Veterans of the U.S. military and those who are currently serving on active duty have a number of valuable benefits. Heading the list is the VA Home Loan program. A qualifying veteran can purchase a home in Portland, OR with no down payment and at terms far better than those available to civilians.
Here is what you need to know about this exceptional earned benefit.
- No down payment required, no mortgage insurance. For most veteran buyers, being able to buy a home without having to make a down payment is the most exciting feature of a Portland VA Home Loan program. Even though there are other programs requiring down payments as low as 3%, they require some form of mortgage insurance. This insurance limits the lender’s risk in the event the borrower went into default.The VA loan is guaranteed by the VA and does not require mortgage insurance. To see how important this is, consider that a civilian buyer making a 3% down payment will have to pay mortgage insurance (PMI) at a rate between .69% and 2.25%. For a $400,000 home with a 97% conventional loan, this would mean paying an additional $223 – $728 enth, depending on credit score.
- Maximum loan amount. In most counties across the state, veterans can buy up to a maximum price of $484,350 with no down payment. In King, Snohomish and Pierce counties, the maximum is $726,525. VA will guarantee loans up to these amounts, provided that the appraisal confirms the price the veteran has contracted to pay. If the appraisal happens to be lower than the agreed price, that is the loan amount the l guarantee. In practice, sellers tend to lower their price if the appraisal shows a lower value.
- Getting a more expensive house. Although the county loan limit determines how much home a veteran can buy with no down payment, VA will guarantee a loan larger than the published limit. In a county with a $484,350 limit, for example, a veteran could use their guarantee to buy a home for $600,000, for example. They would accomplish this by making a down payment equal to 25% of the difference between the loan limit and the appraised value. In this example, $600,000 is $115,650 more than the county limit. The veteran make a down payment of $28,912 and get a VA loan for $571,087. Their down payment would be less than 5%–but without the expense of monthly mortgage insurance.
- VA Funding Fee. VA charges a percentage of the base loan amount as part of the guarantee process. For the veteran’s first use, the fee is typically 2.15%. It is added to the loan, so the veteran does not have to pay it out of pocket. National Guard members may also be eligible for VA loans, with a slightly higher funding fee—2.4% for their first use of the program.
- Lowering the funding fee. If a non-exempt veteran chooses to make a down payment, the funding fee drops to 1.5%–regardless of how many times they have used the program. With a 10% down payment, the funding fee drops to 1.25%. National Guard members would have a funding fee .25% higher in these instances.
- Exemptions from the Funding Fee. Any veteran with a service connected disability is exempt from having to pay the fee. The disability does not have to be severe; if the veteran is receiving a disability check from VA, the chances are they are exempt. The Certificate of Eligibility will confirm whether they are exempt.
- No limit to the number of times to get a VA loan. If a veteran sells his or her home that had a VA loan, they can get another VA loan. There is a small catch to this, however. For “subsequent use” of the VA entitlement, the funding fee normally goes up—to 3.3% for most veterans who reuse their home loan benefit. Just as with the first use with its lower fee, the funding fee is added into the base loan. The veteran can reduce their funding fee by making a small down payment, as we discussed above. A veteran who is exempt from the fee will never pay a funding fee regardless of how many times they might use the program.
- Easier to qualify. For most other loan programs, lenders use an important calculation called “debt to income ratio” (DTI). To determine a borrower’s DTI, they add up the total house payment including taxes, insurance and mortgage insurance if any, and any debt payments, such as car payments, student loans and credit card minimum payments. The total divided by the borrower’s gross monthly income (before taxes) is the DTI. Lenders can approve conventional loans with a DTI as high as 50%.VA loans look at “residual income” in addition to the DTI. This is the borrower’s net income (after taxes have been taken out), minus the total house payment and any other debt payments. A maintenance and utility factor of $.14 per square foot is applied as an expense—a home with 1,200 square feet of living area would carry an expense of $168 per month.What is left is the residual income. The amount required for approval depends on the location, family size and DTI. In Washington, a family of three would need a residual income of $990. If their DTI is significantly over 41%, the required residual income could be 20% higher—$1,188. In any case, a veteran will be able to buy a more expensive home using their VA home loan entitlement.
- VA loans are assumable. A non-veteran can assume a VA loan, but there is a caveat. Allowing a non-veteran to assume a VA loan means that the entitlement will be tied up until the VA loan is paid off. If the person assuming the loan is also a veteran, however, they can substitute their entitlement and free up the selling veteran’s entitlement for reuse.
- VA Streamline Refinance. Once you have a VA loan you are eligible for a future VA Streamline Refinance or IRRRL if rates drop. This program allows the veteran to refinance without the need of a new appraisal, income or asset documentation. The process is much easier than a normal loan transaction and the costs of the loan are often lower. Working with a reputable mortgage lender is still important to ensure there is a definite benefit to the borrower. There are many lenders that will push this program on veterans to give them a slightly lower rate but add significant costs back onto their loan eliminating any benefit of a refinance.
Some sellers may be concerned that if they accept a purchase offer with VA financing involved, it will take a long time for the veteran buyer to get the loan. The fact is that a VA loan takes no longer to underwrite and fund than any other type of loan.
Anyone who has served in the United States Armed Forces has put their life on the line, often going into harms way. Veterans have earned our gratitude and admiration, regardless of when and where they served
They have also earned valuable benefits. Topping the list of those benefits is the VA Home Loan program in Portland, OR.