VA Loans: Homebuying Help for Veterans
Some veteran buyers may even qualify for the holy grail of mortgages, known in real estate parlance as a "VA No-No" -- no down payment and no closing costs.
According to Lisa Peters of Dallas-based Shelter Mortgage, veterans are eligible for a VA loan if they've served on active duty in the United States military and received an honorable discharge after a minimum of 90 days during wartime or 181 continuous days during peacetime.
VA Loans' Beginnings
The VA loan was created in 1944 and signed into law by President Franklin D. Roosevelt. It was part of the GI Bill of Rights, a far-reaching package of educational and housing benefits for vets returning home after World War II. The bill provided veterans a federally guaranteed home loan with zero down payment.
The GI bill helped jump-start an unprecedented building boom in the United States. New housing sprouted up across the nation, from Levittown in New York to Lakewood in California. Prior to World War II, most people bought homes with cash, as mortgages were rare. That limited homeownership to the wealthy. But with government-backed financing, millions of middle-class citizens became homeowners and went to work, keeping the U.S. economy humming.
VA Loans Today
VA loans have come a long way, even from the 1980s, when all files had to be physically mailed to the Veterans Administration. These days, you can get a VA loan from any approved private lender, such as a bank or mortgage company. Veterans are not automatically eligible for the program; they must apply and prove entitlement. (See the requirements at valoans.com.)
In lieu of a down payment, the VA will guarantee a maximum of 25 percent of a home loan amount, up to $104,250; the maximum amount that can be borrowed is generally $417,000. In areas where real estate values are higher, maximum loan amounts can be as much as $900,000. The guarantee means that the lender is protected against loss if the vet, or even a future homeowner, fails to repay the loan.
Instead of requiring private mortgage insurance, VA loans charge a variable funding fee up to 3.3 percent, which depends on the amount of the veteran's entitlement or length of time in the military. Funding fees can be rolled into the financing package or paid by the seller.
VA loans can be assumed, even by a non-military buyer, but the veteran should make sure he obtains a release of liability from the mortgage that is being assumed.
Income qualification ratios for VA loans are also generous: The PITI (that's principal, insurance, taxes and interest) must not exceed 41 percent of gross income, says Lisa Peters. And there are rules covering "residual income" -- that is, money left over after regular monthly obligations are paid out.
The amount of residual income required depends on the number of family members and cost of the property purchased. For example, residual income must be at least $382 for a single person buying an $80,000 home, and up to $1,003 for a family of four in a more expensive home. (Also see "How Much Home Can I Afford.")
Caveats to Watch Out for With VA Loans
One significant way VA loans differ from conventional financing is the obligations they put on the seller. Because VA loans prohibit the buyer from paying some fees, such as certain closing costs, the seller typically pays them. The costs the seller has to cover varies from state to state. In Texas, for example, sellers must cover the processing fee, appraisals and title fees. While having to pay those costs can sometimes affect the seller's willingness to negotiate on price, it shouldn't derail the deal. (Also see "How to Negotiate a Home Offer.")
Another place where VA loan deals can get bogged down is the appraisal process. VA appraisals are stringent, and the process sometimes takes longer than a standard appraisal. However, VA appraisal requirements have been loosened recently, so that they are now comparable to those associated with a traditional mortgage, said Tim Harrison, the "straight-up mortgage guy."
For more on mortgages and homeownership see these AOL Real Estateguides:
- Mortgage Jargon in Simple Terms
- How to Get Pre-Approved for a Mortgage
- Real Estate Terms and What They Mean
- First-Time Homebuyer's Guide
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