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The Pros and Cons of VA Loans

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A VA loan is a mortgage that’s guaranteed by the U.S. Department of Veterans Affairs. The loan is available to certain veterans, active duty servicemembers, and qualifying spouses. Since 1944, the program has helped make homeownership possible for more than 23 million veterans and their families.

The basics of a VA loan

The Department of Veterans Affairs does not issue VA mortgage loans. Rather, private lenders such as banks and mortgage companies provide VA loans to eligible applicants. The VA program guarantees loans up to a certain limit (more on those limits below).

The federal government agrees to back the loan if a borrower goes into default. This added protection enables lenders to provide more favorable terms to borrowers who are eligible to participate in the program.

Eligibility qualifications

To qualify for a VA mortgage, you first have to satisfy a lender’s qualification standards. Basic lender requirements generally include

  • Satisfactory credit history
  • Sufficient income to purchase the home

In addition to satisfying a lender’s requirements, you’ll also need to obtain a valid Certificate of Eligibility (COE) from the VA. To qualify for a COE, you generally need to fit into one of the following categories:

  • You are a veteran and you served for a certain length of time.
  • You are an active duty servicemember and have served for a minimum period of time.
  • You are an eligible Reservist or National Guard member.
  • You are an eligible surviving spouse of a deceased veteran.

You can get more information by calling 877-827-3702.

You’ll provide your lender with your COE, which confirms that you are eligible to receive a VA-backed loan.

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VA Home Loan Benefits

VA home loans are packed full of some great benefits for eligible borrowers. Here’s an overview of some of the best ones:

One hundred–percent financing

As long as the sales price doesn’t exceed the appraised value of the home, VA loans offer 100% financing for eligible borrowers. Translation: You won’t need a down payment to qualify for a VA loan.

In contrast to an FHA loan, which typically requires a down payment of at least 3.5%, a VA loan can save home buyers thousands of out-of-pocket dollars at closing. That equals a $7,000 upfront savings on a $200,000 mortgage when you compare the two loan products.

No loan limit

VA loans don’t have a cap on how much money you can borrow to purchase your home. However, the VA will only guarantee loans up to a certain limit. These liability limits may influence how much a lender is willing to loan you for your home purchase, and they change every year.

Liability limits vary based on the county where you are purchasing a home. They are the same as the loan limits for Fannie Mae and Freddie Mac conforming loans. In most of the U.S., veterans can borrow up to $484,350 without a down payment in 2019.

You can search for the VA loan limits for your county here and learn more in this LendingTree article about VA loan limits. LendingTree is the parent company of MagnifyMoney.

No minimum credit score

There is no minimum credit score requirement associated with VA loans. This may make VA loans a good choice for borrowers with a less-than-perfect credit history. Yet keep in mind that although the VA doesn’t require a minimum score to qualify, most lenders impose credit score requirements of their own.

In an interview with MagnifyMoney, Tendayi Kapfidze, chief economist for LendingTree, recommended that borrowers with credit challenges shop around and compare offers before committing to a specific lender.

Kapfidze explained, “Different lenders will target different types of borrowers. The more lenders you talk to, the more likely you are to find one who may be willing to work with your particular circumstance.”

Limited closing costs

The VA sets limits on the amounts lenders may charge VA borrowers for specific closing costs and fees. These limitations might lower the amount of funds required at closing.

Additionally, sellers are allowed to pay closing costs if the buyer can negotiate the agreement into their purchase contract.

A borrower should be prepared to pay the following potential fees and costs (plus maybe a few others) with a VA loan:

  • Appraisal fee (averages from $400 to $450)
  • Credit report fee (averages from $50 to $65, often due at time of application)
  • Title insurance fee (averages from $600 to $800)
  • Recording fee (averages from $20 to $75)
  • Loan discount points (up to 2% of loan amount is considered reasonable)
  • Loan origination fee (usually 1% of loan amount)
  • State and local taxes

No private mortgage insurance (PMI) required

With certain loans, borrowers are required to pay for private mortgage insurance (PMI). PMI protects your lender if you default on your loan payments. If you’re taking out a conventional mortgage and putting down less than 20% of the purchase price, PMI is typically required.

Because VA loans do not require private mortgage insurance, borrowers are able to save money on their loan payments every month. This can add up to thousands of dollars saved over the life of your mortgage loan.

VA loan challenges

Although VA home loans boast some of the best benefits available for homebuyers, the loans are not without their challenges. If you’re thinking about using a VA loan to finance your home purchase, here are a few facts you should consider first.

