If you are a member of the military, it may seem easy to decide whether to get a VA loan or regular loan. After all, you can get a better interest rate, don’t have to put any money down and don’t need mortgage insurance if you opt for a VA mortgage. However, there are certain things to consider, such as VA funding fees and having to put enough cash down on a regular mortgage to skip the mortgage insurance. At the same time, this decision is one that can be quite complicated in nature. Additionally, certain VA loan benefits tend to be exaggerated to some extent.
Here are some factors you must take into consideration when you make the choice between a VA mortgage and a regular one.
Type of Property
In general, one of the first important factors to consider is the type of property you want to purchase. A VA loan is really only for a primary residence, so if you are looking to buy a second or third home, you may want to look at a conventional mortgage.
One of the largest benefits of a VA loan is that there is usually no requirement for a down payment. However, a lender might require some money down if the purchase price of the property is greater than that of the current market value. In general, that scenario can occur in competitive housing markets when there is a multiple bid situation taking place.
Of course, lenders who offer conventional loans typically require larger down payments. However, these days, it’s even easier than ever to find traditional mortgages that allow for down payments as low as three percent. In some cases, the down payment requirement may be even less than that.
Fees are another consideration when determining whether to get a VA loan or traditional mortgage. There is a funding fee tied to a VA loan so that the costs of possibly defaulting on it can be defrayed. Usually, that comes in the form of a single upfront charge that ranges between 1.25 and 3.3 percent of the total loan amount, depending on your down payment, your branch of military service and how long you have served and whether you’ve previously used a VA loan benefit. This fee is usually included in the loan amount, which causes your payment to be higher and adds to the interest you pay on it. It’s worth noting, however, that veterans who get VA disability compensation are exempt from this fee.
If your down payment comes to less than 20 percent of the total amount, a regular loan would require private mortgage insurance. This is in place to protect the lender if you end up defaulting on the loan. This can be a one-time charge or an ongoing fee included in your monthly payments or even a combination of the two. Generally, depending on the size of your down payment and your credit score, your fee can range from 0.55 to 2.25 percent of your total loan amount.
A VA loan, on the other hand, doesn’t require getting mortgage insurance. Your funding fee is reduced with a down payment. At the same time, that amount can be as little as five percent when you pay down 20 percent on a traditional loan.
Credit Score and Debt-to-Income Standards
At times, you might hear lenders and the Department of Veterans Affairs claim there is no minimum credit score or maximum debt-to-income ratio. However, in reality, most lenders, even those that are VA approved, expect a credit score of at least 620 from borrowers. In 2016, the average FICO credit score for VA home loans was 707, while conventional mortgages saw an average of 753.
In terms of debt-to-income ratios, the average for VA loan borrowers in 2016 was 40 percent, while that for traditional loans was 34 percent.
VA loans generally have lower interest rates than conventional loans. In 2016, 30-year fixed rate loans closed at around 3.76 percent for VA loans and 4.06 percent for conventional mortgages.
These are all important aspects to consider when you are opting for a VA loan or a traditional mortgage. Know all of the specifics and you will be able to get the most reward out of your choice.
With rates now lower than they have been a long time, many Americans are making the decision to refinance their homes. Military personnel and veterans can take advantage of even better deals.
Thanks to the introduction of the home-loan program by the Veterans Administration at the close of World War II, veterans have been able to benefit from a low-cost option for financing the purchase of homes. A VA loan can help veterans not only save money on the purchase of a home but also when refinancing a conventional bank loan.
It should be noted that every case is unique. For this reason, it’s important for veterans to evaluate their own needs and shop around to find the best lender before taking out a new mortgage.
There are two main refinancing products available through the VA. The interest rate reduction refinance loan, or IRRRL, is the simplest product. This product is also sometimes known as a VA to VA loan or a VA streamline refinance loan. The other option is the VA cash-out refinance loan. With this option, homeowners can choose to take advantage of a VA loan for borrowing cash against the equity in their home or refinance a conventional loan to a VA loan. In most cases, it’s usually not advantageous for veterans to refinance their existing VA loan to a conventional loan.
