For eligible Veterans of the Military, the VA Mortgage Loan Program from the U.S. Department of Veterans Affairs is one of the best mortgage loan programs available.
The VA Loan is designed to offer long-term financing to eligible American veterans or their surviving spouses (provided they do not remarry). The basic intention of the VA Direct Home Loan Program is to supply home financing to eligible veterans and to help veterans purchase properties with no down-payment.
The original Servicemen’s Readjustment Act passed by the U.S. Congress in 1944 extended a wide variety of benefits to eligible veterans returning from World War II. The VA loan guarantee program was especially important to veterans, and ended up having an immediate and significant impact, both on Veterans, and the housing markets around the country. In October of 2012, the Department of Veterans Affairs announced it had guaranteed 20 million home loans since its establishment in 1944.
Trivia: The modern 30 year fixed mortgage loan term is the direct descendant of the original VA Loan Guarantee Program. Before 1944 and the VA Loan Program, there was no such thing as a 30 year mortgage term, and in fact, the idea of spreading a mortgage out over 30 years was met with much resistance, however as is with many long-standing traditions, the 30 year mortgage survived, and has been the most utilized mortgage term in history of our modern mortgage markets.
About the VA Mortgage Loan Program:
The most well-known benefits of the VA loan is that they do not typically require a down-payment, nor do they require the borrower to pay for monthly mortgage insurance, which makes the VA loan the single most affordable mortgage program in the U.S. Other benefits include assumability and their special streamlined refinance program for existing VA loan holders, known as the IRRRL.
At its very core, the VA loan is identical to any other mortgage loan. There’s a starting loan amount, a mortgage interest rate which determines your monthly payment, and an obligation on behalf of the borrower to repay the loan to the mortgage servicer and/or bank.
However, where the VA Mortgage Loan differs is that the monthly mortgage payments made by the homeowner are “guaranteed” by the U.S. Government, which means that our government guarantees that a portion of the loan will be repaid to the investor(s), even if the borrower defaults on its terms.
Because of this guarantee, VA approved mortgage lenders can offer the VA Loan with ultra-low mortgage interest rates, which are often lower than interest rates on FHA Mortgage Loans, and/or Conventional Mortgage Loans, backed by Fannie Mae and Freddie Mac.
Who offers VA Loans to eligible borrowers?
The Department of Veteran Affairs do not directly offer, originate, and/or fund VA Loans. Only approved VA mortgage lenders may offer, originate, and fund VA Loans. Approved mortgage lenders will be banks, savings-and-loans institutions, credit unions, mortgage bankers, and even some mortgage brokers can be approved to make VA Loans. Therefore, there are hundreds of such financial institutions, and interest rates and terms may vary from bank to bank, to credit union, to mortgage banker, etc.
VA approved mortgage lenders process, underwriter, approve, and fund the VA Mortgage Loan, provided that the borrower meets the uniform guidelines issued and communicated by the Department of Veterans Affairs, however during the initial application process, the VA does make itself available to support and advise the VA eligible borrower with obtaining the VA Loan.
What are the main reasons to use the VA Loan?
There are many great reasons to consider a VA Loan. As already mentioned, the first and most common reason is that the VA Loan doesn’t typically require the borrower to invest in a down-payment, unless they want to, or if the Veteran no longer has full eligibility. Meaning, in most cases, the eligible borrower can finance up to 100% of the home’s purchase price, and with no penalty to do so, meaning that VA lenders will not increase the interest rate on the VA Loan, simply because the borrower opts to finance 100% of the home’s price.
In addition, most VA Loans are assumable, which means the loan can later be transferred to another eligible borrower if that borrower meets certain requirements. In the coming rising mortgage rate environment, this can be a strong leverage point for a homeowner selling their home where the mortgage they carry on the home is a VA Loan. To learn more about how the assumable option works, CLICK HERE.
Furthermore, VA Loans carry no pre-payment penalty, and as already mentioned, are often offered at measurably lower interest rates than their FHA or Conventional counterparts, and with must lower closing costs as well, when compared to a Conventional Mortgage Loan.
What types of loans does the VA guarantee?
The VA will guarantee loans used to purchase a home, refinance a home, and/or loans that can be used to build a new home, or make repairs or remodel an existing home. The VA Loan used to buy an existing single family home, condominium, a new construction home, or condominium, a manufactured home, or a lot on which a manufactured home will be placed on a permanent foundation.
The VA also offers a special Energy Efficient mortgage (EEM) for homeowners adding “green” elements to a home and wishing to add construction costs to the borrowed amount as opposed to paying for the elements with cash.
Lastly, the VA offers a special refinance loan known as the Interest Rate Reduction Refinance Loan or IRRRL (pronounced earl). Commonly referred to as the VA Streamline Refinance, IRRRL’s are simple quick refinances which lower the VA borrower’s interest rate, and in most cases IRRRL’s don’t require the home to be appraised, or income to be reviewed.
Who is eligible to qualify for a VA Loan?
