Fans of late-night TV will recall the infomercials of a few years ago, hawking zero-down loans. Those loans, along with loans requiring no documentation, were being handed out like candy to anyone who applied, and were largely blamed for the mortgage industry implosion.
In the wake of that mess, mortgage lenders tightened standards. Lenders began demanding that homebuyers needed some skin in the game – a healthy down payment – to make them think twice about defaulting on the loan.
Zero-down loans became a memory.
Today, you have three choices if you’re seeking a mortgage without a down payment: Navy Federal Credit Union, The U.S. Department of Agriculture (with no-down loans for very low-income borrowers who agree to live in rural areas), and the Department of Veterans Affairs (VA).
“The VA loan is the best mortgage around,” according to Envoy Mortgage’s Nathan Raich. “Not only will you not be required to make a down payment, there’s also no mortgage insurance requirement, which makes the loan even less expensive. Finally, borrowers typically get a lower interest rate with a VA mortgage than with a conventional loan,” he concluded.
Eligibility for a VA-backed loan includes what the VA calls “suitable credit” and sufficient income to make your payments every month. You’ll also need a valid Certificate of Eligibility (COE), which in many cases your lender can obtain for you.
Separation from the service must have been under conditions other than dishonorable. Additionally, you must plan on occupying the home as your personal residence.
When buying a home for the first time, many veterans are confused by the process. One of the most confusing aspects of the loan is the VA entitlement. Basically, the entitlement is the amount of money that the VA agrees to pay the lender if you stop making payments and default on the loan.
Here comes the confusing part: The basic entitlement amount is $36,000, but there is a secondary entitlement as well – $68,250, according to Veterans United. The secondary entitlement kicks in only if the purchase price of the home you wish to buy exceeds $144,000.
How they come up with these amounts only causes more confusion, but it has to do with the amount that the VA guarantees, which is one-fourth of the loan amount.
Once you use the entitlement, it can’t be used again until the loan is paid off or another veteran assumes the loan and uses his or her entitlement.
Although the VA doesn’t set loan limits, since it has limits on its liability (one-fourth of the amount of the loan), lenders may set a cap on the amount a veteran can borrow.
They typically set the cap, for a loan with no down payment, at four times the veteran’s available entitlement as long as he or she otherwise qualifies for the loan, according to the Veterans Administration.
The Home-Buying Process
Other than VA-specific paperwork, purchasing a home using a VA loan is very much like purchasing a home with a conventional loan. Your first step will be obtaining loan preapproval. This is the step that requires your COE. You’ll find a chart listing service requirements that need to be met for obtaining a COE at the VA website.
Once you have your preapproval letter in hand, it’s time for you and your real estate agent to begin searching for a home. When you find a home, your real estate agent will insert a contingency in the purchase agreement stating that your offer is subject to final approval for a VA loan and a successful VA appraisal.
Your lender will obtain a VA number for your loan, which is used to track your loan application. The lender will also send a VA form to a state-licensed VA appraiser who will determine the home’s current market value.
The VA has what they call minimum property requirements, or MPRs. Here are a few items the appraiser will be looking for:
- Adequate space for living, sleeping, cooking and dining, and sanitation.
- The safety of all mechanical systems. They must also have reasonable future utility.
- Hot water and a continuing supply of safe drinking water.
- A safe way to dispose of sewage.
- The roof must be free of leaks.
- Adequate attic access and ventilation.
These are the basic MPRs and, although it seems as if the appraiser is giving the home a thorough inspection, the appraisal does not replace the need for a home inspection.
The best place to get answers to your questions about a VA loan is at your lender’s office or by calling a Department of Veterans Affairs Regional Loan Center.