Taking the steps to buying a home or buying land to build a house is exhilarating and daunting at the same time. Searching for your dream home and touring houses can be very rewarding. Imagining yourself and your family in your new abode is exciting.
Figuring out how to pay for your new house is a bit less exciting but critically important. After all, finding that dream home becomes a nightmare if you can’t complete the purchase. Luckily, if you aren’t paying cash for your next home and need a loan, there are many different options.
Loans come in many forms, including conventional, FHA, private lending, and seller financing (just to name a few). In addition, a VA loan offers excellent terms if you are eligible. Read on to learn about VA loans and what to expect to pay at the closing table if you use one.
VA Loans Defined
Conventional mortgages are backed by Fannie Mae or Freddie Mac. FHA and VA mortgages are backed by government agencies. VA mortgage loans are backed by the U.S Department of Veterans Affairs (VA). This doesn’t mean the loan is given to borrowers from the VA, though. Traditional mortgage lenders like banks and credit unions issue the loan, and the VA secures the loan. This means they ensure that the lending institution does not lose its money if a borrower defaults on a VA loan.
This backing makes the loan less risky for lending institutions to approve. In turn, the lender can offer favorable terms, like no minimum down payment, lower interest rates, and a lower credit score minimum compared to conventional loans. For this reason, VA mortgage loans are considered “non-conforming” loans. Another example of a non-conforming loan is an FHA loan. This type of loan is backed by the U.S Department of Housing and Urban Development.
The U.S Department of Veterans Affairs decides which lenders are allowed to issue VA loans. Be sure to check to see if your lender is a VA-approved lender before proceeding with a loan application. The VA also decides which borrowers are eligible to receive a VA loan.
Am I Eligible For A VA Home Loan?
The VA home loan program is available for current military service personnel, military veterans, national guard members (active and reserve), discharged members of the national guard and selected reserve, and surviving spouses. In addition, there are requirements around how long you need to have served to qualify.
In addition to military service, several other qualifications need to be met. This includes lender-defined credit score, income, property type, funding fee, VA loan limit, reserve funds, down payment, and assets.
Let’s look at each of these categories and the specific requirements for VA loan borrowers.
For members of the U.S. armed forces who are currently serving, VA loan applications must include a statement of service signed by their commanding officer. This must consist of the service member’s legal name, birth date, and SS#. The statement of service must also include your military service start date and other relevant information about your service.
If you served in the United States military and have been discharged from service, you are considered a military veteran. Veterans of the military need to submit a certificate that verifies their discharge from the military. This is called Form 214 and can be found on the VA website.
National Guard And National Guard Reserve
If you are currently serving in the national guard or are a member of the reserve national guard, you may be eligible for a VA loan. The statement of service requirement is identical to the requirement for active military service.
National Guard Discharged Members
National Guard (ARNG) discharged members are eligible for a VA loan if they can provide a service record and separation report for all periods they served in the ARNG. The two forms required for this are NGB Form 22 and NGB Form 23.
Selected Reserve Discharged Members
Selected Reserve discharged members are also eligible for a VA loan but must provide a copy of their retirement points statement and proof of honorable service/discharge.
Surviving spouses of the aforementioned military members are also eligible for a VA loan. To apply, they must provide a copy of their spouse’s certificate of death and marriage license. In addition, they must complete Form 21P - 534 - ARE. One can find this form on the VA website.
Length Of Service
Even if you have served, you still might not qualify for a VA loan. There are requirements related to the amount. Here’s a bulleted list of those requirements:
There are some rare exceptions to these time of service requirements, so check with your lender about your specific situation and if you qualify.
As previously mentioned, a VA loan doesn't have a minimum credit score requirement. However, most lenders require a minimum score before approving your loan. Most lenders want to see a score of 580 or higher.
Your debt to income ratio (DTI) is how much debt you owe in relation to how much income you earn each month. This calculation is used for nearly all types of loans, including a VA loan. Like credit score, a VA loan doesn’t have a required DTI, but most lenders that will issue you a VA loan do. This number varies greatly depending on the lender you choose.