VA Cash-Out Refinance
Veterans interested in borrowing money by using the equity in their home may apply for a cash-out refinance loan, as this is not possible with a IRRRL. Prospective borrowers should plan for funding fees that amount to 12.5 percent of the loan amount the first time they use this option and 3.3 percent for subsequent uses. For National Guard members and reservists, the first-use fee is 2.4 percent and 3.3 percent for subsequent uses. Higher fees do not apply if the first use was to purchase a manufactured home. In the event the first VA loan included a down payment of at least 5 percent, reduced fees for a cash-out refinance loan are available.
The cash-out refinance loan from the VA can provide veterans with a low-cost alternative to credit cards or bank loans. Additionally, the Veterans Administration will guarantee home loans for up to 100 percent of the home’s value.
It should be kept in mind that a cash-out refinance can result in financial difficulties in some cases. Financial experts advise that cash-out refinances should only be used in emergency situations due to the fact that this type of loan increases the amount of money the consumer is borrowing. This type of loan also extends the length of time it will take to pay off the loan.
Interest Rate Reduction Refinance Loan
The interest rate reduction refinance loan, or IRRRL, can be used to refinance a property for which the borrower already has a VA loan. Therefore, there is no need to obtain a new certificate of eligibility. There are no restrictions with this type of loan. In the event, the applicant does have a second mortgage, it will be necessary for the lender to agree that the lien on the loan can be subordinated to the new VA loan. There are also no occupancy requirements for an IRRRL, but the applicant will need to verify that they have lived previously in the home. An IRRRL can be a simple way of refinancing a VA loan for borrowers who are not looking for a cash-out option. This is because there is no need for a certificate of eligibility or a new home appraisal. Along with covering the outstanding balance for the first loan, an IRRRL can also cover the closing costs. Additionally, it’s possible to allow up to two discount points as well as improvement costs for energy efficiency.
Overall, the decision of whether to refinance or not should be based on the amount of time left on the original loan as well as the amount of interest rate reduction. Borrowers should also consider how long they plan to remain in that house.
Many homeowners think about refinancing their home loan at some point. Refinancing a home loan may give you the incredible ability to lower your mortgage payment and to make it more manageable for your budget. In some cases, refinancing an existing loan can help you to pay the mortgage balance off many years faster and to reduce interest charges in the process. This can improve your finances in incredible ways. Whether you want to enjoy these or other benefits from refinancing, you may be wondering if you can afford to refinance your current home loan. With a closer look at the IRRRL program, you may learn that refinancing is a feasible option to consider.
What Is the IRRRL Program?
The IRRRL program, or Interest Rate Reduction Refinancing Loan program, is a special program designed for military veterans and active duty professionals. It is offered through the Veterans Administration, and its purpose is to refinance existing VA home loans. If you do not currently have a VA loan, this program is not available to you regardless of your military or veteran status. You will need to apply for a conventional refinance loan. The primary purpose of the IRRRL program is to help veterans lower the interest rate on their VA home loan.
What Are the Closing Costs for This Program?
You may have heard that there are not closing costs for the IRRRL program, but this is a misunderstanding. This popular VA refinancing loan program does not require an appraisal or a credit check during the loan process, so these related fees are not in place. However, as a borrower under the IRRRL program, you will still have to pay the VA loan funding fee as well as the lender or broker costs. The VA loan funding fee will vary based on a wide range of factors, and it can even be entirely waived in some cases. The lender or broker costs are determined by the lender who you choose to work with. Therefore, it can pay off to shop around for the lowest lender fees available. You may also choose to buy down the interest rate by paying discount points at closing.
How Are the Closing Costs Paid?
One of the primary reasons why many people believe that the IRRRL program has no closing costs is because many of the loan fees associated with this program are not paid for at closing. This is a no-cash out program, and this means that you cannot receive cash back at closing through the IRRRL program. However, you can roll all of your closing costs and up to two discount points into your loan amount. Some borrowers under the IRRRL program will roll all of the fees into the loan, but others choose to pay these fees at closing in an effort to keep the loan amount and monthly mortgage payment as low as possible.
How Can You Get a Quote?
If the IRRRL program for VA home loans sounds like it may meet all of your needs and accomplish your goals, it is important to get a quote from a lender as the next step. This program is available for all lenders to offer, so you have an exceptional range of lenders to choose from when applying for this program. While it is available for all lenders to offer, some lenders may prefer not to offer it if they do not have experience in this area. As you shop around for the right lender to work with, focus on comparing lender fees to get the best deal possible on your loan. The actual loan terms should remain the same from lender to lender. Once you have found the right lender to work with, you can fill out the loan application and proceed with the rest of the loan process.
