7 Reasons To Choose The VA Loan Program When Buying A Home

Nothing in this blog constitutes legal advice. This information is not intended as legal advice or representation. No attorney-client relationship is formed nor should any such relationship be implied. Nothing in this blog is intended to substitute for the advice of an attorney, especially an attorney licensed in your jurisdiction. If you require legal advice, please consult with a competent attorney licensed to practice in your jurisdiction.

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Although various types of home loans are available, a special home loan guaranty program was established by the United States Department of Veterans Affairs (“VA”) for military service members, veterans, and certain surviving spouses.[1] Congress passed the Servicemen’s Readjustment Act in 1944 (herein the “G.I. Bill”), which bestowed several benefits to returning World War II veterans.[2] The G.I. Bill included a provision that authorized the VA to guarantee homebuyer loans for veterans.[3] Since the creation of the VA Loan Program, more than 21 million VA home loans have been issued. [4] These loans have helped countless families purchase properties and embrace the American dream. Here are seven reasons to follow their lead and choose a VA loan for your home purchase:

1. 1. No Down Payment. One major benefit of the VA Loan program is that applicants do not need to make a down payment. In the absence of a down payment, the VA provides a lending institution with a government issued “certificate of guarantee,” as security against foreclosure. By using a VA home loan, eligible members can obtain financing up to 103.3 % and up to $6,000 for energy efficient improvements.[5] There is no cap on how much one can borrow to finance their home, but there are limits on the amount of liability the VA will assume.[6] Eligible applicants will receive a basic home loan entitlement of $36,000.[7] Under the Veterans Benefits Act of 2004, the maximum guaranty amount was amended for loans in excess of $144,000 to amount equal to 25% of the Freddie Mac conforming loan limit.[8] As shown in the following chart, for properties located in Hawaii, Alaska, Guam and the U.S. Virgin Islands, the Freddie Mac charter increased amounts by 50%, provided that they are first mortgages.[9] It should be noted that lenders can only reference the One-Unit Limit in the FHFA Table “Fannie Mae and Freddie Mac Maximum Loan Limits for Mortgages Acquired in Calendar year 2015 and Originated after 10/1/2011 or before 7/1/2007” when determining the VA guaranty.[10]
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3. 2. No Closing Costs. Using a VA Loan allows a buyer to avoid paying closing costs. Closing costs are “fees that are associated with completing a loan transaction or purchase.”[11] The list of costs that the VA won’t allow the homebuyer to pay includes the following: lender document fees, recording fees (in excess of $17), notary fees, transaction coordinator fees, broker fees, and termite inspection fees.[12] The VA allows prepaid finance charges (“PFC”), which are connected to the loan and affect the annual percentage rate charged.[13] The list of common PFC’s that are charged includes escrow for prepaid interest and property taxes, the VA Funding Fee, and homeowners association dues, where applicable.[14] Fees that are paid outside of closing (“POC”) are also allowed by the VA.[15] Common POCs include credit reports, pest inspection fees, VA appraisals, and home inspections.[16]

1. 3. Easy Qualification Standards. Most military members, whether active or retired, are eligible for this loan through service they have already completed. The three categories of qualified individuals are: National Guard or Reserve members, Active Duty members, and Veterans. [17] Currently, National Guard and Reserve service members can satisfy the service requirement by completing any of the following: (1) serving for at least six years in the National Guard or Reserve, and (a) were honorably discharged; (b) were placed on the retired list; (c) were transferred to the Standby Reserve, or an element of the Ready Reserve other than the Selected Reserve after characterized as honorable; or (d) continue to serve in the Selected Reserve; or (2) serving on ninety (90) days of active service, provided that such service occurred between August 2, 1990 and the present.[18] Active duty service members can satisfy this requirement by completing ninety (90) days of continuous service.[19] Finally, any veterans who served in the military between August 2, 1990 and the present will qualify, provided that they completed twenty-four (24) continuous months, or the entire period (at least ninety (90) days) for which they were called or ordered to active duty.[20] Veterans who served before the Gulf War commenced are subject to various minimum active duty service rules, which depend on the qualifying active duty dates (as depicted in chart shown below).[21]
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3. 4. No Private Mortgage Insurance. Another benefit to using the VA Loan Program is that no Private Mortgage Insurance (“PMI”) is required. PMI is a risk-management tool that private lending institutions use to protect against borrower defaults.[22] Under conventional loans, lenders normally require PMI if the buyer plans to pay less than 20% at the closing.[23] This arrangement is often expensive, because the borrower is required to make monthly PMI payments until sufficient equity is accumulated in the property.[24] Depending on other factors, such as the loan term and the buyer’s credit score, the cost to carry PMI can range from 0.20% to 1.50% of the balance on the loan each year.[25]