Eligible borrowers for the VA Loan Mortgage Program may include:
- Service Persons on Active Duty
- Members of the National Guard
- Surviving Spouses of Deceased Veterans (provided that they have not remarried)
- Cadets at the U.S. Military, Air Force, or Coast Guard Academy
- Midshipmen at the U.S. Naval Academy
- Officers of the National Oceanic and Atmospheric Administration
How much does a VA Loan cost?
VA Mortgage Loans carry customary closing costs and other settlement charges associated with taking out a new mortgage loan, however the Department of Veteran Affairs places limits on VA Approved Mortgage Lenders regarding the types of loan fees charged, and the amount charged.
Eligible borrowers in most cases will be required to pay what’s called a VA Funding Fee. This one-time fee is a percentage of the loan, and the percentage depends on the borrower’s type of service, purpose and type of loan, and the size of the borrower’s down-payment, as a percentage of the purchase price, or the home’s value and other factors.
The Funding Fee is due at closing, and most often is financed back into the loan, although some borrower’s opt to pay the Funding Fee with their own money at closing, or when purchasing a home, may ask the Seller of the home they’re purchasing to pay the Funding Fee on the Veteran’s behalf.
Tip: the Funding Fee is normally waived for Veterans who receive VA Disability Compensation, and for unmarried surviving spouses of Veterans who died in service or as a result of a service-connected disability.
What else is required to obtain the VA Loan?
Generally, and in order to be eligible for the VA Loan, a VA borrower must show a minimum length of service, an acceptable credit history, and/or credit score, sufficient income to make their monthly mortgage payments, and a valid Certificate of Eligibility (COE) to confirm the borrower’s eligibility.
Borrowers must also plan to make the home they are purchasing their primary and principal residence, however this rule is waived for the VA IRRRL Streamline Refinance program. With the IRRRL, borrowers must only certify and prove that the home was formerly and once was their primary and principal residence.
Some mortgage lenders may overlay the VA’s guidelines and rules. Mortgage lender “overlays” are additional (most of the time more restrictive) mortgage underwriting standards and requirements which do not appear in the official and published guidelines put forth by VA, FHA, Fannie Mae, and/or Freddie Mac. One of the more common examples is that for the VA IRRRL Streamline Refinance, the VA allows for a 100% loan-to-value, but many VA Approved Mortgage Lenders, will only allow for a 90% loan-to-value. This is why it’s important to check with more than one VA Approved Lender when getting pre-approved, to be sure that you have access to the least restrictive rules.
Colorado Home-Buyer Tax Credit:
One of the best benefits for Veterans is the Mortgage Credit Certificate Tax Credit Program. Normally reserved for first-time home-buyers only, an MCC is available to all Veteran’s regardless of whether they’re purchasing their first home, their second home, third, fourth, or fifth home. As long as they can certify their status as an Honorably Discharged Veteran of the military, then they can qualify for this huge money saving opportunity each and every time they purchase a home.
To learn more about the Mortgage Credit Certificate Tax Credit Program, please CLICK HERE . However, the quick facts regarding the MCC are as follows:
A MCC allows the homeowner to claim a tax credit for 20% of the paid mortgage interest on their first mortgage, each and every year for the life of the mortgage loan. Essentially, it’s a refund from the IRS of 20% of the mortgage interest you pay each year, and since it’s a dollar-for-dollar tax credit, it adds up to thousands of dollars over the life of your mortgage loan.
It’s quite simple. Let’s say you pay $10,000 of interest in your first year of home-ownership, then you will get a $2,000 tax credit for having the MCC, and this $2,000 will either reduce the amount that you owe the IRS, or increase the refund you will receive from the IRS each and every year you file your federal tax return.
Example: As a Veteran, you decide to purchase a home for $250,000, and you also decide to take advantage of the VA Loan’s 100% financing benefit, and therefore you finance $250,000. Let’s do the math:
- Purchase Price = $250,000
- Starting VA Loan = $250,000
- Interest Paid in First Year = $11,167
- MCC Tax Credit Paid to you in First Year = $2,234
- MCC Tax Credit Paid to you in first 5 Years = $10,780
- MCC Tax Credit Paid to you over life of the VA Loan = $41,203
Many were brave enough to venture into home-ownership back in 2008, 2009, and 2010 when the U.S. Government was offering the one-time $8,000 first-time home-buyer and $6,500 repeat home-buyer tax credits, but those tax credits were just that, paid one single time.
On the contrary, the MCC is paid out each and every year, and Veterans have the unique opportunity to obtain an MCC each and every time they purchase a home, while most home-buyers will only have the opportunity to take advantage of this phenomenal and highly valuable tax credit when they purchase their first home, and that’s it.
Tip: in order to qualify for the MCC Tax Credit, the Veteran(s) must plan to make the home they’re purchasing their primary and principal residence, and will not be allowed to own any other real estate. Therefore, in order for a Veteran to qualify for the MCC on their second home purchase, they must sell their first home, and cannot retain that home as a rental property, since the MCC is only available to those who own only one home as their primary and principal residence.