Because there is not a credit check or appraisal requirement for this loan program, the loan process can be completed quickly and easily in most cases. Refinancing your existing mortgage may improve your financial situation in substantial ways, and there is no better time to get started with this process than right now. Begin by comparing lenders to find the right professional to work with.
As you decide whether to refinance your mortgage, you have to consider your personal situation, the interest rate environment, and fees. It’s common to pay a significant percentage of your principal in mortgage refinance fees, however, the total can differ depending on the state and lender. While it is not a large charge, these small costs can quickly add up. If you are still committed to getting a lower mortgage rate, be aware of these hidden fees.
If your existing mortgage will charge you a fee if you pay it off earlier than expected, you may want to think about the refinance. A prepayment penalty could be as much as six months of interest payments. Different loans such as FHA and VA loans, as well as other mortgages that guaranteed or insured by a federal agency do not include a penalty. In some states, a prepayment penalty may be illegal.
Points are interest payments in different increments based on the overall amount of your mortgage. You can lower your mortgage loan’s long term interest rate by using discount points. If you plan on staying at home for an extended period of time, loan discount points that lower your mortgage rate can be advantageous. Lenders may charge points on refinanced mortgages to simply make a large profit without reducing the interest rate.
The large amount of paperwork to help complete your mortgage refinance is expensive. You’ll likely have to deal with an application fee to process your loan and obtain a credit report. A loan origination fee is likely, and attorneys are involved, so that may lead to hundreds of dollars in closing costs.
Mortgage Refinance Money Pit
You’ll likely be charged for the lender analyzing your home so that it is properly valued. You may also have to deal with an expensive appraisal fee, though this charge may be waived. However, if you think your home has gained value along with the real estate market, consider having your home reappraised. The lender may want an overall review of the home’s condition, which you will be charged for.
Despite already having homeowner’s insurance due to your existing mortgage, the lender will want protection if the house is destroyed or damaged. Mortgage loans that are guaranteed by government housing programs, such as The Department of Veterans Affairs and The Federal Housing Administration mandate that the payment of mortgage insurance for the lender’s benefit. You may be required to pay for private mortgage insurance to protect the lender if you default on the mortgage. Title insurance is another policy that is involved with refinancing a mortgage. Title insurance covers the cost of any errors that arise when records are searched to make that you own the home.
The Home Ownership and Equity Protection Act protects homeowners who refinance their mortgage from paying expensive fees and high interest rates. However, these regulations are not valid if the mortgage was issued to buy or build a home or establish home equity lines of credit.
Veterans or current military service members are eligible for VA loans. One of these, the Interest Rate Reduction Refinance Loan (IRRRL) works by lowering your interest rate while refinancing your current VA home loan. In other words, when you get a lower interest rate, your monthly mortgage payment amount should be lowered as well. In addition, you can refinance an adjustable rate mortgage (ARM) into a fixed rate mortgage. Here are the specifics of the IRRRL.
Facts About the IRRRL
If you are eligible for the IRRRL, it’s important to know everything it entails. Those details are as follows:
- There are no appraisals or credit underwriting packages necessary when you apply for an IRRRL.
- You can get and use an IRRRL without using any extra money out of your pocket when you include all costs in the loan or if you have a high enough interest that it’s included in the loan, allowing the lender to pay.
- When you refinance from an existing VA adjustable rate mortgage loan to one with a fixed rate, it may result in an increase in the interest rate.
- There’s no requirement of giving you an IRRRL, but at the same time, any lender of your choice can process your application for that type of loan.
- It’s recommended that veterans contact a few different lenders because terms may vary.
- You cannot get any cash from proceeds of the loan.
Eligibility for an IRRRL
You can use an IRRRL to refinance property that you already acquired with a VA loan, but it must be a VA to VA refinance and it will use the entitlement you originally used. Here are a few additional details:
- There is no requirement for a Certificate of Eligibility (COE). If you have the COE, you can use it as proof for the lender that you previously used your entitlement.
- Only your existing VA loan can be paid from what you get from an IRRRL. If you have a second mortgage, the holder has to agree to lower it so as to allow your new VA loan to be a first mortgage.
- In obtaining a VA loan upon purchasing your house or substituting eligibility for the seller, you may have used your eligibility. Additionally, if you assumed the loan, you may have also used your eligibility.
