How they work: Consumers who served stints in the U.S. military or who are on active duty may want to look into a VA Home Loan administered by the U.S. Department of Veterans Affairs.
Qualified veterans can purchase a primary residence with no money down, as long as the purchase price doesn’t exceed the appraised value of the property and the seller is willing to pay closing costs.
The VA does not loan money, but it does back loans made by private lenders to qualified veterans.
The veteran’s basic entitlement under the loan program is capped at $144,000. But for the past several years, the VA has been guaranteeing up to 25 percent of the total loan amount based on the conforming loan limits allowed by Fannie Mae and Freddie Mac.
The conforming loan limit for 2008 is generally between $417,000 and $625,500, but depending on where the property is located in the U.S., can exceed those amounts.
“The VA guarantees the basic entitlement, but the veteran can still get a loan up to $417,000 with no money down and in some high-cost places it’s up to $729,750,” says Judith Caden, director of loan guaranty services for the U.S. Department of Veterans Affairs.
Veterans still need to qualify with respect to income and credit score, and may need money for closing costs. However, the VA program permits the seller to pay closing costs. Borrowers may also need money for the earnest deposit (money the seller usually requires to remove the property from the market while the sales contract is under negotiation).
Loan refinances are restricted under the VA Home Loan Program unless the borrower is refinancing from one VA loan to another.
“If they wanted to get do a cash-out refi, they would be limited to $144,000, or if they were trying to refinance from a conventional loan to a VA loan, they would be limited to $144,000,” Caden says.
Service eligibility and entitlement guidelines can be tricky, so it’s best to check with the VA before applying for a loan.
One important caveat: A dishonorable discharge will disqualify a veteran from the loan program. However, it’s possible to make an appeal to change the status of the discharge.
Cost: Private mortgage insurance is not required, but the VA charges an upfront VA funding fee, which can be rolled into the loan or paid by the seller. The funding fee helps pay for the cost of a VA loan, reducing the cost to taxpayers. The fee can be as low as 0.5 percent for Interest Rate Reduction Refinancing Loans, which enable veterans to refinance an existing VA loan to one with a lower rate. And the funding fee can be as high as 3.3 percent for subsequent users of the VA home loan program.
For first time borrowers, the funding fee ranges from 2.15 percent for regular military to 2.4 percent for Reservists and National Guard borrowers. A down payment can result in a lower fee. For example, the funding fee for a member of the regular military who puts between 5 percent and 10 percent down will be reduced from 2.15 percent to 1.5 percent. For down payments greater than 10 percent, the fee goes down to 1.25 percent. For members of the Reserves or National Guard, the fee falls to 1.75 percent and 1.5 percent, respectively, in these cases.
Pros: With VA loans, borrowers can qualify for 100 percent financing of the sales price. Veterans do not have to be first-time buyers and may reuse their benefit. Private mortgage insurance is not required. The loans are assumable by another veteran provided he or she is qualified. Seller can pay closing costs and the VA funding fee as long as these expenses don’t exceed 4 percent of the loan amount. Seller usually pays for the termite report.
Cons: The veteran must produce a Certificate of Eligibility, or COE. Borrowers may have to pay the VA funding fee, which can mean borrowers may end up with a 102 percent to 103 percent loan on the property. Borrowers must be creditworthy. The average FICO score for borrowers using the VA loan program is 680, according to Caden.
Also a surviving spouse must continue to make loan payments if the veteran dies before the loan is paid off. Veterans must have received an honorable discharge from the U.S. military. Medical and general discharges are handled on a case-by-case basis, but are generally approved.
Who they’re good for: “VA is the best single program if you have no money down or little money down,” Councilman says. “The veteran really doesn’t need any money at all if the seller is willing to pay the closing costs.