Among the various benefits offered to our men and women who have served in the military, the VA mortgage is a real gem. The VA loan is a mortgage program that has empowered thousands of Illinois residents with the ability to buy a home and secure a place in their respective communities.
There are a handful of benefits that come with the VA Guaranteed loan that distinguishes it from other types of mortgage loans.
No Down Payment Requirement
There are a lot of excellent programs available to help Illinois residents buy a home with a small down payment. However, the VA mortgage does not require any down payment for qualified borrowers.
This one major feature gives a veteran the chance to buy a home and potentially save thousands of dollars when compared to the 3% to 5% down payment requirement of other types of loans.
No Private Mortgage Insurance
Most loans that allow borrowers to buy a home with a down payment of less than 20% of the asking price will charge a monthly premium known as Private Mortgage Insurance or PMI. This premium is designed to protect the lender in case the homeowner is not able to make all the payments on the mortgage.
In contrast, the VA mortgage does not ask borrowers to pay PMI. When combined with the no down payment feature, it is clear that qualified veterans can save a lot of money using the VA loan option to purchase a home.
However, there is a funding fee that the VA charges which is 2.3% the first time and a little higher at 3.6% for subsequent uses. This fee can be added to the loan amount and in some circumstances, certain veterans could be exempt from paying it.
Less Expensive Closing Cost
It is an understatement to say that there are a lot of documents involved in buying a home. For example, here are some of the service providers and their roles in the mortgage
- Mortgage lender – helps borrower complete the application
- Appraiser – reviews the home and provides a market-based price report
- Home insurance agent – provides an insurance binder to cover the home
- Title insurance agent – reviews the title & deed of the home and provides a report
- Real estate agent – helps the borrower complete a formal contract to buy the home
- Closing agent – assembles all the documents for signatures
This is only a partial list of the various people involved in a mortgage. To aid the veteran, the federal government places a cap on the amount of each item that can be charged.
Getting Approved for the VA Mortgage
Each kind of mortgage has a set of guidelines that determine who can qualify for the loan. The Veteran’s Administration oversees these guidelines, but it does not lend money directly to the borrowers. Instead, it approves banks, credit unions, and mortgage brokers to offer the VA mortgage.
Listed below are descriptions of the basic guidelines for the mortgage.
The Veteran’s Administration has differing requirements for the length of service based on wartime or peacetime. In addition, people that have served in the Reserves and/or National Guard may be eligible to get this loan. Here is a brief breakdown of the service requirements.
- Must have served at least 90 consecutive days during a declared war
- Must have served at least 181 consecutive days during peacetime
- Must have served at least 2,548 consecutive days (6 years) either with the Reserves or National Guard
- If your spouse died during the time of their military service, you may be eligible
Once you have determined that you have met the service requirement you may take the form DD-214 to a lender of your choice. The lender will use that form and apply online for your Certificate of Eligibility.
Picking an Eligible Property
The VA loan will allow qualified borrowers to purchase the following kinds of properties
- A single condominium unit if the unit is part of a VA approved complex
- A single-family home often called a stick-built home
- Multi-unit property. This can be a duplex or even a 4-plex. The main requirement is that the qualifying borrower must live in one of the units as their primary residence.
Any type of property that is zoned as commercial is not allowed for the VA mortgage. Investment or rental properties are also not allowed.
Documenting Your Household Income
One of the main document requirements of the VA mortgage is proving your annual income. Generally speaking, people use one of the following methods to document their income.
- For people that own a business, you will be asked to provide the last 2 year’s business tax returns as well as the last 2 year’s private tax returns. You may also be asked for a current cash flow statement
- For people that do not own a business, the most recent pay stubs documenting your income from the last 60 days, along with the last 2 years’ w-2 forms should be sufficient.
- If your income comes from some other type of sources, such as disability payments or investment income, you will need to document your income by providing bank statements showing where the money is coming from for the last 2 years as well as personal tax returns.
Residual Income Guideline
The VA mortgage has enjoyed some of the lowest foreclosure rates since its inception primarily for one reason; the residual income rule. This rule was put in place to ensure that the veteran would have money left over each month to cover not only basic necessities but a few luxuries from time to time.
The amount of residual income necessary to get approved will depend on the yearly income for all borrowers, the amount of monthly debt payments, and the number of people living in the home.
