VA (Veteran's Administration) Loans
The Department of Veterans Affairs (VA) guarantees home loans. Veterans who qualify for a VA loan must obtain a Certificate of Eligibility (COE). Determinations of eligibility are based on the length of service and are issued to veterans who were not discharged dishonorably.
Although there are a few exemptions, including exemptions for veterans with disabilities, most VA loan include a funding fee, which the veteran can finance. The funding fee ranges from 0.50% to 3.30%, depending on what type of loan the veteran is obtaining and whether it is his/her first time use of loan eligibility or a subsequent use.
The VA funding fee can also be financed. Disabled veterans, spouses of disabled veterans, and surviving spouses of veterans who died in service do not pay the funding fee. The VA also limits the amount veterans can be charged for other fees. In addition, the veteran can be charged a 1% flat origination fee and reasonable discount points. Closing costs cannot be financed in purchase transactions.
VA loans are made based on a total (back) debt ratio of 41%. While VA underwriting doesn’t look at the housing (front) debt ratio, it does consider residual income when qualifying borrowers. Based on the geographic area, the borrower must be guaranteed a certain amount of income every month after expenses.
The veteran is required to occupy the subject property as his or her primary residence, however VA loans are assumable. The buyer must qualify for the assumption, but does not need to be a veteran. However, the entitlement of the original borrower is not available for use again until the assumed loan is repaid.
The loan guaranty is based on the veteran’s entitlement; the VA will guarantee a loan amount four times the amount of the eligibility listed on the veteran’s COE. A veteran’s maximum entitlement is $36,000. Investors will generally not purchase a loan without a minimum of 25% guarantee.
The VA does not have maximum loan amounts, although loan size can be limited by transaction types. The maximum guaranty for certain loans in excess of $144,000 is 25% of the $417,000 loan limit. The loan limit for a one unit property is $417,000 so the maximum guaranty is $104,250.
VA loans can be for purchases or refinances and can be used for a number of different transactions including:
- Traditional purchases
- Construction refinances
- Installment land sales contracts
- Loan assumptions
- Traditional refinances
- Interest rate reduction refinance loans (IRRRLs)