Veterans Affairs-backed mortgages are booming, and more important than ever, in today’s strict lending climate. If you even think you might be eligible for this benefit, it’s worth doing a little research to determine your eligibility. Even if you aren’t personally eligible, you probably know someone who is and who can therefore benefit from this home loan program.
To those who haven’t used their VA loan benefit, or to real estate agents who are unfamiliar with the program, the process of obtaining a VA-backed mortgage may be daunting. The fear of the unknown leads many to go the traditional conventional mortgage route instead of using their hard-earned benefit. To alleviate this fear, let’s talk about how VA and conventional mortgages compare.
The VA mortgage is a government-backed loan. Qualifying U.S. military veterans and service members obtain a mortgage through a lender, and the VA backs the loan in case of foreclosure. This allows the veteran to finance 100% of the loan amount with no down payment required, and also saves the veteran from paying for private mortgage insurance (PMI). There are some exceptions to the no-down-payment rule, mainly when a veteran wants to purchase a home above the county loan limit in that area. You can view the 2013 county loan limits on the VA’s website.
Conventional loans aren’t backed by the government, and, as a result, generally have higher upfront costs. These upfront costs include a down payment minimum of 5% of the purchase price and the monthly cost of PMI, unless the buyer can put down 20% of the purchase price at closing.
However, there’s one cost the VA mortgage has that conventional loans don’t have: The VA funding fee. This is a one-time fee that can be rolled into your loan amount, and can range from 0% (for those with service-connected disability) up to 3.3% (for those using their benefit more than once).
Both VA and conventional loans offer several financing options, with the most popular being a 30-year fixed-rate mortgage. Other options include fixed-rate mortgages with shorter terms and adjustable-rate mortgages.
Both conventional and VA lenders will require you to meet certain guidelines, but these guidelines vary from one loan type to another, and from one lender to another. The focus here will be on common guidelines that you’ll see with a large number of lenders, but there may be exceptions to each, depending on the specific lender you choose to work with.
One of the big requirements for loan preapproval in all types of credit lending is your credit score. The VA doesn’t establish a minimum credit score to qualify, but lenders who finance the loan transaction certainly do. Most commonly, you are going to see a minimum credit score requirement of 620 on a VA-backed loan. Conventional loan credit score requirements vary more from lender to lender, but most will require a credit score of 720 or above.
In addition to credit score requirements, both VA-backed and conventional mortgages will require you to have a debt-to-income ratio within their guidelines, which is at or below 41 percent for both conventional and VA loans. Your lender may allow an exception permitting your DTI to be higher, but this is generally on a case-by-case basis.
In addition to credit and DTI requirements, the VA has an additional overlay when reviewing a mortgage application: the potential buyer has to meet residual income requirements. This is a dollar amount the borrower must have available each month after all bills are paid, in order to cover necessary expenses such as food and clothing. The dollar requirement on residual income varies by family size, loan amount and location. This residual income requirement is one of the main reasons the default rate on VA loans is much lower than other mortgage products.
The VA has additional requirements for appraisals that you won’t see with conventional home appraisals. One of the big focuses is on minimum property requirements (MPRs). The VA has established MPRs to protect VA homebuyers from hazardous, unsafe or costly issues with the home. These MPRs may prevent a potential homebuyer from moving forward with the purchase using their VA benefit if the seller is unwilling to make necessary repairs. However, this same buyer may be able to move forward on the same transaction using a conventional mortgage. The question here is whether the homebuyer would really benefit from the completion of the transaction. If the home is unsafe or has costly repairs that will be required in the near future, if not immediately, is the buyer setting himself up for financial disaster?
If you are eligible for a VA-backed loan, it will more than likely be your best option, but it’s still good to weigh your options based on your individual circumstances. For example, if you have 20% to put down, a conventional loan may be a better option, as you won’t have to pay PMI or the VA funding fee. If you aren’t able to put 20% down, the VA-backed mortgage may be your best option because you will not pay PMI.
Don’t let fears of the unknown guide your loan decisions. Consider your specific situation and then make an educated decision on which loan will provide you with the greatest benefit.