The VA provides a unique housing benefit to veterans if they have devoted a portion of their lives to serving the country. They can secure complete financing via a VA loan. Lenders will be happy to know that some of the loan is guaranteed by the VA. As such, lenders can issue financing to a borrower under versatile guidelines.
VA GUARANTEES: WHAT ARE THEY?
A VA guarantees a loan for a lender. The guarantee is not the same thing as a benefit. It serves as a sort of backup that lenders can use, incentivizing them to issue loans for borrowers deemed “risky.” When it comes to such borrowers, the VA’s guidelines are quite relaxed. A borrower with a 620 credit score or a 43% debt ratio, for example, will be eligible.
Contrast that to traditional loan guidelines where credit scores must be 680, at the very least; or debt ratios must have a maximum total of 36%. Suffice it to say, the VA’s guidelines are quite relaxed, making loans seem less risky. That’s why guarantees are offered by the VA. If you were to default on a loan, then the loss will be repaid by the VA.
How much will be paid by the VA?
Maximum guarantees are available for various loan amounts from the VA. For the most part, 25% of a loan’s amount is what they guarantee, right up to a national conforming amount. These days, that could be as high as $453,100. $113,275 would be guaranteed by the VA if the loan you had was for a maximum amount.
If the loan you have is smaller, though, not as much of it would be guaranteed by the VA. 5% of the loan will be guaranteed if the amount ranges from $144,000 to $453,100. If the loan amount is between $56,251 and $144,000, then the VA would guarantee 40% of a mortgage, to a maximum of $36,000. $22,500 of a smaller loan amount would be guaranteed by the VA if the amount ranged between $45,001 and $56,250. Any loan amount lower than $45,000 will come with a 50% guarantee.
VA LOAN QUALIFICATION
Because the VA offers a guarantee, the guidelines associated with getting VA loans are not very stringent. As mentioned earlier, your debt ratio can be high, and your credit score can be low, and you’ll still qualify. The reason? The VA concentrates on disposable income only.
If your disposable income is adequate based on where you live and the size of your family, then you should be able to repay your mortgage – at least, that’s the VA’s perspective. As such, their guidelines for debt ratios are not strict. Front-end ratio maximums aren’t published, either. Decisions are made based on whether your disposable income meets their guidelines.
Out of all the mortgage programs out there, the VA’s default rates seem to be the lowest. They can provide guarantees to multiple lenders since they really don’t need to pay up that often. When veterans do default, their entitlement portion is lost.
If the loan you have defaulted on is $120,000, then $30,000 of an entitlement would be lost. Because you receive a basic entitlement amount of $36,000 in advance, only $6000 would be accessible if you were to qualify once again.
For veterans, the VA’s program is great. Veterans can get complete financing, even if their debt ratio is high and their credit score is low. No money down is required, and a mortgage value at a maximum conforming amount can be secured. It is a convenient solution for veterans who cannot afford a mortgage, and allows them to get a home a lot easier once they leave the service.