How to get a mortgage with little or no down payment
Obtaining a mortgage is what makes homeownership a possibility for most people, but between down payments and closing costs, buying a home can still be…
There are numerous mortgage options to choose from, but if you’re a qualified veteran, active duty service member, or surviving spouse, you may benefit most from taking out a VA loan. These low-cost home loans offer several advantages for buying or refinancing a home, and it is usually much easier to get approved compared to conventional mortgages because of the flexible eligibility criteria.
VA loans are government-backed through the Department of Veterans Affairs (VA), and generally, the only requirement is that you are active duty, a surviving spouse, or a veteran. While other types of mortgages will have more strict approval requirements in place, such as good credit scores, VA loans tend to be more relaxed with these requirements. Some of the other benefits of VA loans include no down payment requirements and lower interest rates.
Although the Department of Veterans Affairs does not issue VA loans, they decide who is eligible to receive them, and all applications for VA loans must first go through them. There are also different types of VA loans to choose from, depending on what you’re looking for. The main types of VA loans are purchase loans, cash-out refinance loans, and Interest Rate Reduction Refinance Loans (IRRRL).
Advantages of VA loans
For qualifying borrowers, VA loans can be a good solution if you’re looking to avoid a large down payment. In fact, aside from USDA loans, VA loans are the only other available loan option if you want a mortgage with absolutely no down payment requirements. This one advantage alone is what makes homeownership possible for many and having that extra money can be useful for other things, such as home renovation projects.
There are several other benefits of VA loans aside from no down payment requirements. VA loans also help borrowers save money overall because they typically have lower interest rates and also don’t impose monthly private mortgage insurance (PMI) payments. For conventional loans, PMI typically runs between 0.5 and 1 percent of the loan amount annually until borrowers reach 20 percent equity. Because VA loans don’t require PMI, even if borrowers have less than 20 percent equity, they will have lower monthly mortgage payments.
If you’re refinancing, taking out a VA IRRRL—also known as a VA Streamline—enables borrowers to refinance into a lower rate without any home equity. These loans give borrowers the opportunity to refinance up to 120 percent of a home’s value in order to lower a rate or change a term.
Although lenders will take your debt-to-income (DTI) ratio into consideration when making their decision, VA loans are more flexible with their limits. With a median 620 credit score, a fixed-rate VA loan can allow for a DTI as high as 60 percent, and as high as 50 percent if you’re taking out an adjustable-rate VA loan. If your credit score is less than 620 but at least 580, the DTI limit is typically 45 percent. Compared to DTI limits with conventional loans, these terms are more lenient.
VA loan eligibility
Most veterans, active duty members, and surviving spouses will qualify for VA loans. However, specific criteria determine whether you will be eligible. In order to qualify, you must meet one of the following service requirements:
- At least 90 days under Title 32 with a minimum of 30 consecutive days served
- Six years of service with the National Guard or Reserves
- A minimum of 181 days of peacetime active service
- A minimum of 90 consecutive days of wartime active service
A surviving spouse of a military member who passed away due to a service-related disability or in the line of duty may also be eligible for a VA loan. There may be restrictions in place if a surviving spouse has remarried, but each case will be individually evaluated.
Down payments and funding fees
Down payments are not required for VA loans, which is one of the many appealing qualities of VA loans. However, VA loans do impose funding fees. There are a few exceptions to this; veterans who receive disability payments for service-related injuries, surviving spouses, and Purple Heart recipients who are also active-duty members can typically get funding fees waived.
As of January 1, 2020, funding fees range from .5% to 3.6% of the loan amount. The specific amount you’ll pay will depend on certain factors, including the size of your down payment. In other words, although a down payment isn’t required with a VA loan, making a down payment will help to lower the amount of your funding fee. If it’s not feasible to pay a funding fee upfront, you may be able to have it rolled into your total loan amount so this isn’t something you necessarily have to pay in cash when buying a home, thus keeping your out-of-pocket expenses low.
Whether or not you make a down payment towards your home purchase, bear in mind that the majority of all mortgages, VA loans included, require that borrowers have reserves in their bank account. This is money that you will still have in your bank account after closing. The minimum amount you should have will vary based on a few factors, such as the type of VA loan you take out, but aiming for two months’ worth of mortgage payments is a good goal.
Qualifying for a VA loan
VA loans offer a lot of flexibility compared to conventional loans, but there are still some limitations when it comes to minimum acceptance criteria. During the approval process, there are several factors taken into consideration, such as the type of home you’re buying, your credit score, and how much you need to borrow.
You can only purchase certain types of properties with a VA loan; these types of loans can’t be used for investment homes or vacation properties. The home you purchase with a VA home loan must be your primary residence and you must be living there within 60 days of closing.
Your credit score does play a part in VA loan eligibility. Although the Department of Veterans Affairs doesn’t impose a credit score requirement, the lender you ultimately work with will have their own requirements. Contact Filo Mortgage to go over your different options based on your credit history and to discuss whether a VA loan is the right fit for you.
Your DTI ratio is also an important factor when determining VA loan eligibility. This is the amount of money you make each month versus the amount of debt you have. Just like with any other mortgage, having a favorable DTI will increase your odds of approval.
If you’re looking to buy a home with a VA loan and without a down payment, there is a loan limit of $548,250 throughout the majority of the United States. If you’re looking to buy a home in an area with a higher cost of living, you may be able to take out a larger VA loan. Your loan amount may increase beyond the loan limits but a down payment may be required in those instances.
Applying for a COE
Once the Department of Veterans Affairs determines your eligibility for a VA loan, they will issue you a Certificate Of Eligibility, or COE, which is a crucial first step in the VA loan application process. This document will prove to your lender that you qualify for a VA loan. Proof of service is required to receive a COE.
There are different documents you’ll need to submit when applying for a COE; the documents you’ll need will depend on your eligibility for a VA loan. Active-duty military, for example, will need their unit commander or personnel officer to sign a statement of service. The statement of service should include your full legal name, date of birth, and Social Security number. This document will also outline specific details about your service, such as your commander’s name, the date your service started, and any discharges or breaks that were taken.
Veterans will be required to submit a certificate that verifies military discharge, which is known as DD Form 214. Veterans can request this form by using the online eVetRecs filing system.
Surviving spouses that do not receive dependency benefits will need to submit a completed VA Form 21P-534-ARE, their marriage license, their spouse’s DD Form 214, and their spouse’s death certificate. Those receiving dependency benefits must submit a completed VA Form 26-1817.
If you’re currently a member of the National Guard or Reserve, you’ll need a similar statement of service. If you’re discharged, you’ll need proof of honorable service and discharge, as well as a copy of your yearly Retirement Points Statement if you were a member of the Selected Reserve. Discharged members of the National Guard will need to supply proof of character of service, NGB Form 22, NGB Form 23, Report of Separation, and Record of Service for each period of service.
Apply for a VA loan with Filo Mortgage
At Filo Mortgage, we are happy to offer VA loans to qualified borrowers. Contact us today to learn more about VA loans, discuss options, obtain your COE, and to get started on the application process.