Lender loan limits

As mentioned above, VA liability limits can influence how much money a lender is willing to extend to you for your home purchase. If the home you want to buy costs more than a lender is willing to offer you with a VA loan, consider a different loan option or see if another lender is willing to work with you.

Funding fee

Most VA borrowers pay what is known as a funding fee in order to help offset the costs of the program for taxpayers. The funding fee is a percentage of your loan amount and can vary based upon the following:

  • Loan type
  • Military category
  • Buyer status (first-time user of the VA benefit or repeat borrower)
  • Down payment (optional)

Borrowers may choose to pay their funding fees in cash at closing or opt to finance the fee into their mortgage.

Certain types of borrowers are exempt from funding fees, including:

  • Veterans receiving VA compensation for a service-connected disability (or those who would be eligible to receive the benefit under different circumstances)
  • Surviving spouses of veterans who died in service or from a service-related disability

Closing costs

Although closing costs associated with VA loans are often lower than those required for other mortgages, it can still be a challenge for some borrowers to come up with the necessary funds to bring to closing.

Mark Smith, director of programs and development for the PenFed Foundation in Alexandria, Va., explained why his nonprofit organization believes it’s so important to help veterans overcome this common obstacle.

“One of our missions is to help ensure that our veterans and active duty military members have the tools they need to build healthy financial futures,” he said. “We believe homeownership is a way to help those who have served become thriving members of their local communities.”

Through its Dream Makers Program, the PenFed Foundation provides a no-strings-attached down payment assistance grant that VA borrowers may also use to help cover closing costs. The grant offers eligible applicants a 2-for-1 match (up to $5,000) of any funds borrowers put up personally for earnest money and closing costs.

According to Smith, around $6.5 million in grants has been distributed to help borrowers since the program’s inception.

Potentially larger loan than the value of your home

VA will guarantee loans up to 100% of the value of your home. As a result, if you also finance your funding fee requirements, there’s a chance that your VA loan amount could end up being higher than the value of your home.

Thankfully, there are a number of ways you can avoid this potential problem.

  • Apply for a grant or ask the seller to cover some (or all) of your closing costs.
  • Provide a down payment.
  • Purchase a home priced below its appraised value.
  • Consider other loan options.

What else should you know about a VA loan?

Although VA loans have been around for more than 70 years, they are surprisingly underused. Only 3.12 million veterans were actively participating in the VA Home Loan Guaranty Program as of 2018. This is remarkably low when you consider the total number of veterans is estimated to be somewhere in the neighborhood of 19.6 million.

Borrowers may not take advantage of VA loan benefits because of common misconceptions like:

  • The false idea that VA loan benefits can’t be used more than once. In reality, VA loans benefits are not limited to a single use.
  • The false idea that benefits expire. VA benefits don’t come with an expiration date, even if your service ended decades ago.
  • The fear that credit issues like bankruptcy or foreclosure may prevent you from qualifying. Lenders have their own requirements for loan qualification, but a past bankruptcy or foreclosure typically will not permanently exclude you from VA loan benefits.

Conclusion

Before you sign on the dotted line for any new home loan, it’s important to do your homework first and make sure that you are ready for the commitment.

According to LendingTree’s Kapfidze, you should educate yourself, compare offers from multiple lenders and understand your finances completely. “Taking out a mortgage is a pretty big financial obligation,” he said. “Make sure you’re prepared for that.”

This article contains links to LendingTree, our parent company.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Michelle Black
Michelle Black |

Michelle Black is a writer at MagnifyMoney. You can email Michelle here

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When to Apply for a Mortgage Without Your Spouse

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It has not been previewed, commissioned or otherwise endorsed by any of our network partners.

Marriage is considered by many to be the ultimate partnership between two people. Couples not only combine their homes, belongings, and lives, but often combine their finances as well. They set goals, make plans, and commit to working together to make their dreams a reality.

Most couples I know either dream of buying a house or have already made that achievement a reality. In my husband’s and my case, we couldn’t wait to buy a house, and when I graduated college we immediately started house hunting – but not before heading to the bank to become pre-approved for a mortgage.

What we found when we tried to obtain that mortgage preapproval was that my husband’s identity had been compromised since the last time we had checked his credit. Not only did we have a huge credit mess and a tanked credit score to clean up, we had a deadline to buy a house – because we were having a baby!

