VA Loans – Do You Know Your Benefits?
Your VA Benefit
When it comes to home financing, it is hard to beat the opportunities provided through the Veterans Administration. How does 100% financing for the purchase or refinance of your home with no mortgage insurance sound to you?
With traditional home financing, home loans with a Loan to Value greater than 80% require that the borrower obtain mortgage Insurance. With FHA financing, mortgage insurance is required on all financing options and in most cases the mortgage insurance premium is permanent.
Mortgage insurance is protection purchased by the borrower to protect the lender in the case of default. It provides no benefit to the borrower other than an inducement for the lender to grant the loan.
VA financing is a benefit earned by our active service military service members, reservist service members and previous military service members who were honorably discharged. I would encourage any Veteran considering home financing of any kind explore their VA benefits and what VA financing can provide.
Myths about VA Financing
One of the more frequent objections to using VA financing when purchasing a home is that VA loans cost the seller much more than selling to an individual using more traditional types of financing. On a VA home loan, there are restrictions on what fees are allowed to be paid by the Veteran.
Listing agents unaware of the allowable sources of funds to pay these costs believe that they must be passed through to the seller of the home. While the seller can offer credits to cover the unallowable costs, they may also be covered through lender credits or agent credits. When the proposed financing for the purchase of a property using VA financing is done properly, the perceived burden by the seller can be removed and the Veteran buyer can obtain financing with all the benefits that VA provides.
Another myth is that the appraisal requirements are more restrictive using VA financing. Financing of any kind for the purchase of a new home would require an appraisal be done. The appraiser would be required to note any health and safety issues found during the inspection for any type of report provided.
The only true requirement VA financing has over other types of financing is that a Termite Report and Clearance must be provided to the lender. The Veteran may not pay for the pest inspection report, but can pay for any corrective work. Although a pest inspection may not be requested when using Conventional or FHA financing, the lender reserves the right to request this inspection be done, or an existing report be provided, should the appraiser note any potential issues or if there is a charge for pest inspection on the estimated closing costs received from escrow.
Many believe that their VA benefits are a one-time use. This is not the case. The only requirement is that the benefit be used for the purchase of the Veteran’s primary residence. Once the previous home loan has been repaid, the veteran’s entitlement can be restored allowing them access to VA financing once again. Existing VA financing can be processed under the current entitlement used for the original purchase of the subject property. There are even some circumstances where an additional VA loan can be obtained for a new primary residence when the current home owned is financed through VA provided sufficient entitlement is left to cover the new request.
VA Funding Fee
Similar to FHA financing, VA loans require a Funding Fee based on the type of financing being used (purchase or refinance). For purchase transactions, the standard funding fee for the Veterans first use of their benefits financing 100% of the purchase price is 2.15% (2.4% for Reservists). Subsequent use of VA benefits for purchasing a new home financing 100% of the purchase price would be 3.3%. This fee can be paid in full, financed or a combination of the two.
For Veterans receiving disability benefits from the VA for a service connected disability, the funding fee is waived! This is a huge benefit.
VA Financing Flexibilities
Another important but frequently overlooked benefit of VA financing has to do with Debt to Income qualifying for the home loan. While most mortgage loan originators believe VA financing has one of the more restrictive stances with debt to income ratios (41%), this is not the case. When processing a VA home loan request, a frequent mistake made initially is not to consider the borrowers residual income.
Residual income is the amount of income left for the borrower after considering all debts, including the proposed mortgage and home maintenance costs (home maintenance is generally factored at .17 per square foot). VA has published required residual income amounts for households located throughout the country. For a household of 3 in California, the current residual income requirement is $990 per month.
If the Veterans residual income exceeds the standard requirements by 120%, VA debt to income ratios can become very flexible. I recently was able to help a Veteran whose spouse became unemployed causing a strain on their finances. We were able to obtain an approval using VA financing to consolidate all of their debts, lowering their monthly expenses by over $1600 per month with an overall debt ratio over 57%. This option would not be available using Conventional or FHA financing.
Using VA Financing Above County Loan Limits
VA Loans can provide great benefit for the purchase of homes exceeding the County Loan Limits. VA insures the lender against losses up to 25% of the county loan limit. If a Veteran wishes to purchase a home whose sales price exceeds the county loan limit, the Veteran will be required to provide down payment of 25% of the amount the purchase price exceeds the county loan limit plus the VA Funding Fee.
In general, most Jumbo financing (Loan amounts Exceeding $625,500) require 20% down payment, require higher credit scores, documented cash reserves (6 to 18 months of the proposed Principle, Interest, Taxes, Insurance and HOA Fees) and carry interest rates about .5% higher than VA Financing. Consider the following:
$1,000,000 Purchase Price in a High Cost County for a Single Family Residence (High Cost County Limits are $625,500):
- Loan Amount: $800,000
- Down Payment Amount: $200,000
- Principle, Interest, Taxes and Insurance (Assuming a 4.5% Interest Rate): $5,261.82
- Required Reserves (Assuming 6 Months required): $31,570.92
- Total Assets to be Verified: $231,570.92 + Closing Costs
- High Cost County Loan Limit: $625,500
- Difference between County Loan Limit and Purchase Price: $374,500
- Veteran’s Required Down Payment Based on Purchase Price: $93,625
- Loan Amount: $906,375
- Principle, Interest Taxes and Insurance (Assuming a 4% Interest Rate): $5,557.67
- Required Reserves: None
- VA Funding Fee: $13,595.63 (Can be lowered to $11,250 with additional $6,375 Down Payment)
- Total Assets to be Verified: $107,220.63 + Closing Costs
- The total assets needed to be verified to close the VA home purchase would be over $120,000 less than the proposed Jumbo Financing option.
What if I already Have a VA Loan?
The short answer to this question is YES. Keep in mind that VA financing is for the purchase of a primary residence so the purchase of an investment property would not be possible.
The answer to this question has to do with Entitlement. The Entitlement amounts are what is used to insure the lender making the VA loan. VA insures the lender against losses equal to 25% on the loan amount.
When a Veteran has earned their eligibility for VA financing, the basic entitlement is $36,000. Additional Entitlement amounts are made available based on the County Loan Limits for the County in which the property being purchase is located.
One of the documents obtained during the lending process if the Certificate of Eligibility (COE). The COE will be used to confirm eligibility, show the available Entitlement amounts, if the Veteran is Exempt from the VA funding fee as well as show the excluded Entitlement amounts previously used.
One More Example
A Veteran used their Entitlement amounts to purchase a home for $144,000 financing 100% of the purchase price. A total of $36,000 of the Veterans Entitlement was used in this transaction (25% of $144,000).
Several years later, this same Veteran wishes to move closer to his family in Orange County. Since Orange County is a High Cost County, the county loan limit is $625,500. VA will insure up to 25% of the county loan limit so the Veterans Entitlement is this area would be $156,375. Since The Veteran has already used $36,000 of his allowable entitlement, they would have a total of $120,375 left of their Entitlement in Orange County.
Since VA insures the lender for 25% of the loan amount, this Veteran would be able to use his remaining Entitlement to purchase a home with 100% financing for up to $481,500 ($230,375 x 4). In this scenario, the Veteran would need to pay any applicable funding fees or reduce the purchase price to allow for the funding fee to be included.