A house is the largest purchase you’ll probably ever make, and you’ll be paying it off for up to 30 years (unless you sell it first). So it’s critical to do your homework as you decide what type of loan to pursue.
A VA Home Loan is the perfect place to start. These are incredible assets for veterans who don’t have the funds for a huge down payment. There are many other benefits to consider, too. However there’s also a lot of misconceptions about these loans. On occasion, this happens because a lender may insinuate a detail about your loan which is, in fact, not actual VA policy.
So let’s clear up any confusion by busting some myths and misunderstandings about VA loans right now!
1.) VA Home Loans are not home loans from the VA
One type of Home Loan the VA features is called a Purchase Loan. The name itself leads to confusion, because the VA itself doesn’t loan money for you to buy a home! These loans come from private lenders, meaning banks or other companies in the business of loaning money.
So what does the VA actually do, then? Essentially, with a Purchase Loan they promise your lender that a certain part of the loan (25%) will be “guaranteed” by the government. In other words, the VA vouches for you and may cover losses in certain circumstances.
Since houses do cost so much, having this insurance puts a lender’s mind at ease. When that happens, they can offer you better terms on the loan. Long story short, using a VA Home Loan can get you a better deal and potentially save you a lot of money over the long run. But they aren’t the ones doing the actual lending of funds.
2.) VA Home Loans don’t need a minimum credit score
Sometimes people get mixed up on this one. The VA doesn’t require a credit score to issue a Home Loan. But again, the VA isn’t the lender!
The actual mortgage lenders themselves most likely will require that a borrower (you) must have a certain minimum credit score. Again, this is a massive amount of money on the line, and they need to ensure a borrower can make the payments. Having the VA guarantee a portion of the loan helps with that, but such loans still don’t tell the lender anything about you. A credit score, on the other hand, reveals a lot!
So even though you don’t need any certain credit score to get a VA Home Loan itself, the actual lender will most likely require one because they want to make sure you have a low risk of defaulting on the loan. What does this mean to you? It means, different lenders will have different requirements, so shop around.
3.) The VA only cares about your leftover income, not your debt-to-income ratio
Similar to the myth about the VA requiring a minimum credit score, they also don’t require a certain Debt-To-Income (DTI) ratio. What’s a DTI? Basically, the percentage of your gross income that you use to pay bills and debts.
If you want to take out a mortgage on a home, that’ll be a new debt. A big one! They call that a PITI (principal, interest, taxes and insurance), and you need to understand what this means. Paying for a house includes more than just the house payment, but also taxes and insurance. So the PITI adds it all up—how much of your pay would go specifically towards the mortgage Principal payment, the Interest payment, the property Taxes, and finally the Insurance (however, with VA loans, mortgage insurance isn’t required).
So the lender will take your potential PITI debt and add that to your other debt, to calculate your Debt-To-Income ratio. If your debt is too high, they’ll be less inclined to offer the loan, or will require higher interest to mitigate their risk. But—again, the VA isn’t doing this calculation, the mortgage lender is. All the VA cares about is your “residual income.” After you pay your bills, will you have enough to make your house payment? If so, you qualify under their rules. So shop around for lenders, and ask about their DTI requirements, because the VA doesn’t have any.
4.) You can rent out property bought with a VA Home Loan
VA Home Loans are intended to help veterans wanting to buy a residence. They’re not intended to help veterans buy property they intend to turn around and rent out as an investment. Doing this would run afoul of the requirement for the veteran to be the primary resident.
But this doesn’t mean you have to sell the home if you move away due to a change of station or other reason. It just means you’ll need to be careful and ensure you remain in compliance with the VA’s rules. One workaround offered is an Interest Rate Reduction Refinance Loan (IRRRL).
Not only can an IRRRL get you a better interest rate, but it also alters the rules related to your residency requirement. As long as you were the primary resident at one point, you’re free and clear to rent the place out to tenants. Just be sure to adhere to state guidelines about property management. Some states require landlords to live in the state or to have a license. However, many reputable property managers will do all the legwork for you for a small monthly fee.
5.) You can carry more than one VA Home Loan
As mentioned, the VA requires you to be the primary resident for a home you buy with a VA loan. But there are cases where you can end up moving and renting the property out. In other words, you don’t live there but it’s still covered by your VA loan. So what if you want to buy another house at your new location?
As long as you have renters in the first home and their rent covers your mortgage and other related expenses (remember the PITI?), and as long as you otherwise meet the residual income requirement, then the VA will let you use your remaining entitlement. The VA isn’t always great at explaining things on their websites, but private lenders can break down how this works.
In a nutshell, the VA guarantees up to a quarter of your total loan amount, as discussed above. They do this by giving you two entitlements. The first is called a basic entitlement, and is worth ~$36,000. That’s the amount which shows up on your Certificate of Eligibility when you receive it.
But chances are, the house you want to buy costs more than four times that amount, though (i.e. $144,000). So that’s when your bonus entitlement, or Tier 2 entitlement, can kick in. This adds a guarantee of up to an extra ~$70,000, for a combined total of $106,000 and change.
Thus, the maximum loan you could qualify for (without a down payment) would be $424,000.
But what if you don’t want a home that expensive? What if your first house cost $250,000? The VA loan backed 25% of that, or ~$62,500. That means they’re still willing to back another $43,500, which would qualify you for a second loan of up to $174,000. Make sense? As long as you still have some benefit amount left, you can tap into it.
And it may go without saying, but if you sell your VA Home Loan house, then you reset your benefit. You can use it as many times as you want, for as long as you live!