With the increased number of active military personnel due to the war in Iraq, applications for VA loans may be on the rise in the months and years to come. What is a VA loan? What are its benefits over traditional financing? Who qualifies?
A VA loan is one that is backed by the Department of Veteran Affairs, so they are guaranteed by the Federal Government. VA loans are available to eligible veterans, and in special circumstances, to their spouses.
VA loans feature no down payments on loan amounts up to $417,000 if the veteran has full entitlement. This allows veterans to retain their savings for other purposes and also offers an advantage to borrowers who have been unable to accumulate savings. Monthly mortgage insurance and cash reserves are not required for these loan types. This lowers the monthly payment and allows more borrowers to qualify. Sellers are allowed to contribute 4% towards the buyer's closing costs, allowing the buyer to close with less money from their own pocket. The Department of Veterans' Affairs does not impose credit score requirements on the loans. However, most lenders that fund VA loans will have a minimum credit score requirement of their own in order to do the 100% financing. Typically, it is in the 580-600 range.
VA loans are also assumable, which in today's market is very unusual. The assumption feature means that a new borrower can assume the terms of the original loan if they qualify. VA also offers an Interest Rate Reduction Refinance Loan (IRRRL). This allows an existing VA loan to be refinanced without an appraisal and in most instances, with no credit qualifying. This provides veterans a quick, easy, and less costly means to refinance and take advantage of a lower interest rate.
VA financing is available for primary residences only (no investment or second homes). Eligible borrowers include any man or woman who has served in the past, or is currently serving, in the armed forces for the period of time as required by VA to be eligible for VA benefits. Veterans will need to provide a DD214 to show their dates of service and the amount of their entitlement.
The biggest drawback to VA loans are the property inspections and appraisal. Appraisals are not intended to be property inspections; however, appraisers are required by VA to determine the overall condition of the subject property and recommend any readily observable repairs necessary to meet the Minimum Property Requirements as provided by VA.
VA loans are a wonderful opportunity for first time homebuyers who are veterans. They offer 100% financing, low fixed rates, no monthly mortgage insurance, and little cash for closing. With the decline of the subprime marketing, I am sure that we will see an increase in VA loans as our soldiers make their way home.
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