Photo by Jim Stapleton
Originally Posted On: https://lendertribune.com/why-is-using-a-va-loan-a-good-choice/
Currently, there are over 20 million veterans taking advantage of these no money down payment loans since 1944 when there were originally established.
VA loans may be the most unique and attractive loan on the market today.
With 22 Million people qualify for the VA loan benefit, in this article Lender Tribune explains how to qualify for the loans, how to use the loans, and how to get started.
The VA loan program was designed to help military vets buy a home with no down payment. In order to qualify, you must prove that you can afford to make the mortgage payment, property tax, and homeowners’ insurance, as well as your current expenses like credit cards, personal, auto, and student loans.
Lenders consider the number of times you’ve used your benefit, monthly gross income, monthly expenses, down-payment, and a credit score which minimum allowed is 620. The maximum debt-to-income ratio you can have is 41%.
Requiring no money down is the biggest benefit to using the VA loan but keep in mind that you’ll still have to pay an upfront VA funding fee. Under certain circumstances, you can even finance the VA funding fee.
As of January 1, 2020, the VA doesn’t limit how much you can borrow from your lender, provided you qualify, you’ll get a home loan entitlement, this allows you to borrow up to 4x the amount of that entitlement without a down-payment, this is your loan limit.
The VA loan is my favorite, I recommend it 98% of the time. There is no reason why you shouldn’t use your VA benefit if you can, and in this market, vets should choose to work with a mortgage broker that is familiar with all the products available in the market, sometimes conventional rates are beating VA loans in high balance between $510,000 to $765,000, but are still my choice under $510,000.
–Scott Criss – The Criss Group, a San Diego, California based mortgage broker.
There are 2 types of entitlement:
- Basic – The VA guarantees your lender that they’ll up to $36,000 or 25% of your loan, whichever is less if you default on that loan. $36,000 x 4 = $144,000
- Bonus – Let’s say you want to buy a home that costs more than $144,000, to make this happen, they offer a second (bonus) entitlement, this varies depending on the market.
There are several types of VA renovation loans supported by the US Department of Veterans Affairs and understanding how these loans work will help you decide which one fits your conversion plan best. VA renovation loans allow eligible military borrowers to buy or refinance a fixer-upper house – and finance the cost of improving their homes into the loan.
Military borrowers enjoy flexible VA loan policies, including low-interest rates, low down payments, and a low loan-to-value ratio. FHA mortgage loans have historically had lower average rates than commercial and conventional financing programs.
The Federal Housing Administration (FHA), which is part of the US Department of Housing and Urban Development (HUD), offers a loan program for the refurbishment and repair of single-family homes. While rehab loans are designed for fixers, buyers can also take out loans for homes that need work and finance construction costs for repairs.
Veterans and military personnel in California can get home loans through CalVet, which offers lower market rates and has no or lower down payment requirements. These renovation loans can be used to purchase a home. For the nearly 1.6 million vets living in California, most will find a program that they qualify for so they can buy a home.
As a requirement, these loans only apply to homes inhabited, occupied, or purchased by veterans. Home loans for veterans extend eligibility to current and former service members who have served at least 90 days.
Some loans can also help you make repairs or upgrade the house you already own. VA renovation loans are financed by repaying the loan over 30 years, resulting in a lower monthly rate.
This is used to address electrical, sanitary, and structural problems by modernizing the kitchen and bathroom, replacing the floor, or making the house more energy-efficient. A loan for refinancing allows you to take cash out of your equity to replace an existing VA loan.
Once you have received approval for the loan, you will need to provide a detailed list of specific renovations to be carried out. Instead of having two separate loans, VA rehabilitation loans can be converted into a single loan. They have only one mortgage rate and one monthly payment.
Apart from basic military authorization, it should be noted that VA loans, unlike investment real estate, may only be used for personal use and may only be issued by a qualified bank or lender. There is also a streamlined VA refinancing program.
The VA Energy Efficient Mortgages Program, also known as VA EEM, enables active and retired military personnel, including veterans and reservists, to incorporate their energy-efficient upgrades into their mortgage, they only make up 1% of total home loans in the US, even after 30 years!