Ultimately, we decided to leave my husband off of the mortgage, and that I would buy the house on my own while we sorted out his identity theft situation, but there are many other scenarios in which you may want to apply for a mortgage without your spouse.

Credit Problems

Credit problems can arise for many reasons:

  • Identity Theft (like ours)
  • Lack of Credit
  • Low Credit Score
  • Excessive Debt

Identity theft is the biggest shocker of all, as you may not know that your identity was compromised until you attempt to qualify for a mortgage. It can result in excessive debt, a ruined credit score, or high credit usage. In order to avoid a surprise like ours, it is good idea to check your credit on a regular basis, and especially before trying to obtain pre-approval for a mortgage.

Unfortunately, mortgage companies don’t just pick and choose the best credit aspects from both spouses; or even use the average of their credit. What a bank will be most concerned with is the lowest credit score, basically calling attention to the very credit problems you wanted to hide.

Lack of credit can be just as damaging to your mortgage application as bad credit is. If your spouse does not have a credit score at all, or has a very short credit history, it may be better to leave him or her off of the mortgage application so that you can secure a better rate.

The same goes for high credit usage or a high debt-to-income ratio. High credit usage is considered using 20% or more of your available credit, such as using 20% or more of your credit card limits. A high debt-to-income ratio is when your debt payments are more than 40% – 50% of your income.

Banks have maximum requirements for credit usage and debt-to-income ratios in order to approve a mortgage application, and if one spouse does not meet the maximum criteria, you could end up paying a higher interest rate, or even be denied a mortgage.

So, if your spouse has credit problems, you might want to consider leaving your spouse off the mortgage application – unless you need his or her income to qualify.

Low Income

Generally to apply for a mortgage, you will need the following:

  • 2 Years of W2’s
  • 2 Years of Tax Returns
  • 2 months of bank statements

Some situations call for more documentation or less, but you should have these documents ready, at the very least.

Occasionally, one spouse will not meet these requirements. He or she may not have had a job for the last 2 years, or may be self-employed and not have 2 years of self-employment tax returns. If your spouse does not have consistent income, or cannot provide this documentation, it may make more financial sense to leave him or her off the mortgage application.

The Application Process

Even though only one spouse is applying for your mortgage, it is important to note that there will be some differences in the application process and being prepared for them will make the whole process go much faster.

  • A Smaller Loan Amount: Cutting your combined incomes in half also lessens the mortgage amount that you will quality for.
  • The Mortgage Company Will Look at Your Spouse’s Debt: If the home you are looking to purchase is in a community property state, or is a FHA or VA loan, both spouse’s debts will be taken into consideration.
  • Joint Bank Accounts Are Ok: As long as you are listed as an owner on the account – no matter the other account owners – the bank should have no problem with your home loan.
  • You Spouse Will Need to Acknowledge The Debt You’re Taking On: Even though only one spouse is taking out the mortgage, many lenders will require that the other spouse sign an acknowledgment form stating that they understand the debt that their spouse is taking on.

Besides the above differences, buying a house without your spouse is not really all that different than buying a house with them. It may actually be easier, as only one person needs to rearrange their schedule to sign important documents related to the mortgage and closing, rather than two.

To see if you can qualify on your own, it makes sense to shop around. We recommend starting with LendingTree. With a single form, over 400 mortgage lenders will be given the opportunity to compete for your business. You can check to see if you can qualify by starting here:

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Ultimately, It Is The Rate That Matters

The goal in applying for a mortgage is to get the best rate possible. And the way to get your best rate possible is to present the most credit-worthy, solid mortgage application possible to the bank. Sometimes, this means leaving one spouse off of the application, and proceeding alone.

The more attractive you look as a borrower, the lower your mortgage rate. Doing something as simple as leaving one spouse off of the mortgage, could lower your rate enough to save you hundreds of thousands of dollars.

Consider this example: A 6% rate on a $200,000, 30-year mortgage (assuming a 20% down payment) will cost you $185,340 in interest over the course of the loan.

That same mortgage with a 5% rate will cost you $149,207 in interest over the course of the loan – saving you $36,133 just by dropping your rate by 1%!

Just remember: when shopping for a mortgage rate, it is best to condense all of your inquiries into a short period of time. All mortgage inquiries completed in one shopping window (typically 30 days or less) will only count as one inquiry on your report.

