The world of mortgages is loaded with information, jargon, guidelines, horror stories and feel-good endings. Due to the sheer volume of data, and the fact that VA home loans are backed by the government, some things are misunderstood and other items are simply false. The following compilation will provide important facts that are definitely true about VA mortgages as well as debunk some commonly believed myths.
Important VA Mortgage Facts
Down Payment is Not Necessary
The Veterans Administration does not require a down payment in order to purchase a home. While some people may need to save for a down payment in order to qualify for a conventional loan or even an FHA loan, this is not the case for VA mortgages. Over the years, approximately 90% of VA mortgage purchase transactions do not involve a down payment.
Be sure to view the video below to learn what no down payment mistakes to avoid!
Mortgage Insurance Not Required
For most other kinds of loans, a low down payment requires an extra fee known as mortgage insurance. This insurance protects the lender in the event the borrower is not able to continue making payments on the loan. However, VA loans do not have this extra fee.
To be fair, the VA charges a funding fee which is a percentage of the original loan amount. Thankfully, this fee can be added to the overall loan balance and give the borrower the opportunity to pay overtime instead of up front.
Borrower Must Live in the Home
Lots of loans enable the borrower to buy a home and rent it out as an income producing asset. The VA mortgage is not one of those loans. The Veterans Administration wants to help qualifying veterans buy a place to live. Therefore, one of the
main requirements of this loan is that the borrower must plan to live the home as their main residence. In fact, the borrower needs to move in to the property within 60 days of closing except in certain circumstances such as Veterans who
are currently stationed overseas. That is discussed in more detail below.
VA Mortgages Are Very Low Risk
Among all the various types of mortgages, the VA loan routinely has the lowest percentage of foreclosures. This is in spite of the fact that a down payment is not required and in spite of the lack of mortgage insurance. The underwriting rules for the mortgage process use various ratios and real-world applications to ensure the veteran has a good chance of making the payments while maintaining their current quality of life.
Loans are Available for People that Have Suffered Financial Problems
Lots of people struggle through financial difficulties for a number of reasons. Unfortunately, these tough times sometimes can cause people to either file for bankruptcy or even lose a home in a foreclosure process. The VA will allow people to apply for a home loan 24 months after either a foreclosure or the discharge of bankruptcy. It is even possible to buy a home with a VA loan after a short sale.
Top VA Mortgage Myths
In order to help improve the understanding of the VA loan we present some of the most pervasive myths along with the corresponding truth to debunk the myth.
Myth: A qualifying veteran may only use the VA loan to buy a traditional type home.
Truth: A VA loan can be used for a variety of home types. Traditional, stick built homes are certainly eligible as well as new construction homes. A condo or townhome may also be eligible depending on certain factors. Namely, the whole complex has to meet the VA guidelines in order for a single unit to be eligible.
Myth: A VA mortgage can only be used for a purchase transaction.
Truth: The VA loan is ideal for a purchase. BUT, it can also be used for a cash out refinance. Or, if interest rates drop and the borrower has made their payments on time, they can refinance the loan with the express purpose of lowering their mortgage rate.
Myth: The process for closing approving, underwriting and closing a VA loan takes a long time.
Truth: If you work with a lender that is experienced with VA mortgages, the overall time required to close the loan is no different than other types of mortgages.
Myth: Because of the funding fee, VA loans are more expensive than other kinds of loans.
Truth: It is undeniable that a funding fee is charged by the Veterans Administration for each and every loan. However, since there is no mortgage insurance requirement, and the interest rates are similar to other loans, the VA mortgage can be as low as and even cheaper than other similar mortgages.
Myth: Veterans are allowed to buy a home one time with their service qualification.
Truth: The Certificate of Eligibility does not state that a veteran is allowed only one opportunity to buy a home. As long as they are eligible there are no restrictions on how many times they can buy a home.
Bonus: In certain situations, a qualifying veteran can qualify for 2nd VA mortgage with Second-Tier VA Entitlement, even soon after a financial hardship or in the event of being relocated to another base.
Myth: Getting approved for a VA loan is difficult.
Truth: The VA does not have any set requirements for a credit score, however the lender may trump the VA with a minimum credit score requirement this is called a mortgage overlay. The program is quite lenient for borrowers that have previously suffered financial troubles. Primarily the underwriter is looking at the last 12 to 24 months to make sure all payments have been made on time.
Myth: A veteran must either be retired from service or discharged in order to qualify for the mortgage.
Truth: People who are currently serving in the military can be approved for a loan. It depends on their length of service as well as whether they have served in a war situation or in a peaceful station.
Myth: The VA only approves small loan amounts that are mainly focused on a first home purchase.
Truth: The VA guidelines do not put a limit on the size of the loan that the borrower can receive. Instead, the borrower must pass ratio tests for income and debt. As long as the borrower has enough income to pay their current obligations, along with the proposed home payment, and have a certain percentage left over, then they can be approved. This means that the borrower's current debt has as much to do with the approval as the size of the mortgage.
Myth: People that have served only in the National Guard or Reserves do not qualify for a VA loan.
Truth: Soldiers that have served in the Reserves and Guard are able to get a VA loan. They must meet service requirements that are typically longer than service requirements for full time soldiers, but they can qualify just the same.
Myth: Only the qualifying service member can receive a VA loan.
Truth: Within the past few years the Veterans Administration has recognized that widows and widowers of service members were left without an advantageous way to purchase a home. For this reason, the home purchase eligibility was expanded. As long as the service member passed away either during full time duty or due to a disability that is connected with their service, the widow or widower may apply for a VA loan.
Myth: A qualifying service member may only be approved for a loan if they are living in the states and intend to occupy the property as their primary residence.
Truth: There are two different ways for overseas service members to qualify for a VA mortgage. First, if their service will end within the next 12 months then they may be able to get approved for the loan. Secondly, if the service member is married and their spouse intends to live in the property as their main residence then the loan may be approved.
Summing Up VA Mortgage Facts
It is important for anyone considering the purchase of a home to be fully informed. As the preceding list shows, there are a lot of details to understand about the VA loan process. Take the time to talk with your mortgage lender about your needs. Make sure you have a basic understanding of what is required of you throughout the entire underwriting period. This will make the transaction smoother and help you achieve your dream of home ownership.
Additional VA Home Buying Resources:
Top VA Mortgage Mistakes via Teresa Cowart
Mistakes First Time Home Buyers via Bill Gassett
VA Mortgage Myths via Christy Soukhamneut
What Are Closing Costs? Via Conor MacEvilly
How To Buy A Home With a VA Loan via Debbie Drummond
Important Disclosure: The VA mortgage program is available to eligible Veterans only.