You can qualify for the EEM program through the VA if you have been a member of the U.S. Army, Navy, Air Force, Marine Corps, or Coast Guard.
The VA does not fund loans, but it does provide financial guarantees for loans eligible for the program. The VA sets the rules for those who qualify, and the minimum requirements and policies for which mortgages may be offered.
The Energy Efficient Mortgage Loan Program is just one of many FHA programs that insure mortgage loans. The loan maximum amount depends on the county limits, but the limit for 1-4 units is $1,472,550. This is not considered a second mortgage, it’s an add-on to your current or proposed mortgage after your refinance. No additional lien.
The Energy Efficient Mortgage Program allows borrowers to include the cost of energy efficiency improvements in their FHA loan. VA loans offer flexible credit policies and often do not require a down payment.
The Veterans’ Administration (VA) is limited to veterans and their dependents, veterans’ families and veterans’ families with children under 18.
The EEM incorporates the cost of energy efficiency improvements into the loan itself, allowing the borrower to repay the investment as an investment over the term of the loan and deduct interest from federal and state income taxes. The VA limits loans for energy-efficient improvements to $3,000 to $6,000, with an additional $1,500 for the first year and $2,200 to $4,300 for each year after that.
Participating lenders also offer borrowers discounted mortgage rates, and homebuyers can increase their debt-to-income ratio by two percent if they can demonstrate the ability to offset higher mortgage payments. Buying a home that is already energy efficient will increase Fannie Mae’s mortgage amount by up to 5%.
In addition to the government-insured program, private lenders can also offer their own energy-efficient conventional mortgages under the Energy Efficient Mortgage Program, which is supported by Fannie Mae. In addition, most mortgage lenders offer EEMs through federally insured mortgage programs, such as the Federal Home Loan Mortgage Insurance Program (FHLIP) and the US Department of Housing and Urban Development (HUD).
Adding the cost of these improvements to the loan amount saves the borrower significant time and money compared to obtaining a separate loan or paying out-of-pocket for the upgrades. In addition, a higher mortgage amount can be an advantage for borrowers in the form of tax deductions, versus paying for improvements using credit cards or personal loans that do not provide a tax deduction or advantage. As improvements in energy efficiency reduce monthly utility costs, improving the ability to make mortgage payments, borrowers do not need to apply for new, higher mortgage amounts.
In short, the VA-EEM program allows borrowers to make energy improvements to their homes that they might not otherwise be able to afford. Veterans Administration (VA) The EEM program has enabled borrowers to conserve energy and save money from utilities.
What is an Example of EEM and How Can it Work for You?
An example from the HUD website:
If your total monthly income is $5,000, then the maximum allowable monthly payment is 29% which is $1450, then the maximum mortgage is $207,300.
BUT, if you chose to purchase an energy-efficient home:
The maximum allowable monthly payment increases to 33% which is $1650, so the maximum mortgage you are allowed goes up to $235, 900. This gives you the opportunity to move into a nicer home with lower monthly bills, making it even more affordable.
There are three different kinds of EEMs
- VA EEM – For past and present military personnel and allows you to spend up to $6000 for energy-efficient upgrades.
- FHA EEM – You can bower up to 5% of your home’s value, between $4000-$8000
- Conventional EEM – These are lenders who sell their loans to Fannie Mae and Freddie Mac, it’s the most powerful of the three programs with 15% of your home’s value for improvements.
What Things Can EEM loan Pay For?
You can use the EEM loan to pay for upgrades like solar, fix or replace a chimney or wood-burning stove, energy-efficient water delivery systems, home weatherization, higher R-value insulation, new high-efficiency HVAC unit with air ducts, new insulated glass Low-E windows among other things.
How Do You Get the Loan?
First, you need to find out what upgrades your home needs, to satisfy the requirements, you will need to obtain a HERS report – Home Energy Rating System, which is an evaluation of your home. A certified and trained RESNET HERS Energy Rater comes out to your home and completes an inspection. The costs are between $300 to $800 and it can be financed in the loan.