- The requirement of occupancy for an IRRRL varies from that of other VA loans. With an IRRRL, you must prove that you lived in the house.
IRRRL Application Process
There is no requirement for a new Certificate of Eligibility. You can take your COE to show that the entitlement was previously used or the lender can use the US Department of Veterans Affairs email confirmation procedure.
Limits on the Loan
VA doesn’t have any particular cap set on the amount of money you can borrow to finance a home. At the same time, there are certain limits on the amount that the VA can assume, which typically will affect the amount of money a financial institution will allow you to borrow. Loan limits are the amount an eligible veteran with full entitlement can get without making a down payment. Those limits vary depending on the county in which you reside because a house’s value depends on its location.
Each veteran has basic entitlement that amounts to $36,000. Lenders can loan as much as four times the available eligibility minus a down payment as long as the veteran is qualified for income and credit and the property includes an asking price. It’s important to check the loan limits in your county to get all the specific information.
VA Funding Fee
There is a funding fee tied to VA loan benefits. The funding fee reduces the cost of the loan for taxpayers because those eligible are not required to purchase mortgage insurance. Generally, the funding fee is a specific percent of the loan amount. This amount is determined based certain criteria, including whether you’re using the loan for the first time and whether you are making a down payment on the property. You can either finance the funding fee or pay it off with cash, but the fee has to be paid by closing. There are only a few exceptions to that rule. They are as follows:
- You’re a veteran receiving VA benefits for disability related to your service.
- You’re a veteran who’s due VA benefits for disability related to your service if you didn’t get active duty pay or retirement.
- You had or have a veteran spouse who died in service or from a disability related to their service.
It’s worth nothing that, if you are a second-time user of the loan, the funding fee may also be a bit higher.
These are all the facts about IRRRL for VA loan recipients. Make sure you understand everything about them before deciding how you ultimately want to use your IRRRL.
One of the biggest advantages of joining the military is that you and your family are eligible for a number of financial benefits. Among those benefits are VA loans. There is a program that was founded by the Department of Veterans Affairs specifically for the purpose of helping out service members and their families so that they can qualify for home mortgages through private lenders. Of course, there are a number of benefits of VA loans and the programs that offer them. It is worth knowing what these benefits entail.
Chief Benefits of VA Loans Program
- You can more easily get a mortgage without having to put down a payment or with a very small one.
- You don’t need private mortgage insurance when you buy a home and the down payment you make toward refinancing is 20 percent less and includes less than 20 percent equity.
- You get the perk of streamlined refinancing known as an Interest Rate Reduction Refinance Loan (IRRRL). When the interest rates decrease, an IRRRL helps the lender to refinance a mortgage with considerably less paperwork.
Three Things to Consider with VA Loans
Although these advantages are considerable, the process of buying a home still takes a great deal of research, budgeting and overall due diligence on your part. If you are considering purchasing a new home and find out that you’re eligible for a VA loan, there are a few details you must consider. They are as follows:
- VA loans allow you to finance up to 100 percent. However, is it really worth doing that?: In general, lenders require that buyers who have down payments that are less than 20 percent to get private mortgage insurance. This is done as a way to protect the lender in the event that the home buyer defaults on a payment. The belief is that the more experience buyers have under their belt, the more committed they will be in their investment. At the same time, it’s obvious that if a family with enough financial discipline who has saved 20 percent of a home’s value is likely better equipped to pay off their mortgage than one that has not. In other words, instead of financing 100 percent of your purchase of a home with a VA loan, it’s wiser to save money for a down payment, especially if you are considering making a move related to your career.
- You should know all the costs associated with owning a home on a VA mortgage and compare the numbers to those in a traditional mortgage: You will likely pay a funding fee on a VA mortgage that ranges from 0.5 to 3.3 percent, depending on certain factors. There may be other restrictions involved, such as closing costs. Additionally, interest rates on VA mortgages are different from those associated with regular mortgages. Analyze the numbers for both types of mortgages before deciding on what to do.
- Depending on the situation, you can have more than one VA mortgage: This varies depending on the circumstances. In some cases, you may become eligible for an additional VA mortgage. It is worth being aware of how the entitlement calculation is made to know how much you can potentially get from a lender. If you need a second home, you may be eligible even if you still need to make a down payment. It’s a well-known fact that military families travel around frequently and move just as often, which means that you may be eligible for purchasing a second or even third home for very little money. However, it’s important to consider your situation and ask yourself whether it is really necessary. There is a cap on VA entitlement that comes to $417,000.