The type of property that is eligible depends on the lender's specific requirements. A VA loan can almost always be used on single-family homes. In some cases, it can be used on manufactured homes and condominiums as well.
No matter what type of property you choose to buy with a VA loan, you must use it as your primary residence. This designation must occur no later than 60 days after purchase of the property. VA loans usually can’t be used for vacation rentals and investment properties. You can, however, buy a residential property and rent out part of it as long as you use one of the units as your primary residence.
VA Funding Fee
Since the VA is a government agency, taxpayers fund it. That means they fund VA loans as well. VA borrowers pay a VA funding fee when they take out a VA loan to cover this cost. The VA funding fee is usually around 3 percent of the total loan amount. For example, if you take out a VA loan for $200,000, your VA funding fee will be about $6,000. You’ll need to be able to cover this cost before you close.
The VA funding fee can vary based on several different factors. These factors include the amount of your down payment, whether or not you have used a VA loan before, your type of military service, and whether you are refinancing your current home or buying a new one. Some people are exempt from the fee as well. This includes active military that has received a purple heart, veterans on disability, and surviving spouses.
VA Loan Limit
There is no limit to the amount you can borrow using a VA loan. However, there is a limit to the amount that the VA can guarantee if you stop paying your loan. That limit varies by location but is usually $548,250.
Almost all loans require you to show that you have a certain amount of money in the bank. This is to let the lender know that you will be able to make your mortgage payments each month once you have paid all of your closing costs, down payment, and everything else associated with your loan. Your reserve funds should equal at least two months of mortgage payments.
Down Payment And Assets
One of the best features of a VA loan is that you don’t need to put any money down to get approved. That said, some lenders will require a downpayment depending on your credit score. If your score is 580 or above, you won’t need a downpayment. If your score is lower than 580, your lender may require you to put down money.
Many people think that no down payment means they don't need to pay anything before the loan closes. This is not true. There are several fees and closing costs associated with a VA loan.
VA Loan Fees
If you want to make sure you can afford to close on a home using a VA loan, you need to know what fees to expect. Some of these fees are related to the VA loan, and others are related to the property purchase. This is not a complete list, as there may be other fees. Talk to your specific lender about all the costs associated with your VA loan.
Let’s start by looking at the usual fees directly tied to your VA loan. These include a title fee, loan origination fee, VA appraisal fee, VA funding fee, credit report fee, non-allowable fees, and specific inspection fees.
The title needs to be reviewed before you close on a property using a VA loan. This ensures there are no liens or other legal entanglements that might impede the sale. The title company does this work, and they charge you a fee. This fee varies by the title company, so shop around. In addition, lenders require you to get title insurance. This protects your property ownership in case any title issues arise after the sale is completed.
Loan Origination Fee
Loan origination costs cover originating the loan, underwriting the loan, and processing the loan. The initial lender representative originates the loan (gets it started). It is then sent to underwriting and processing. This process is where another person at the lending company verifies all of your information and issues final approval. The VA regulates how much lenders can charge for this process, capping it at 1 percent of the total loan value.
VA Appraisal Fee
An appraisal is required if you use a VA loan to purchase a property. Appraisal fees cover the cost to have a professional appraiser review the property and determine its value. Appraisal fees range between $400 and $900.
VA Funding Fee
The VA funding fee is a cost that is only associated with a VA loan, so you won't see this fee if you use a conventional loan, FHA loan, or any other type of mortgage. The purpose of this fee is to support the VA loan program so it can continue to be offered to homebuyers.
The amount you pay for the VA funding fee depends on the amount of your down payment. The more you put down, the smaller your funding fee will be. The funding fee is calculated as a percentage of the total loan, which will shrink as your down payment amount grows.There are exceptions to the VA funding fee. You won’t need to pay it if you are receiving VA benefits for a disability related to service or if you are the surviving spouse of someone who died in service or who receives benefits for a disability related to service. You also don’t need to pay this fee if you are a purple heart recipient.
Credit Report Fee
VA mortgage loans don’t require a minimum credit score, but most lenders do (580 score or better). To determine your score, lenders need to do a hard pull on your credit. This is usually between $50 and $100.
