The many women and men that serve our country in the armed forces deserve our utmost respect. They willingly sacrifice themselves in the pursuit of our country’s freedom. It is for this very reason that the Veteran’s Administration introduced VA loans.
Unique Mortgage Features
VA mortgages in Minnesota have a few distinct features that make them a great option for buying a home.
No Down Payment Requirement
Almost every type of mortgage will ask for some type of money to be paid upfront by the buyer in the form of a down payment. But not VA mortgages.
The guidelines for this loan expressly state that a qualifying veteran may borrow up to 100% of the home’s asking price, or appraised value, whichever is lower.
Be aware of no down payment mistakes too, as any of these could derail your purchase!
Overall Closing Costs are Cheaper
All mortgages come with closing costs. It takes quite a bit of paperwork in order to document that a person or married couple has bought a home. In order to protect the veteran, the Veteran’s Administration puts a limit on the type of items that can be charged as well as the amount.
Mortgage Insurance Not Required
Most mortgages that offer a low down payment also require an extra monthly fee called private mortgage insurance. This additional fee is paid to the lender. It acts as a safety net in case the loan is not fully repaid. Private mortgage insurance is typically calculated at a small percentage of the outstanding loan balance.
The VA mortgage does not require any private mortgage insurance. Coupled with the no-down-payment option, it is clear how this loan can save borrowers lots of money.
Like all mortgages, there are certain rules in place to determine who is eligible for the loan. Here are some of the basics of getting approved for a VA mortgage.
First and foremost, you must find out if your time in the service meets the minimum requirements. Here are the most common service guidelines
- Served on active duty at a time of peace for a minimum of 181 days
- Served on active duty during a time of war for a minimum of 90 days
- If your spouse was killed during their service
- Served a minimum of 6 calendar years either in the National Guard or the Reserves
If any of the above conditions are true, then you may use your DD-214 form and apply for the Certificate of Eligibility (COE).
Proof of Income
In order to obtain the VA mortgage, you will need to show how you earn your income. This can be done in a number of ways.
- If you are not self-employed, you will need to provide copies of pay stubs or paychecks covering the most recent 60 days along with W-2 forms for the most recent 2 calendar years
- If you are self-employed, you will need to provide copies of the most recent 2 calendar years’ personal and business tax returns
- If you are disabled and receive disability compensation, you will need to show your disability payments from the last 2 months
Eligible Home Types
VA mortgages allow qualified borrowers to purchase one of the following types of homes
- A single unit family home
- A multi-unit home. The maximum number of units is 4 and the borrower must live in one of the units.
- A condo unit that is part of an approved condominium complex
The Veterans Administration mortgage does not approve mortgages for commercial properties or investment homes.
Relaxed Credit Requirements
If your credit score is not high enough to qualify for the top conventional mortgage rates, you may still qualify for a VA loan. The guidelines look at the most recent 12 months’ history and are a bit more forgiving for past mistakes.
There are also many ways to improve your credit score if you have time before you purchase.
Meeting the Residual Income Requirement
VA mortgages have a dual clause to make sure qualifying veterans do not get a mortgage that is too expensive for them.
First, there is the debt to income ratio. This ratio compares the borrower’s monthly income to their existing debt along with the proposed mortgage payment. If the ratio is 41% or lower, then they meet the debt to income ratio guideline.
Secondly, there are residual income guidelines. This basically states that a person must have a certain amount of income left over after all bills are paid, to cover the necessities of their household. The amount is based on the number of people living in the home.
Choosing the Right Mortgage
Like most mortgages, VA loans come in many varieties. Picking the right one will depend on your specific needs at the time you choose to buy a home.
Fixed Interest Rate
The most common type of loan is the fixed interest rate. This means that the interest rate charged to the borrower will not change over the life of the loan. These loans are offered with several durations ranging from 10 years up to 30 years.
This type of loan combines the features of the fixed-rate mortgage with the one-year adjustable mortgage. The loan will have a defined period where the mortgage is fixed. Typically, this defined period will range between 3 years and 10 years. After the defined period has ended, the mortgage rate may change yearly, like the one-year ARM mentioned above.
Not only does the Veterans Administration make it possible for qualifying veterans to get a home loan, but they also have a refinance option to allow homeowners a way to lower their rate without a lengthy mortgage process. The program is officially called an Interest Rate Reduction Refinance Loan but is often referred to as an IRRRL.
In order to get approved for the IRRRL, the homeowner will have to meet a few guidelines
- The existing mortgage must be a VA mortgage
- The borrower must be up to date on their mortgage payments
- The borrower must have made the most recent 12 payments on time
Items NOT Required In Certain Circumstances
The following things may not be required for the IRRRL
- Proof of income
- Strong credit score
- Certificate of Eligibility
- Home appraisal
These things are not always required since the goal of the loan is to provide a benefit to the borrower. A benefit can be defined as lowering the principal and interest payment on the new loan compared to the old principal and interest payment.
Having 2 VA Mortgages at the Same Time
Although it is usually declined, there are a couple of instances where it is possible for a qualifying American veteran to have 2 VA-approved mortgages at the same time which is also known as a Second-Tier mortgage.
The most common scenario involves someone still enrolled in the military and has been assigned a new duty station. If the person has bought a home at their current location, they may choose to keep the existing home as a rental and use their COE to buy a second home at the new duty station location.
However, the purchase price of the 2nd home may be lowered by the outstanding balance of the existing home. Your mortgage lender can walk you through the calculations to help determine how much you can borrow with your COE.
Buying a Home After Foreclosure
The other way to have two VA mortgages at the same time involves a foreclosure.
There is a calculation performed when a veteran buys a home to determine their eligibility. If they have not used all of the entitlement, it is possible to buy a home with the VA mortgage after suffering through a foreclosure.
Here is an example to help make sense of the calculation.
Assuming that a veteran is considering a home in an area where the maximum allowed loan amount is $548,250 and that $43,000 of their entitlement was used in the foreclosure.
$548,250 multiplied by 25% gives us $113,275, which is the maximum amount of guarantee.
The veteran used $43,000 of the guaranty in the previous foreclosure, leaving $70,275.
Multiplying $70,275 by 4 results in a $281,100 maximum mortgage amount that the veteran may qualify for without a requirement for a down payment.
Summing Up VA Loans for Illinois Residents
Any person that has previously served in the military or currently serving should start with this mortgage as their first option for buying a home. The relaxed credit requirements and the ability to buy with no down payment make it a great way to get a home and save money at the same time.
- Important Disclosure
VA loans are only available to eligible veterans and/or their spouses.
Madisonmortgageguys.com is not acting on behalf of or at the discretion of the Department of Veteran Affairs or the Federal Government.