Even though it may seem unconventional at first, buying a house without your spouse actually makes quite a bit of sense in some situations. As with any big decision, be sure that you make the decision about whether to buy a home together or separately by talking openly so that you and your spouse are on the same page about your homeownership dream and what it will take to get there.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Gretchen Lindow
Gretchen Lindow |

Gretchen Lindow is a writer at MagnifyMoney. You can email Gretchen at [email protected]

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How to Speed Up Your Mortgage Refinance

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The saying “time is money” is even more true when you’re refinancing your home to reduce your monthly payment. The sooner you complete a refinance, the sooner you’ll be able to enjoy the benefits of lowering your payment and improving your financial situation.

There are steps you can take to move the process along more quickly. We’ll discuss these as we explain how to speed up your refinance.

Why speed is important in a refinance

Interest rates change on a daily basis. Once you lock in your rate, the clock begins ticking. If you don’t complete the refinance within the lock timeline, you could end up paying extension fees or end up having to re-lock at a higher rate.

Rate locks are usually priced in 15-day increments, although different lenders may offer other timelines. The shorter the lock period, the better your rate should be. If you can complete your refinance within one of the shorter lock-in periods, you’ll end up with a lower rate, lower costs or both.

Tip No. 1: Know what you want to accomplish with the refinance

If you’re objective is to save money every month on your payment, the refinance process can be incredibly fast. The simpler your goal is for the refinance, the easier it will be for the lender to approve your loan.

If a lender sees that you’re saving money and improving your financial situation with a lower down payment — and that you have made all your payments on time — it already has a pretty good idea that you’ll make a new lower payment on time.

However, if you’re applying for a cash-out refinance to consolidate debt, that may be a red flag that you are overextended on credit because your job or income is unstable, prompting lenders to request more proof of income to make sure you can repay your loan.

Tip No. 2: Pick a streamline refinance option

One of the benefits of government-backed loan programs, such as those offered through the Federal Housing Administration (FHA) and Veteran Affairs (VA), is the ability to refinance under “streamlined” guidelines. These refinance programs don’t require any income verification, and they usually won’t require any appraisal.

They also don’t require a full credit report, and they only verify that you’ve made your current mortgage payments on time with a mortgage-only credit report. Because lenders don’t have to underwrite your income or an appraisal, the refinances can be completed very quickly.

If you have an FHA or VA loan and have made seven payments on time since you took out your mortgage, you are probably eligible for a streamline refinance option. The VA streamline program is more commonly called a VA Interest Rate Reduction Refinance loan (IRRRL), but it features the same income and appraisal flexibilities as the FHA streamline refinance.

Tip No. 3: See if you can get an appraisal waiver on conventional financing

When market values go up — as they consistently have for at least the past five years — conventional lenders may begin to offer appraisal waivers. Although you’ll still need to document your income and assets, conventional lenders may be able to offer you a waiver of your appraisal, which will significantly speed up your refinance process. It will also save you the cost of an appraisal, which is usually $300 to $400.

You may hear your loan officer talk about a property inspection waiver (PIW) or an automated collateral evaluation (ACE). These basically amount to a computerized system accepting the estimated value you input on your loan application as the appraised value for your refinance.

Appraisal waivers are usually only available on rate-and-term refinances, which are refinances paying off the balance of your loan to save money. If you are looking for a cash-out refinance to consolidate bills or make home improvements, chances are you’ll need a full appraisal.

Tip No. 4: Fill out an accurate and complete application

Take the time to fill out your loan application accurately. Be sure to provide contact information for your employer, your homeowners insurance company and a complete two-year history of your employment and addresses.

If you’ve applied for new credit accounts in the past 60 days, have a current statement handy in case the balance and payment haven’t yet appeared on your credit report. These may seem like minor things, but they can cause major delays if you don’t disclose them properly at the beginning of the loan process.

Tip No. 5: Have your basic paperwork ready to provide

Depending on the type of refinance for which you are applying, there may be very little your lender needs. However, there are some basics you should have handy to speed up the process, just in case.

  • Current month of pay stubs: If you aren’t doing a streamlined government refinance, this is usually the bare minimum a conventional lender will need.
  • Last year’s W-2: If you have high credit scores (above 720), you may not have to provide a W-2, but it depends on the type of income you receive. If you get overtime and commissions on top of a base salary, expect to provide two years’ worth of W-2s.
  • Current mortgage statement: This is needed to show that there are no late fees accruing. It also provides a snapshot of your current loan balance for your loan estimate preparation.
  • Two months of bank statements from a checking or savings account: Some lenders will only require one month. If you’re adding the closing costs to your loan balance, you may not need any bank statements at all.
  • Copy of your current homeowners insurance policy: Whether you include your homeowners insurance in your monthly payment or not, the lender will need this to calculate your total qualifying payment. It will also need to switch the lender information to show who your new mortgage company will be.
  • Current property tax statement: Again, this is required regardless of whether you have an escrow account. Your property taxes will need to be current, and the lender will need the yearly taxes to calculate your total qualifying payment.
  • Copy of your driver’s license or picture ID: This is needed to confirm your identity at your application and then again at your closing.

