Department of Veterans Affairs (VA) and U.S. Department of Agriculture (UDSA) are two popular loan guarantors, but they are more restrictive than conventional or FHA loans as far as who is eligible. If you are eligible to get one of these loans – they are great choices in lieu of conventional and/or FHA loans. Because both of these loans are backed by the U.S. Government lenders take little risk with total loss and therefore, have less stringent lending requirements and often offer better terms. If you have federal debt you will likely not qualify for any federal loans (including FHA).
VA loans are only available to those who have “served 90 consecutive days of active service during wartime, or served 181 days of active service during peacetime, or have more than 6 years of service in the National Guard or Reserves, or you are the spouse of a service member who has died in the line of duty or as a result of a service-related disability.”
VA Purchase Options & Down-Payment
VA loans do not have a down payment requirement. However, the VA does charge a funding fee click here for a funding fee calculator. The funding fee for the first use of the VA loan benefit is 2.15% of the loan amount. Any subsequent uses of the VA loan program will have a 3.3% funding of the loan amount.
The VA loans conform to traditional lending limits set by Fannie Mae and Freddie Mac of $417,000. But, VA does accommodate high cost areas by increasing the maximum loan amount so borrowers can still take advantage of the program. Find the VA loan limit calculator here.
The traditional lending limit DOES NOT prevent a borrower from buying a house that exceeds the traditional conforming loan amount of $417,000. The borrower will likely have to factor in a down-payment.
Typical fees like the appraisal and inspection(s) are paid upfront by the buyer.
VA Refinance Options
VA Streamline or Interest Rate Reduction Refinance Loan (IRRRL) is open to borrowers who already have a VA Loan. The refinance is usually quick because the borrower is refinancing from one VA loan to another. This refinance program does not require an appraisal, there is no need to verify eligibility, and there are no out-of-pocket costs if the borrower rolls costs into the loan.
IRRRL is strictly for borrowers that want to refinance into a lower mortgage rate. Therefore, new loan payment must be lower than the last. Additionally, the borrower cannot receive any cash back and must certify they are occupying the property.
VA Cash-Out Refinance Loan is available to veterans that have a VA, FHA, USDA or conventional loan (any loan type) and want to lower their interest rate and take cash out. The VA cash-out loan takes the place of your existing loan instead of becoming a second loan. These borrower must go through the regular underwriting procedures. The closing costs and funding fee can be rolled into the loan. You must certify you are intending to occupy the home as your primary residence.
There is no income limit on VA loans.
Debt to Income Ratio
Some lenders may impose a DTI on a VA loan but per VA’s documentation there is no maximum debt to income ratio.
Lenders are usually impose a credit score requirements on VA loans, but per the documents there is a no minimum credit score requirement for a VA loan.
There are no PMI costs for a VA loan.
VA loans are government backed, for this reason banks do not require any form of mortgage insurance.
Eligible Property Type
Condominiums*, townhouses*, manufactured homes*, modular homes, site-built single family homes*
*Condo and Townhouses must receive must receive VA approval.
*Manufactured homes must be on a permanent foundation. Single-wide homes must be 400 sq ft, double-wide homes must be 700 sq ft. Both must have permanent eating, cooking, sleeping and sanitary facilities.
*Site built homes must be complete. There are no available construction loans.
VA loans can be fixed loans or adjustable rate mortgages (ARM’s)
Closing costs are typical and cannot be rolled into the loan. If the seller agrees to pay closing costs the borrower will not have to bring any money to the table. Seller paid concessions are limited to 4% of the loan amount. The borrower can choose to roll the funding fee into the loan and, therefore, will not have to pay for it out-of-pocket.
Warnings and Restrictions about VA loans
The VA home inspection is called the Minimum Property Requirement of MPR which is particularly rigorous.Unfortunately, VA inspections and appraisals can take a little longer than a normal conventional inspection or appraisal. If you are getting a VA loan, you must use a VA qualified appraiser and inspector. Issues such as peeling paint, termites, mold and loose handrails are all causes for the inspection to fail. Once the VA orders and assigns an appraiser to a file it can take several weeks for the appraisal to be complete.
When you speak to a loan officer about getting a mortgage, advise him or her you are eligible for a VA loan and make sure you get information. If the lender does not offer VA loans, find another lender. You should at least be able to compare the VA loan with whatever conventional or FHA products are offered. Loan officers might try to prevent Veterans from using VA loans because of the length of time for inspections and appraisals which could mean slower/longer closing periods.
