VA mortgage in details
What is VA loan?
In 1944 Servicemen’s Readjustment Act was modified. Its main aim was to include a benefit package for all the service members who are eligible. Along with this a new program was created which is known as VA loan. This program specifically concentrates on veterans. After the service period is over, it is usually tough for a veteran to get loan from the market. When you apply for a loan in the market, the most important factor is the repayment capability. It is the repayment capability which decides, how much loan a person is eligible for. For veterans, the source of income is usually very limited and hence any lending company in the market does not prefer lending to them as the risk is very high.
In order to ensure that the veterans get the required loan easily, government came up with VA program. VA actually is not a lending agency i.e. it does not lend any money from itself. It actually provides the lender a guarantee against any default from the borrower. So, if the borrower fails to repay the loan, the VA agency reimburses the default amount to the lender. Once the lender has a guarantee for the loan repayment, they also do not hesitate providing the loans.
Through VA mortgage loans, there is wide variety of options that one can apply loan for. These points are mentioned below:
- If a single family home needs to be built.
- If one has to buy an already constructed single family home. This unit has to be in a VA approved zone.
- If one has a primary residence that he needs to rebuild, repair or renovate.
- If there is already a mortgage existing and he needs to get it refinanced.
- If the borrower has to buy one or more manufactured homes.
- If the borrower has to make changes in the house like solar heating, cooling etc. which are energy efficiency related.
Since the mortgage insurance is not required in case of VA loans, it offers a perfect suitability to those veterans or their families who need to finance 80% or more value of their purchase price or appraised value.
Advantages of VA loans:
- There is no need to pay upfront down payment if the value of the property is less than $417000.
- These loans do not require any mortgage insurance.
- One has favorable DTI ratio. The lender will compare all the incomes vs all the expenses. If the debt-to-income ratio is less than 41%, that is enough to be eligible.
- In case if the borrower wants to prepay the loan, he does not have to pay any penalty for the same.
Disadvantages of VA loans:
- VA charges for a funding fee which exists for every VA loan.
- One can take the loan only if it is intended for primary residence. If one already has a primary residence, he does not qualify for any VA loan.
- Not every lender is interested in lending loans as the risk is high even though they have VA guarantee on the same.
Overall, VA loans provide a good source of finance to veterans at the age when other lenders are not that open to finance them.