In most cases, purchasing a home is one of the biggest investments that an individual will make during their lifetime. The Veterans Affairs (VA) Home Loan Guarantee program is a home loan program which is popular with veterans.
The VA Home Loan Guarantee program may help an individual get a better interest rate and purchase a home, even if they cannot afford a down payment. This program can also be used for other reasons, such as guaranteeing a loan to:
- Build a home;
- Purchase a condo;
- Purchase a lot;
- Make repairs or home improvements;
- Refinance a loan; or
- Install energy-efficient home improvements.
This program guarantees the home loan but does issue the home loan. An individual will be required to obtain the loan from a private mortgage lender.
A mortgage lender, which is also called a mortgagee, is an individual, a group of individuals, or a company which provides money to a borrower, or a mortgagor, so that they can purchase a home. In most cases, a mortgage lender is a financial institution, such as a bank or a mortgage company.
What is the Veterans Benefit Administration?
The Veterans Benefits Administration (VBA) is an agency under the United States Department of Veterans Affairs. There are many benefits provided by the VBA, including:
- Veterans’ compensation;
- Veterans’ pension;
- Survivor’s benefits;
- Rehabilitation and employment assistance;
- Education assistance;
- Home loan guaranties; and
- Life insurance coverage.
The Loan Guaranty Program provided by the VBA allows veterans, certain spouses, and service members to buy and retain homes. In lieu of a substantial down payment and private mortgage insurance which is required in a conventional mortgage, the VA provides a partial guarantee of the loan made by a private lender.
In most cases, a qualified veteran can obtain a loan without having to make a down payment. The Loan Guaranty Program also provides:
- Specially Adapted Housing (SAH) Grants;
- Native American Direct Home Loans;
- Servicing Assistance;
- Veterans Mortgage Life Insurance (VMLI); and
- Servicemembers’ Traumatic Injury Protection (TSGLI).
What are the Eligibility Requirements for Getting a VA Home Loan?
In order to be eligible for a VA loan, an individual or their spouse must meet the basic service requirements which are set by the Department of Veterans Affairs (VA), have a valid Certificate of Eligibility (COE), and satisfy the lender’s income and credit requirements.
An individual may be eligible for a VA loan if they meet one or more of the following requirements:
- They served 90 consecutive days of active service during wartime;
- The served 181 days of active service during peacetime;
- They have 6 years of service in the National Guard or Reserves;
- They are the spouse of a service member who has died in the line of duty or as a result of a service-related disability.
An applicant is typically not required to have the COE in their hand when applying for the loan. However, it is an important part of loan eligibility because it provides the lender with confirmation that the individual qualifies for VA loan benefits.
In most cases, a COE will be requested electronically through the VA’s automated system. Most COEs are requested electronically and around 2/3s are issued immediately.
The three ways to obtain a COE for a VA loan include:
- Applying through a VA approved lender;
- Applying online using the VA’s eBenefits portal;
- Applying by mail using VA Form 26-1880.
Even though the VA determines the guidelines for their loan eligibility, a private lender who finances a home will typically have an additional set of guidelines which a potential borrower is required to satisfy. This may include:
- Sufficient reliable income to repay the loan;
- An acceptable level of debt; and
- A credit score which meets the lender’s credit requirements.
The property being purchased will also be required to satisfy the VA’s appraisal process. This process examines the home’s fair market value as well as its condition.
The VA itself does have a minimum credit score requirement for eligibility. However, lenders usually do.
Due to this, a VA loan credit score requirement will vary by lender. Most lenders require a minimum credit score of 640.
In addition to the credit score requirement, a VA borrower must maintain a certain amount of income every month after their major expenses are paid. This requirement increases the chances that the borrower will earn sufficient income to meet all of their financial obligations.
What are the Advantages and Disadvantages of VA Home Loans?
There are numerous advantages of a VA home loan. These include:
- No down payment required;
- No private mortgage insurance (PMI);
- A higher allowable debt-to-income (DTI) ratio, typically 41% or less;
- No prepayment penalty, so the borrower can pay off their mortgage early without being penalized;
- Refinance options, including:
- The VA Interest Rate Reduction Refinance Loan (IRRRL); and
- The VA Cash-Out Refinance;
- Flexibility with bankruptcy and foreclosure. An individual may obtain a VA loan only 2 years after a Chapter 7 bankruptcy, foreclosure, or short sale;
- The VA amendment to contract, which allows a potential buyer to walk away from a purchase when the appraisal comes back for less than they agreed to pay;
- VA loans are assumable, which means an individual may be able to obtain a lower interest rate; and
- Better terms and interest rates.
There are also disadvantages to VA loans. These may include:
- Limited availability. This VA loan program benefit must be earned and some home loans are only available to eligible service members and veterans;
- Every VA loan has a mandatory VA funding fee which goes directly to the agency. It can be financed into the loan and is 2.3% of the amount borrowed;
- The funding fee increases on subsequent uses. This number increases to 3.6% for a borrower who has previously used the VA loan program. It can be reduced by putting down 5% or more at closing;
- VA loans are intended for primary residences. They cannot be used for investment properties or second homes;
- Not all real estate agents are familiar with a VA loan, which may cause delays if the property does not meet the requirements; and
- The seller is not always open to receiving an offer from a VA borrower.
Are There Any Legal Issues or Disputes involving VA Home Loans?
Pursuant to VA credit dispute mortgage guidelines, a credit dispute is not permitted during the mortgage process. This means that:
- Any non-medical VA credit dispute must be removed in order to move forward in the mortgage process;
- If there is a dispute, the account will go into suspense until the credit dispute is removed; and
- A non-medical collection account with a total outstanding balance of $1,000 or less is exempt from removing the dispute.
The VA requires credit disputes to be removed because a credit score with a credit dispute is inaccurate.
How Has COVID-19 Affected VA Home Loan Applications?
COVID-19 has affected every aspect of life around the world, including home loans. In many cases, offices are operating with limited staff and may have reduced hours. Due to these issues, there may be delays in application processing.
It is important to note that National Guard troops who supported the COVID-19 response may be eligible for VA home loan benefits. This new law applies to individuals who served at least 90 days of qualifying Title 32 active service, which included a stint of at least 30 days.
Should I Hire a Lawyer for Help with a VA Home Loan Issue?
Yes, it is essential to have the assistance of a mortgage attorney for your VA home loan issues. As previously discussed, VA loans have specific requirements regarding eligibility and properties which can be purchased. Your attorney can ensure that all requirements are met, assist you during the mortgage application process, and represent you should any disputes arise.