1. 5. Multiple Use Allowed. VA loans can be used multiple times. A common misconception is that a VA loan can be used only once. Once a person qualifies for the VA Loan Program, he or she will be eligible to use the VA home loan again in the future.[26]

1. 6. Credit Score Standards. A homebuyer’s credit score is always a factor when buying a home, but the VA Program has relaxed standards. A credit score is defined as a “statistically derived numeric expression of a person’s creditworthiness that is used by lenders to access the likelihood that a person will repay his or her debts.”[27] The scores are derived from the relationship between the different items in a credit report and the likelihood of default. [28] For example, FICO scores (the most commonly used credit score) range from 350 to 850, the higher the better.[29] As of April 2014, the national median FICO score was 692, so this offers a benchmark that many lenders will use to measure against.[30]

1. 7. Multipurpose Loan. Finally, VA loans can also be used to refinance an existing home. Eligible applicants can refinance in a couple of different ways. The most popular types of refinance options include the VA Streamline Refinance and a VA cash-out refinance.[31] The Streamline Refinances option allows veterans with an existing VA Loan to refinance to a lower interest rate.[32] Cash-Out Refinances offers the homebuyer the chance to use his or her equity in the home as cash. If state law allows it, veterans can borrow up to 100% of reasonable value in a refinance where a new VA loan is created.[33] In a refinance, where the borrower is using a VA loan to refinance an existing VA loan, the veteran can borrow up to 100.5% of the total loan amount.[34] The additional .5% represents a funding fee for a VA Interest Rate Reduction Refinance. [35]

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Citations:

1. 1. http://www.mass.gov/veterans/housing/home-loans/va-home-loan-program.html

1. 2. History of the Loan. Clayton Closson, Quicken Loans.

1. 3. Id.

1. 4. https://www.veteransunited.com/resources/stats/

1. 5. http://nationstrustmortgage.com/loan-products/va-loan

1. 6. http://www.benefits.va.gov/homeloans/purchaseco_loan_limits.asp

1. 7. Id.

1. 8. Id.

1. 9. Structured Agency Credit Risk Investor Overview Deck. Freddie Mac. © 2015.

1. 10. http://www.benefits.va.gov/homeloans/purchaseco_loan_limits.asp

1. 11. Define Closing Costs. Laura Bramble, Demand Media.

1. 12. Pulling Back the Curtain on VA Home Loan Closing Costs. Chris Birk, Veterans United Network. December 16, 2014.

1. 13. Id.

1. 14. Id.

1. 15. https://portal.hud.gov/hudportal/HUD?src=/program_offices/housing/ramh/res/sc3secta

1. 16. Id.

1. 17. http://www.benefits.va.gov/homeloans/purchaseco_eligibility.asp

1. 18. Id.

1. 19. Id.

1. 20. Id.

1. 21. Id.

1. 22. http://www.investopedia.com/terms/p/privatemortgageinsurance.asp

1. 23. Id.

1. 24. Id.

1. 25. What you need to know about mortgage insurance. Amy Fontinelle, Interest.com. August 20, 2015.

1. 26. Yes, You Can Use Your VA Loan Benefit Again. Chris Birk, VA Loans Insider. August 6, 2014.

1. 27. http://www.investopedia.com/terms/c/credit_score.asp

1. 28. http://financial-dictionary.thefreedictionary.com/Credit+Score

1. 29. Id.

1. 30. VA Loans and Credit Score Minimums: What All Buyers Need to Know. Samantha Reeves, Veterans United Network. February 3, 2015.

1. 31. http://www.benefits.va.gov/homeloans/irrrl.asp

1. 32. Id.

1. 33. http://nationstrustmortgage.com/loan-products/va-loan/

1. 34. Id.

1. 35. Id.

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Disclaimer – Blog Not Legal Advice – No Attorney-Client Relationship Formed by These Posts or By Any Comments, or By Comments Replying to Comments, on This Blog. The information and materials on this blog are provided for general informational purposes only. This information is not intended to be legal advice. The law changes frequently and varies from jurisdiction to jurisdiction. Being general in nature, the information and materials provided may not apply to any specific factual and/or legal set of circumstances. No attorney-client relationship is formed nor should any such relationship be implied. Nothing on this blog is intended to substitute for the advice of an attorney, especially an attorney licensed in your jurisdiction. If you require legal advice, please consult with a competent attorney licensed to practice in your jurisdiction.