Non Allowable Fees
The VA prevents lenders from charging specific fees that are often part of other loan types. These include settlement charges, prepayment fees, and attorney fees. If lenders try to charge you these fees, don't pay them and report the lender to the VA.
Termite, Septic, And Well Inspection Fees
The VA requires these inspections even though many other loans don't. In addition, some states require the seller to pay for termite inspection instead of the buyer. This is unique to VA loans, as most traditional property purchases require the buyer to pay for all inspections. Check the rules in your state, so you know what you will need to pay for and what you will need to ask the seller to pay for.
VA Closing Costs Beyond The Loan
In addition to costs and fees pertaining to your VA loan, you can expect several other costs related to the final sale of the property. These include a recording fee, real estate agent commissions, homeowners association (HOA) fees, home warranty fees, prepaid interest, and prepaid taxes and insurance.
When a property changes hands, it must be recorded by the local municipality. This includes fees levied by the state and city/town you live in. These fees vary by area, but you can expect to pay about $300. The transaction must be recorded to ensure that some aspects of the sale are public and available for anyone to look at, which is required by law.
Real Estate Agent Commissions
Buying a house without a Realtor is possible, but it’s usually not a good idea. Realtors offer expertise during the entire home search and purchase process. This includes finding suitable properties, negotiating an offer price, facilitating inspection, and a slew of other nuanced tasks to get you to the closing table.
Sellers usually pay real estate commissions for both their agent and the buyer's agent. However, this can sometimes be negotiated, with the buyer ending up with some or all of the real estate agent commission cost.
Depending on where the property you buy is located, it may be part of a homeowners association (HOA). These monthly fees vary widely depending on the area and type of HOA your property is located in. These fees will often be prorated, so you only pay for the days of the month after you close on the property.
Home Warranty Fee
The first year of a home warranty can cost anywhere from $300 to $500 and is a recurring yearly charge as long as you keep the warranty active. The first year needs to be paid at the closing and can either be paid by the buyer or the seller. In the current seller’s market (low inventory and high demand), these are usually paid for by the buyer.
Lenders require you to prepay the monthly interest on your loan for the days between the closing and the end of the month. This is true of VA loans and almost all other types of loans. The cost depends on your total loan amount and interest rate on your VA loan.
Tax fees work just like prepaid interest. You are required to prepay the monthly taxes on your home for the days between the closing and the end of the month. In addition, many lenders will require prepayment for an even longer extended period. These funds are paid at the closing and put into an escrow account to be dispersed to your local municipality when they are due. The amount is dependent on your specific home and location, but estimate 1 percent of the property purchase price.
When you purchase home insurance, there is a premium that you need to pay each month. Lenders require you to pay the first year (sometimes more) of your home insurance premiums at the closing. Estimate about $800 to $1,500 for home insurance premiums when calculating your costs and fees to purchase a home with a VA loan.
VA Loan Closing Costs: How Can I Pay?
Now that you understand what costs and fees to expect when you close on a VA loan, you might be wondering which ones are tax-deductible and how you can pay for them. If you think that you don’t have enough cash to cover everything, fear not! There are various ways you can pay for VA loan closing costs.
Roll VA Loan Closing Costs Into Your Loan
One way to cover your VA loan closing costs is to roll them into your VA loan. This means you add them to your monthly payment, spread out over the term of your loan, instead of bringing all that cash to closing. To roll your VA loan closing costs into your loan, the property must appraise at or above the sales price combined with your VA loan’s closing costs. Lenders will often require you to have a higher interest rate on your VA loan if you are rolling closing costs into it.
Seller Pays VA Closing Costs
You can ask the seller to pay for your closing costs, but that’s tough in a seller’s market (i.e., the current market). Most homes are going for over the asking price and creating bidding wars among buyers. This means sellers are less likely to make concessions. If you convince a seller to pay for your VA loan closing cost, they can only pay for up to 4 percent of the total loan amount.
A VA loan can be an excellent tool for helping you secure your next home. They offer excellent terms and the backing of the federal government. The qualifications are specific to military service, so they aren’t available to many Americans. This is definitely a lending option you should consider if you do qualify. Understanding how these loans work and what to expect in terms of closing costs will set you up for success.