant that the maximum VA Loan amount was $240,000. The VA recognized the unrealistic nature of this limit and recently made a change so that VA Loan limits are in line with conventional loan limit. Currently the VA will guarantee up to $104,250, which raises loan limits to $417,000. In Alaska, Hawaii, Guam, and the U.S. Virgin Islands, the limits can be as high as $625,000. Certificate of Commitment Once a veteran has gone through the steps of proving their entitlement with a Certificate of Eligibility, finding a VA approved lender, getting pre-approved for a mortgage loan, finding the home they want to purchase, getting the appraisal, and having all of the necessary inspections done, the VA will issue a Certificate of Commitment. This Certificate of Commitment goes directly to the VA approved mortgage lender and is the paper form of the guarantee on the Veteran's new loan. The Certificate of Commitment is worth the amount that the VA guarantees on the home in case of default or foreclosure. The VA Certificate of Commitment includes:
The loan, the lender, and the veteran must all be proven eligible to the VA, and all of the required paperwork and home inspections must be completed and satisfy VA requirements before a Certificate of Commitment will be issued. Once a Certificate of Commitment is issued it is good for six months. This means that if the closing of the loan takes longer than six months, then the lender and the veteran will need to request a time extension in writing to the VA explaining why the loan has taken an excessive amount of time to close. Conclusion Every Veteran and Active Duty servicemember deserves the right to become a homeowner, and through a VA Loan this dream can come true. We understand the important role we play in aiding every decision our clients make. Now more than ever, the VA Home Loan Program can be utilized to help the men and women of our military purchase a home. |
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