Things to know about VA loans

Mortgage can allow for no down payment

Demand has increased in recent years for Veterans Affairs mortgages, known as VA loans. These mortgages do not always require a down payment and are available to veterans and active military members.

VA loans are made through private lenders and are guaranteed by the Department of Veterans Affairs, so they do not require mortgage insurance. There’s no minimum credit score requirement.

The VA loan remains one of the few mortgage options for borrowers who don’t have down payments. Available to millions of veterans and active military members, VA loans are somewhat easier to qualify for than conventional mortgages.

The U.S. Department of Veterans Affairs is not a direct lender. The loan is made through a private lender and partially guaranteed by the VA, as long as guidelines are met.

If you think you may be eligible for a VA loan, here are some must-knows about the program.

ELIGIBILITY

Most members of the military, veterans, reservists and National Guard members are eligible to apply for a VA loan. Spouses of military members who died while on active duty or as a result of a service-connected disability may also apply.

Active-duty members generally qualify after about six months of service. Reservists and members of the National Guard must wait six years to apply, but if they are called to active duty before that, they gain eligibility after 181 days of service.

“Most reservists are qualifying under active duty,” says Michael Frueh, loan guaranty director for the Department of Veterans Affairs.

Reservists, members of the National Guard and active-duty members generally are eligible after 90 days of service during war periods.

“If you were on any type of foreign soil, more than likely you are eligible,” says Grant Moon, a veteran and president of VA Loan Captain Inc., a loan referral company.

Potential borrowers must obtain a certificate of eligibility. The form can be submitted online.

“But you don’t need the Certificate of Eligibility in hand to start the mortgage process,” says Chris Birk, director of education for Veterans United Home Loans. “Lenders in many cases can get this document for borrowers during the preapproval phase.”

ADVANTAGES OF A VA LOAN

Loans guaranteed by the VA can be obtained without any down payment.

“That’s a huge plus,” Frueh says.

Another plus: A VA loan doesn’t require mortgage insurance, as do Federal Housing Administration and conventional loans with less than a 20 percent down payment. The benefit translates into significant monthly savings for VA borrowers. For instance, a borrower who makes a 3.5 percent down payment on a $200,000 FHA-insured mortgage pays $142 a month for mortgage insurance alone.

“And with a VA loan, you don’t have to save all the money you would have to save for a conventional loan,” Moon says.

FEES

Although the costs of getting a VA loan are generally lower than other types of low down payment mortgages, they still carry a one-time funding fee that varies, depending on the amount of the down payment and the type of veteran.

A borrower in the armed forces getting a VA loan for the first time, with zero down payment, would pay a fee of 2.15 percent of the loan amount, Frueh says. The fee is reduced to 1.25 percent of the loan amount if the borrower makes a 10 percent down payment. Reservists and National Guard members normally pay about a quarter of a percentage point more in fees than active-duty members pay.

Those using the VA loan program for the second time, without a down payment, would pay 3.3 percent of the total loan amount.

“And if you receive disability compensation, the fee is waived,” Frueh says.

Use this VA loan calculator to estimate monthly payments on your loan.

UNDERWRITING REQUIREMENTS

Veterans Affairs does not require a minimum credit score for a VA loan, but lenders generally have their own internal requirements. Most lenders ask for a credit score of 620 or higher, Moon says.

“There are players that would go lower, but they would probably charge a higher interest rate,” he says.

Borrowers must show sufficient income to repay the loan and shouldn’t have excessive debt, but the guidelines are usually more flexible than they are for conventional loans.

“We always tell underwriters to do their due diligence, but this is a benefits program, so there is some flexibility,” Frueh says.

VA guidelines allow veterans to use their homeloan benefits a year or two after bankruptcy or foreclosure.

“We look at the whole credit picture, what was the reason for the credit bankruptcy and where the borrower is now,” says John Bell, assistant director of loan policy at the VA.

VA loans are available only to finance a primary home. A VA loan cannot be used to purchase or refinance vacation and investment homes.

The limit on VA loans vary by county, but it’s $417,000 in most parts of the country and up to $625,500 in high-cost areas in the continental United States and even higher in four counties in Hawaii.

WHAT IF I STOP PAYING THE MORTGAGE?

Another advantage of a VA loan is the assistance offered to struggling borrowers. If the borrower of a VA loan can’t make payments on the mortgage, the VA can negotiate with the lender on behalf of the borrower.

“We have dedicated staff nationwide committed to helping veterans who are experiencing financial difficulty,” Bell says.

VA’s financial counselors can help borrowers negotiate repayment plans, loan modifications and other alternatives to foreclosure, he says.

Regardless of whether they have VA loans, veterans who are struggling to make their mortgage payments can call 877-8273702 for assistance.

THINKSTOCK Available to millions of veterans and active military members, VA loans are somewhat easier to qualify for than conventional mortgages.