The interest rate for VA loans can be .50% to 1% lower than a conventional mortgage. There is no mortgage insurance on the loan because the loan is backed by the U.S. government.
Although there is a funding fee, you have the potential to roll these costs into the loan. If the seller pays closing costs the borrower has the possibility of not having to bring much money to the closing table. To find out more about VA home loans, click here.
USDA loans are only available for properties in rural areas and borrowers must also meet certain income limits. USDA loans are for single and multifamily housing, rural business and water and environmental loans.
USDA provides a 90% loan guarantee to lenders which allows them to offer 100% financing to eligible rural home buyers. The program is meant to provide loans to low and moderate-income households. Specifically, USDA states, “the opportunity to own adequate, modest, decent, safe and sanitary dwellings as their primary residence”. Qualification tends to be easier for these types of loans since they do not require a down-payment or high credit score. Many suburban areas may be eligible for USDA financing. To find out more about specific facts of the USDA loan check out the fact sheet here. The highlights of the USDA loans are covered below.
USDA Purchase Options & Down-Payment
You must make sure the home is in an eligible area, this is the most important part of the loan approval process.
USDA Refinance Options
USDA Streamline Refinance is available as of 2012 and currently has 3 qualifying requirements. The home must be your primary residence, the home must have a USDA Direct Home Loan or a USDA Guaranteed Home Loan and finally, you must have made 12 consecutive on-time payments.
The program is available in a total of 34 states:
Alabama, Alaska, Arizona, Arkansas, California, Colorado, Florida, Georgia, Idaho, Illinois, Indiana, Kansas, Kentucky, Michigan, Mississippi, Missouri, Montana, Nevada, New Jersey, New Mexico, North Carolina, North Dakota, Ohio, Oklahoma, Oregon, Rhode Island, South Carolina South Dakota, Tennessee, Texas, Utah, Washington, West Virginia, Wisconsin and Commonwealth of Puerto Rico
Mobile or manufactured homes are NOT permitted. The monthly mortgage payment must be reduced by $50 to provide a tangible benefit. No cash-out is permitted and the upfront mortgage fee and monthly mortgage fee will be added.
Income verification will apply with the refinanced loan and the borrower must be employed. There is no LTV cap and the property will qualify even if it is no longer in an eligible area.
USDA loans are available to “moderate” income earners. The USDA defines “moderate” as individuals or families earning 115% of the area’s median income. You can check income-eligibility here. Similar to the conventional HomeReady loan, USDA takes all people who earn income within the household into consideration.
When you apply for a USDA loan, you will need to provide 2 months of bank statements. If you have 20% down in reserves, this would technically qualify you for a conventional loan. If you qualify for a 20% conventional loan you will not qualify for a USDA loan. To find out more about USDA eligibility requirements, click here.
Debt to Income Ratio
As of December 2014 the new DTI ratio is 29/41 of gross monthly income. This can be overridden with a manual underwrite to allow for higher ratios. However, these are the ratios the automated underwriting system “GUS” will use.
The minimum credit score allowable for a USDA loan is 640.
USDA requires a upfront mortgage insurance fee of 1% of the loan amount and an annual mortgage insurance of 0.35% of the loan amount. The upfront fee can be rolled into the loan while the annual fee is paid monthly. The borrower also has the option of paying the upfront fee out-of-pocket.
Eligible Property Type
First and foremost, the property needs to have an eligible address to receive financing. The premise being the home should be located in a rural area.
Condominiums*, townhouses*, manufactured homes*, single family homes and multifamily homes are all eligible property types.
*Condominiums and town houses must meet FHA, Fannie Mae, Freddie Mac or VA requirements.
* USDA typically only allows the borrower to purchase new manufactured homes, but not existing manufactured homes unless the current owner has a USDA loan. The manufactured home must also have a minimum living space of 400 square feet and be attached to a permanent foundation.
USDA only offers 30 year fixed rate loans because they are the most stable and proven loans.
Closing costs are typical for a USDA loan. The borrower can use seller paid concessions up to 3%, gift funds and/or funds for organization such as state “first time buyer programs”.
Warnings and Restrictions about USDA Loans
The biggest reason home buyers are not eligible is the location where the property is located. But, always check the map if the address is available.
The mortgage insurance fees are considerably cheaper than mortgage insurance fees of FHA (0.85% and 1.75%) and cheaper than the funding fee of VA loans (2.15%). Additionally, the 0% down-payment trumps that of the conventional loan 3% down. USDA has many standard forms available to use for different situations. You can find those letters and a USDA handbook for mortgages here.