Lower credit scores are not a deal breaker with VA Mortgage Loans

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VA mortgage loans can be easier to qualify for because the loan is backed by the government, banks assume less risk and have less stringent qualification standards for VA Loans, making them easier to obtain.

There are not many options for mortgage loans if you have low credit scores and no down payment. VA home loans have helped millions of veterans, service members and military families become homeowners. VA loan volume has more than tripled since 2007.

If you’re an honorably discharged veteran, are currently serving on active duty or have completed a total of six years of service in the National Guard or selected reserves, you are eligible for a loan. Certain surviving spouses of veterans may also be eligible.

Credit benefits of VA home loans

While the Veterans Administration does not require a certain credit score for veterans to be eligible for a VA home loan, the actual lender will require a minimum credit score. That’s because the U.S. Department of Veterans Affairs (VA) does not issue VA loans, they guarantee a portion of the loans to the lender on behalf of qualified buyers.

VA lenders accept credit scores below what is required for conventional financing. A 620 FICO® score is a common minimum credit score for VA loans although some lenders may offer VA loans to veterans with lower FICO® scores. Because lenders take on most of the risk, they’re allowed to set a minimum credit score.

Loan limits on VA loans

The limits on VA mortgage loans vary by county, but it’s $484,350 in most parts of the country. Borrowers must show sufficient income to repay the loan and shouldn’t have excessive debt, but because it is a benefits program, there is more flexibility.

Although the VA loan guaranty program does not impose a maximum amount, the maximum guaranty is limited to$484,350 unless you live in a high-cost county area. VA’s 2019 Loan Limits are the same as the Federal Housing Finance Agency’s limits – 2019 Loan Limits (Effective January 1, 2019).

No Mortgage Insurance

VA loan does not require mortgage insurance premiums unlike FHA and Conventional loans with less than 20 percent down payment. Mortgage insurance is a policy that protects lenders against losses that result from defaults.

No mortgage insurance benefit translates into significant monthly savings for VA borrowers because it typically costs between 0.5% to 1% of the entire loan amount on an annual basis. On a $200,000 loan this means the homeowner could be paying as much as $2,000 a year, or $166 per month – assuming a 1% PMI fee.

Wait time after Bankruptcy or Foreclosure

VA loans are also more lenient when it comes to negative credit events like a bankruptcy or foreclosure. VA buyers can purchase again two years after a Chapter 7 bankruptcy and one year after filing a Chapter 13 bankruptcy. For veterans who have experienced a foreclosure the wait time is two years.

Interest rates

VA borrowers with less than perfect credit may able get the same kind of rates as conventional borrowers with higher credit scores. Interest rates on VA home loans tend to be lower on average than on conventional loans. VA loans are offered by U.S. banks, savings-and-loans institutions, credit unions and mortgage lenders — each of which sets its own VA loan rates and fees. This means you can shop around to get the VA loan that works best for your budget.

Rates as of Jan. 30, 2019 according to mortgagenewsdaily.com:

  • 30-Year Fixed VA Loan is 4.54%
  • 15-Year Fixed VA Loan is 4.12%

Funding Fees

Although the costs of getting a VA loan are generally lower than other types of low down payment mortgages, they still carry a “funding fee”. Funding fees vary widely, from 0.5% to 3.3% of the loan amount, depending on the veteran’s service and loan type. Funding fees don’t need to be paid as cash. The VA allows it to be financed with the loan.

Though a down payment is not generally required, putting 5% or more down will reduce your VA funding fee. And a down payment will lower your monthly payment, too.

But not all VA borrowers will pay it. VA funding fees are normally waived for veterans who receive VA disability compensation and for unmarried surviving spouses of veterans who died in service or as a result of a service-connected disability.

Closing Costs

Closing costs are part of VA loans but they are limited to certain categories. VA loan closing costs include the appraisal, credit report, title insurance, origination fees, recording and survey or abstract charges. VA loans do not include loan processing, loan underwriting, document prep fees, escrow charges, settlement fees and a host of other fees.

VA borrowers who lack the funds to pay closing costs can request the seller to pay them or request lender credit. With lender credit, a lender can increase your interest rate by one-quarter of one percent or more, and provide you with a lender credit to be applied to your closing costs..

Types of VA loans

Home purchase: Loans backed by the VA are available to buy a home.

Cash-out refinance: This replaces your mortgage with a new loan, while tapping some of your home’s value.

Interest rate reduction refinance loan: An IRRRL (pronounced “Earl”) is also called a streamline refinance loan. You can replace an existing VA loan with a mortgage offering a lower interest rate, or move from an adjustable-rate loan to a fixed interest rate.

Native American Direct Loan program: This helps qualified Native American veterans buy, build, improve or refinance a home located on federal trust land.

Adapted housing grants: These assist veterans with service-related disabilities purchase, build or modify homes for better livability.

How Can Veterans Get VA Loans?

Veterans can apply for a VA loan with any mortgage lender that participates in the VA home loan program. You will need a Certificate of Eligibility from the VA to prove to the lender they are eligible for a VA loan. Lenders can also get the certificate on behalf of their clients. Find the VA eligibility form here.

 

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