A VA loan is a mortgage loan that is guaranteed by the United States Department of Veteran Affairs. The program is strictly for American veterans, active military members, reservists and select surviving spouses. A VA loan can be used to purchase single-family homes, condominiums, multi-unit properties, manufactured homes and new construction. The VA does not actually originate these loans, but instead, sets the rules for who may qualify for the loans and issues minimum requirements and guidelines under which mortgages may be offered.
The VA also guarantees the mortgage for people that qualify for a loan. The loan is issued by qualified lenders with the basic intention of supplying home financing to eligible veterans and to help veterans purchase properties with no down payment. VA loans allow veterans to qualify for larger loan amounts than the traditional Fannie Mae or conforming loans. Standard VA guidelines state that the VA will insure a mortgage where the monthly payment of the loan is up to 41% of the gross monthly income. This guarantee is assuming the veteran has no monthly bills, although there is no hard limit to the DTI for a VA home loan. This is a stark contrast to the 28% of gross monthly income for conforming loans. Veterans have also been known to be approved with a DTI of up to 80%, if the veteran can show other factors that strengthen their loan application. These factors include a low Loan-To-Value (LTV), sufficient residual income, additional income received but not used to qualify for the loan, good credit, etc.
The VA typically requires a funding fee unless a veteran is exempt because he or she receives VA disability compensation. It is a myth that the disability compensation must be some percentage, “such as minimum of 10%”. The statute actually reads, “…38 U.S. Code § 3729.Loan fee – (1) A fee may not be collected under this section from a veteran who is receiving compensation (or who, but for the receipt of retirement pay or active service pay, would be entitled to receive compensation) or from a surviving spouse of any veteran (including a person who died in the active military, naval, or air service) who died from a service-connected disability…”
If a veteran is awarded disability compensation after paying a funding fee, he/she can apply for a refund of this funding fee, so long as the beginning date of the disability is prior to the closing date of the home mortgage.
However, Congress passed a bill in August 2012 that allows a Veteran to receive the benefits of having Veteran Disability while it is still pending. The amount paid for the funding fee can be refunded back to the Veteran when a determination is made and the paperwork is received.
The VA Funding fee may be included in the loan amount, or may be paid in cash. Closing costs such as VA appraisal, credit report, loan processing fee, title search, title insurance, recording fees, transfer taxes, survey charges, or hazard insurance may not be included in the loan. However, the seller may pay these on behalf of the VA borrower.
To apply for a VA loan you will need to the following paperwork: Copies of your W2 statements for the past two years to assess your gross household income, and copies of your two most recent pay stubs. You will need documentation of your other assets (savings & checking accounts, financial investments, trust funds, etc.). If you are self-employed, you will be required to show two years of consecutive tax returns. The Veteran also needs to supply their DD 214 and Certificate of Eligibility.