Tip No. 6: Apply with a digital or online refinance lender

You may see advertising or have a loan officer tell you about a digital or online refinance process. This generally means the lender doesn’t need any income or asset documentation to approve your loan, allowing the refinance to finished quickly.

That doesn’t mean they aren’t accessing your personal information in another way. New technology allows lenders to access your income and employment history through online databases. It can see your assets with “view-only access” to your banking accounts.

You generally have to work for a large employer to be eligible, and your bank accounts need to be with a large bank. You also need to be comfortable with giving your lender your log-in credentials for your bank for “read-only” access.

Tip No. 7: Stay at your current job

Your income and employment will be verified during the loan process and right before closing. Switching from a salaried to a commission position, or changing employers, will create delays in the process or prevent you from being able to complete the refinance at all.

Tip No. 8: Don’t make large deposits into your checking or savings accounts

If you are increasing your loan amount to cover your costs, you may not need to provide any bank statements at all. If you do need to provide bank statements, the first thing the lender will look for is large deposits.

If you received a large cash gift from a relative, or recently sold an asset such as a car or coin collection, avoid depositing the funds until after your transaction is complete to avoid having to provide documentation and explanations.

Tip No. 9: Provide only asset documentation you need for the loan

Refinance lenders only need enough documentation to approve your loan. If you have an extensive portfolio of stock funds, 401(k) plans or several different asset accounts, you don’t need to disclose them if you aren’t going to be liquidating them to complete your refinance.

Tip No. 10: Communicate any changes to your loan officer immediately

Sometimes a new job opportunity is too good to pass up, or a car breaks down requiring you to buy a new one. The most important thing is to immediately notify your loan officer of any changes to your employment, credit or assets so they can develop a game plan to prevent any unnecessary delays finishing your refinance.

Things that could slow down the refinance process

Sometimes situations can arise that you have no control over in the refinance process. You’ll need to make quick decisions to keep the refinance moving if you run into any of them.

Your appraisal comes in lower than estimated

A low appraisal could affect the viability of a refinance. This is especially true with conventional mortgages, where the interest rates are influenced by how much equity you have. Even a 5% difference in your estimated value could result in a higher rate, higher costs or both.

You can also dispute a home appraisal by providing recent, similar sales you think better represent your home’s value. If your value comes in lower, reach out to your loan officer to have a new break-even point analysis done to make sure the refinance still make sense. This calculation divides the total closing cost of your refinance by the monthly savings to determine how long it takes to recoup the costs. Getting your refinance done quickly isn’t beneficial if it takes you longer to recoup the costs than you plan to live in the home.

One caveat: Don’t give the appraiser your opinion about what you think your home is worth. There are very strict laws in place to make sure appraisers have the independence to evaluate your home’s worth without any pressure from an interested party. An appraiser can refuse to complete your appraisal, creating delays and potentially causing the lender to decline your loan.

Some states consider it a felony to influence a home appraiser, so it’s best to let the appraiser do the inspection, then dispute the value with recent sales if you don’t agree with the appraiser’s opinion.

You have a second mortgage you want to keep

If you have a home equity loan or a home equity line of credit (HELOC), you may want to keep it open and just refinance your first mortgage. This will require an extra approval process called “subordination” or “resubordination.”

Your second mortgage lender will need to agree to being “subordinate” to your new first mortgage. That means your first mortgage lender wants to have first rights to foreclose on your home if you default.

Home equity loan and HELOC lenders will usually have a process in place to approve subordinations quickly, but some have long turn times that may force you to lock in your mortgage for a longer time period.

Final thoughts about speeding up your refinance

Be sure to shop around to get the best rate possible. Once you’ve found your best deal, lock it in and be prepared to act quickly with any documentation requests from your loan officer and loan processor.

Taking all these steps will help speed your refinance up so that you can begin enjoying the benefits of a lower rate and monthly payment.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Denny Ceizyk
Denny Ceizyk |

Denny Ceizyk is a writer at MagnifyMoney. You can email Denny here

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