Less Than Perfect Credit Standards
The VA loan program is known for approving borrowers with less than perfect credit scores. So long as the borrower has made all of their debt payments on time for the past 12 to 24 months, they stand a good chance of getting approved for the mortgage. If you have time before you purchase, improving your credit score is something to consider.
Picking A VA Rate
Most mortgages come in different varieties and the VA loan is no exception. Each one has advantages that will pertain to certain circumstances.
The fixed interest mortgage is the exact opposite of the ARM. The rate that is used when the loan is closed will never change during the life of the loan. People who intend to remain at one location for many years are usually the best candidate for a fixed-rate mortgage.
You can use our speedy payment calculator to estimate your monthly payment.
As the name implies, the hybrid is a mix of two loan types. It is usually described as a fixed-rate ARM (ARM is an acronym for Adjustable Rate Mortgage). This means that the first portion of the loan will use a fixed interest rate while the remainder of the loan will have an adjustable rate.
For example, a 5-year ARM would have a fixed interest rate for the first 5 years of the mortgage. At the end of the 5 years, the rate would adjust each year until the end of the loan term. Most adjustable-rate loans have a ceiling for how much the rate can change per year and how much the rate can change over the life of the loan.
Fast and Easy VA Mortgage Refinance
Regardless of credit, income, or location, getting a loan can take some time. Recent reports show that from pre-qualification to actual closing, it can take as long as 30 days to get a mortgage.
For this reason, the VA program has a speedy refinance option. It is a great way to get a lower interest rate without the typical paperwork and time involvement of a usual VA mortgage.
Basics of the VA Refinance
The VA refinance is officially called the Interest Rate Reduction Refinance Loan. Many people in the industry refer to it by the initials IRRRL. To apply for the IRRRL, the customer must meet these requirements:
- Must currently have a VA mortgage. The program is not available for other types of home loans.
- The borrower must be on time for the most recent mortgage payment.
- The last 12 mortgage payments must be on-time payments. No late payments are allowed.
What is NOT always needed for the IRRRL
- Income documents
- COE, (also called the Certificate of Eligibility)
- High Credit Scores
- New appraisal
The focus of the VA IRRRL is to help existing veterans lower the rate on their current loan. Therefore, it is not necessary to prove their income, determine the value of the home, or perform a credit check. Even if the home’s current market value is below the loan balance, qualifying veterans can still apply for an IRRRL.
Mortgage Exception for a 2nd VA Loan
As previously mentioned, it is not allowed by the VA mortgage guidelines for one eligible borrower to have more than one VA loan at a time. But, like most rules, there are two small exceptions. The VA 2nd-Tier Mortgage can be used in the following circumstances:
Relocating to Another Base
Illinois residents who have experience in the military know that it is common to get transferred around from base to base. In a situation in which a person has already used their certificate of eligibility to purchase a home near one base, they may keep that home and rent it out. They could then buy another home at the new location using the VA mortgage.
It is important to note that qualified veterans are limited to the purchase price of a home by their eligibility certification. Since they will have one home using part of the eligibility, you can see where the 2nd home’s price would be limited since the overall eligibility is reduced.
In this situation, it is best to speak with a mortgage lender and find out the maximum amount to which you can qualify for the 2nd home.
Purchasing a House From Beyond a Foreclosure
If a qualifying Illinois veteran does not use all of their eligibility when they buy their home, it is possible to have a remainder of eligibility that can be used after a person has a home foreclosed.
Here is a walkthrough of one example.
Suppose a veteran previously purchased a home that used $41,000 of their total eligibility. And suppose that within the area the maximum loan amount is $424,100
In this scenario, the initial loan guaranty is $106,025 ( $424,100 x 0.25 = $106,025)
Initial guaranty, less amount used, equals $65,025 ( $106,025 – $41,000 = $65,025)
Therefore, the veteran may qualify for a $260,100 home loan without the need for a down payment ( 4 x $65,025 = $260,100)
Summing Up The VA Mortgage in Illinois
Illinois residents that have served on active duty or in the reserves should contact a mortgage lender and ask about the VA mortgage as they are preparing to purchase a home. The ability to buy a home without the requirement for a large down payment, and the forgiving credit requirements, make it a great way to obtain homeownership status.
- Important Disclosure
VA loans are only available to eligible veterans and service members and/or their spouse.
Madisonmortgageguys.com is not acting on behalf of or at the discretion of the Department of Veteran Affairs or the Federal Government.