The Department of Veterans Affairs (VA) is a government entity that caters specifically to our nation’s veterans. In order to help our veterans achieve affordable housing the VA will guarantee loans made by approved lenders via the VA Loan Guaranty Service within the Department of Veterans Affairs. This enables lenders to offer veterans 100% financing, more lenient loan terms, and easier credit qualifying.
There are three types for VA loans: Purchases, Cash out Refinances and VA’s Interest Rate Reduction Refinance Loan (IRRRL). Click below for more information on each of these transaction types.
- Cash Out Refinances
- Interest Rate Reduction Refinance Loans
The most attractive feature of a (VA) Veteran’s Home Loan loan is 100% financing. This means the veteran is not required to put down any money as a down payment. No other mortgage product offers this – not even FHA loans! Listed below are more great reasons to choose a VA loan:
0% Down Payment – The VA offers 100% financing for veterans – this means they are not required to put have any kind of a down payment. The only exception to this is when the purchase price exceeds the appraised value. Under this circumstance the veteran would be required to pay the difference from their own resources.
Gifts – Family members are allowed to give you a gift of money to help pay for your new loan. A gift of money can cover closing costs, the VA Funding Fee or even contribute to a down payment even though a down payment is not required.
Seller Contributions – Sellers may contribute up to 4% of the sales price to pay for things such as carpet allowance, minor repairs, and/or the VA Funding Fee that is required at closing. Any amount over 4% would require a reduction to the loan amount. However, sellers may pay for any veteran’s allowable fees without limit.
Lower Qualifying FICOs – Minimum FICO is 620 but we will lend to borrowers with nontraditional credit as well.
Higher DTI – DTI, or debt to income, is the ratio of your gross monthly income compared to your monthly debt obligations – essentially what proportion of your income is used to pay your housing expenses, car loans, credit cards, etc. With a VA loan your DTI can be higher than FHA or conventional loans, as long as it’s been determined by an underwriter that the new loan will not put you, the veteran, in financial hardship.
No Mortgage Insurance Required – Mortgage insurance is not required on VA loans regardless of the LTV.
Cash Out Refinances
Any refinance of a VA loan that is not specifically an IRRRL is considered a Cash out Refinance regardless of whether the borrower will actually be receiving cash at the end of the transaction or not. The main benefit of doing a VA Cash out Refinance is the option to refinance up to 95% of the new appraised value. Borrowers receiving less than $500 when the loan closes have the option of refinancing 100% of the appraised value. Also, unlike FHA and conventional refinances, mortgage insurance is never required – regardless of LTV.
Interest Rate Reduction Refinance Loans
Similar to the FHA’s Streamline Refinance loans, the IRRRL is a faster loan process with less documentation specifically intended to improve the borrowers’ loan terms. In general, to qualify for an IRRRL the new loan must do one of the following: lower the rate, shorten the loan term, and/or move you to a more stable product (Such as an ARM to a Fixed product). The Funding Fee is still required as with all VA loans, but at a reduced rate of 0.50% of the loan amount.
The VA funding fee
In order to fund the administration of the VA Home Loan Program each veteran is required to pay a funding fee to the VA at the time the loan closes. The fee is a percentage of the initial loan amount and may be added to the loan balance or be paid in cash when the loan closes. The Funding Fee ranges from 1.25% – 3.30% of the loan amount, depending on whether the veteran wants to use a down payment or not, or if the veteran has used entitlement before. Veterans who are permanently disabled at a rate of 10% or more due to active duty injury are exempt from paying the Funding Fee.
The VA Guarantee
The VA Guaranty protects the lender from loss if the borrower defaults and the loan is then guaranteed by the veteran’s entitlement. However, if used for a loan default, it must still be repaid by the veteran to the VA and is considered a government debt. The amount of the guaranty is dependent on the veteran’s entitlement and the property value.
Restoration of Entitlement
If a Veteran has used entitlement in the past it is still possible for the entitlement to be restored and to receive a new VA loan, as long as the previous VA loan has been paid off. The veteran should complete the form VA 26-1880 Request for Certificate of Eligibility along with a copy of the HUD-1 documenting the loan being paid off. MFG will assist the veteran to get entitlement restored with VA.
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