The HERS report includes:
- The overall rating for the house As-Is
- Recommendations for upgrades
- Cost estimates of price, savings, and life of the upgrades.
- Value of the home after the improvements
- Before and After comparisons of energy costs for the home
Once you have your rating, work with your lender to find out how much loan you qualify for, then when the loan closes, the funds go into an escrow account, you’ll have between 90 and 180 days to complete the upgrades, you can choose to make the improvements yourself, but you can’t pay yourself for the labor.
What Properties Qualify for a VA Loan?
New Construction is ok if it’s 100% complete, or complete by the customer’s standards with necessary appliances, countertops, and flooring. If you want to buy a new build which is considered new within 1 year of being constructed and never lived in, you will need to get a warranty from the builder on the home for 1 year or enroll in a 10-year protection plan or you can act as your own builder and plan to start right away, and of course, live there as your primary residence.
You’ll have to get an appraisal that will be based on your plans and the after-built value. In this case, I suggest you work with an experienced builder / general contractor as your project manager and consultant.
The VA must approve any condo development before they will guarantee a loan there, this involves reviewing the complex’s homeowner’s association documents, policies, parking availability, and by-laws. The VA has a list of already approved complexes here.
Modular and Manufactured Homes
The VA will give you a loan on a modular or manufactured home if it’s permanently attached to a foundation.
It is relating to safety and livability and must have a working and functional systems. It can’t be in a flood hazard zone where you can’t get flood insurance since homeowner’s insurance policies don’t cover floods and the bank couldn’t protect themselves in a disaster.
The VA does not say that you can use your VA loan for investments, but it is possible if you understand the rules and plan to buy a property intended for personal use. In the case of a single-family home, you first must live in the home and if you receive assignments elsewhere then turn it into a rental property or allow your spouse to live in the property.
If you choose to buy a 2-4 unit property by using your VA benefit, you can also invest with a VA loan. Then makes a lot of sense in my opinion, maximize your benefit and allow others to pay down your mortgage! You just need to occupy one of the units for at least one year.
This is an extremely useful advantage if you are interested in buying an apartment building with a small down payment. If you qualify for a VA mortgage, you may be able to purchase a property with four units without a down payment.
What if You Have Challenged Credit or Carry a Little Extra Debt?
The government offers multiple loan options that may be a better choice besides a VA loan. If you have challenged credit and can’t hit the required 620 fico for a VA loan, with the FHA loan you can qualify with only 580 credit scores. If you have a higher debt-to-income ratio, they will allow for 43% or higher.
These guidelines apply or single-family, mobile home, or manufactured homes.
- A minimum credit score of 550 required with a down payment.
- The minimum down payment is 3.5%
- FHA requires (MIP) Mortgage Insurance Premium
- The maximum debt-to-income ratio is 43%
- You must intend on the home being your primary residence
- Borrow must have a 2-year work history with good income
Recap – Quick Facts
- The Department of Veterans Affairs insures VA loans but doesn’t make them.
- Vacant land isn’t allowed on its own, but if used in conjunction with a construction loan, it’s fine.
- You have to plan to use the VA loan for primary residences, not a vacation or investment homes.
- They don’t penalize you for paying the loan off early.
- They have a funding fee that should be expected but can be financed if needed.
- No monthly mortgage insurance needed for this loan. Your funding fee offsets this.
- If you can pay off your VA loan you can reuse the VA loan benefit.
- The VA loan may not be for every veteran but should be considered.
- Over 80% of VA loans require no down-payment.
- Hundreds of thousands each year are using the VA loan to refinance their loans as well.
- A 2015 annual benefit report stated that the average VA borrower has less than $9,000 in assets.
- You can still qualify with bankruptcy or foreclosure on your credit, even after one year of discharge!
- There is a surge in VA loans since the housing crisis.
- Don’t be one of the millions of veterans missing out!
- Don’t lose your home to foreclosure without checking out all of your options including a VA loan.