In the great Badger State of Wisconsin, the VA loan can be used whether a borrower needs to buy a home or refinance an existing VA mortgage. The VA loan that is authorized by the Veterans Affairs Department provides a great benefit to the men and women who have sacrificed for our United States of America.
Top Benefits of a VA Loan
The VA program has multiple advantages that make this program very attractive to qualifying borrowers. The top benefits of the VA loan are:
- Borrowers can buy without making a down payment allowing Veterans to purchase now. There’s no need to save thousands of dollars to apply towards a down payment first.
- Unlike other loans that require private mortgage insurance if the borrower pays less than a 20% down payment, this program does not require PMI (private mortgage insurance)
- Interest rates for this program are very competitive with FHA and Conventional mortgages
- Credit guidelines for getting approved for this program are quite forgiving compared to a conventional loan
- If agreed upon in writing, the seller of a home is allowed to pay a significant portion of the costs associated with the loan
The fact that the VA loan does not require a down payment nor any private mortgage insurance payments allows the borrowers to save a lot of money not just at closing but also over the life of the loan.
People have various options for serving in the armed forces of the USA. Therefore, there are various ways a person can qualify for this program. The following lists out different details for each type of service record and their ability to qualify someone for the VA loan.
- Discharged after service during a war – A veteran that served no less than 90 days during the time of war and then received an honorable discharge.
- Discharged after service during peace – A veteran that served no less than 181 days, in a row, during the time of peace, and received an honorable discharge.
- Current Duty – anybody that is currently enlisted in any branch of the military and has completed a minimum of 90 days of their service.
- Disability discharge – If the veteran sustained an injury during service that left the person disabled and subsequently honorably discharged
- Service in the 1980s – Any veteran whose service time occurred between the dates of September 7, 1980, to August 1, 1990, must provide documentation that they were enlisted for a minimum of consecutive 24 months and that they received an honorable discharge.
- Army National Guard or National Reserve –
The following conditions apply for people that served in either the Guard or the Reserve:
- Must show that they have completed at least 6 years of service.
For a person that did not complete the 6 years due to a disability, the person must be in one of the following categories:
- Honorable Discharge
- Received a transfer to the Ready Reserve unit
- Made the decision to be a member of Selected Reserve
Broadening the eligibility requirements to extend to both active duty and past duty personnel, as well as members of the Guard and Reserve, has opened the program to a large number of applicants.
Spouses of Deceased Veterans
The Veterans Affairs office has determined that the VA loan should not stop with just the actual veteran. In the event that a veteran (1) receives an injury or disability during their service and (2) passes away after discharge due to the injury or disability, then the veteran’s spouse may apply for this program.
Property Types Allowed
The following list represents the type of homes that may be purchased with the use of the VA loan
- Single-family residence
- A new construction property
- A townhome
- A condo that is in a unit that was approved by the VA department in the past
A qualifying borrower may not use the VA loan to purchase a rental property. The borrower must intend to live in the property as their main home.
In order to provide veterans with a program that does not require either a down payment or private mortgage insurance, the banks, and other approved lenders are taking on quite a risk. If the veteran finds themselves in a position where they can no longer make the home payments, the lender could be stuck with a major loss.
For this reason, all VA loans are assessed a funding fee. The money collected from the funding fee is placed in a trust and used to provide a guarantee for lenders in the event that a home is foreclosed.
The first time that a veteran uses their eligibility to purchase a home with the VA loan, the lender will charge the veteran 2.3% of the original VA mortgage amount. Thankfully, the fee can be combined with the initial VA mortgage so that the veteran may pay the fee over the course of the VA mortgage term. If the veteran sells the first home and chooses to use the VA mortgage again, the funding fee will increase to 3.6% of the original VA mortgage.
Qualifying members of the Reserve or National Guard pay the same amount for their funding fee. With their first home purchased with a VA mortgage, the funding fee is also 2.3%. For any additional VA mortgage, the fee will be 3.6%.
After the lender has determined that a person has the proper service eligibility for a VA mortgage, and after their credit report has been reviewed, the lender will next determine if the veteran can afford to pay for the proposed home payment.
The various credit cards, auto loans, and other monthly payments will be gathered from the credit report. The proposed home payment, along with estimated amounts for the home insurance policy and the annual property taxes, will be added to the other debt payments. This will provide the lender with the veteran’s total monthly payments. This figure is then compared to the veteran’s monthly gross income. As long as the percentage is 41% or less, the veteran has a strong chance of getting approved for the VA mortgage.
Here is a detailed example to illustrate the debt-to-income calculation. Let’s imagine a married veteran who has a job earning $80,000 per year and a wife having a job making $30,000 per year. The married couple has a single car payment of $389 per month, plus a few credit cards that total $332 per month, along with a small unsecured loan at their local credit union for $120 per month. The calculations would look like this if they had a proposed $1,500 per month home payment (including taxes and insurance escrow):
$80,000 + $30,000 = $110,000
Salary divided by 12
Total debts ($389 + $332 + $120 + $1,500)
Debt to Income ratio ($2,341/$9,166.67)
After determining the debt-to-income ratio, the lender will make one more calculation. This calculation is called the residual income test. This states that after the veteran has made the necessary monthly debt payments, there should be enough money left over to take care of basic needs such as utilities, groceries, clothing, and other items. The residual income amount will be determined by the VA mortgage amount as well as the number of people that intend to live in the home and their location. This calculation gives the lender a rule of thumb to use to determine if the veteran is a good candidate for the program.
VA Mortgage Refinance
Along with buying a property, the VA mortgage may also be used to refinance a mortgage. There are 3 different ways in which a VA mortgage may be used for a refinance transaction.
- Streamline refinance or IRRRL (Interest Rate Reduction Refinance Loan) – A streamline allows a person with a current VA mortgage to refi with minimal paperwork. A new appraisal is usually not required and the homeowner does not have to provide proof of income documents. The purpose of the streamline is to either lower the veteran’s overall payment by taking advantage of a lower interest rate or keep the payment the same with a lower payment term in years.
- Refinance any other type of program to a VA mortgage – If a qualifying veteran chose to buy a home with a conventional mortgage, FHA, or some other type of program they may later decide to use the VA program to refinance the mortgage.
- Cash-out Refinance – This is the type of mortgage that is advertised frequently over the radio, TV, and internet. When a veteran has a home whose value is greater than the balance of the existing VA mortgage, the veteran may choose to refinance the mortgage to a higher amount and use the additional funds as they please. The funds may be used to pay off other debt, purchase a boat, go on a vacation, or any other possible reason.
The refinance options provide some flexibility to the homeowner and give them the option of either getting a better home payment or tapping into the equity of their home.
Summing Up The VA Mortgage
With so many attractive features, it is easy to see why many qualifying veterans choose the VA mortgage as a way of buying a home and living out their version of the American dream.