How to Get Help with VA Loans
Of course, there are plenty of other variables that can affect whether it’s a good idea to use a VA loan. If you are a member of the service and are considering one of these loans, it’s important to educate yourself by accessing the VA’s benefits website. There are also many lenders who are experienced in the area of VA loans who can give you additional information if you need it and advice on the best way to apply for a loan.
Overall, you can get still more information by speaking with a fee-only financial planner in your area. The best way to ensure that you make sound financial decisions is to talk with a skilled professional about your options. In the long run, it will work to your advantage.
Being eligible to receive a VA loan continues to become more complicated. Getting a VA home loan is significant, so there are a few hurdles that you must go through. Banks normally issue the loans, not the Department of Veterans Affairs. The Department does insure part of the loan in the event of a default. Lenders can also add their own unique stipulations. That’s why it is important that you do your research. Before you purchase a new home or decide to improve your current residence, here is some important information to learn about VA loan eligibility and the different requirements.
Who Is Eligible?
How To Obtain Eligibility
To receive your loan benefits, you will need to get a Certificate. There are multiple ways that you can receive your COE. You can use your eBenefits account, complete the paperwork for a Certificate of Eligibility , or a VA lender can get the certificate for you.
How To Complete The COE
To complete the Certificate of Eligibility, you will need signed evidence showing the reason that you were separated and a record of your service, a statement of military service, and forms showing information about your discharge.
Even though a VA mortgage does not have as strict of guidelines as those for a conventional loan, applicants still need at least decent credit and a stable income to purchase a home.
Put Some Money Down Towards The Loan
Ideally, you will not be required to make a down payment. Be aware that you may have to pay the difference if your home’s purchase price is larger than its value. If you are in a tough market, paying some money towards the loan may be necessary. That would show that you are a serious buyer.
While a VA loan does require insurance, you will have to deal with a funding fee. The fee is used to help the Department offset the costs of foreclosures. The fee amount is based on the down payment, length of service, and if you have previously used a VA loan benefit. The fee is added to the overall loan amount, and your monthly payment will increase. Veterans who receive disability coverage are exempt from paying the funding fee.
The VA has strict property requirements. Recently built homes are required to have protection plans and warranties. The VA doesn’t require a minimum credit score that is necessary for you to receive the loan. However, the lender is advised to review everything and make the appropriate lending decision.
Depending on the lender, additional requirements may be necessary to complete the loan process. That could include your credit accounts and the late payments that show up on your credit report. Try to apply for more than one lender.
Other Housing Programs
Native American Direct Loan
The Program strives to help Native Americans build, buy, improve or even refinance homes on federal trust land. This program is available to all Native American tribes.
Special Housing Grant
This program gives veterans and service members assistance to help finance the purchase, renovation, and construction of a home designed to suit their needs.
VA loans, or Veterans Administration loans, are designed to provide military veterans and active military professionals with competitive mortgage terms. However, interest rates change over time, and you may now be in a position where you are thinking about refinancing your loan to reduce the interest rate. This process is completed through the VA’s Interest Rate Reduction Refinance Loan, or IRRRL. Before you move forward with your plans to refinance your current mortgage under this loan program, there are a few things you need to know.
The Benefits of Refinancing Your Loan
Refinancing your current home loan to take advantage of a lower interest rate under any loan program can provide you with exceptional benefits. Through this process, you may be able to build equity more quickly, lower your monthly payment or pay your loan balance off faster. When you refinance your VA loan under the IRRRL program, you may enjoy additional benefits. For example, you will not be required to pay for an appraisal, and there are no closing costs that you will need to pay for out of your own pocket. There is also not a credit check required. These factors make it a preferred loan program for many loan applicants.
What to Expect From the IRRRL Program
If you have never applied for a refinance loan through the IRRRL program, you may not know what to expect. This is a streamlined program that is designed to make it easy for qualifying veterans and military professionals to refinance their home loan. You may be able to refinance an adjustable rate mortgage to a fixed rate mortgage under this program, but your interest rate may actually increase if this is the case. You will need to get a direct quote from a lender. Keep in mind that different lenders offer this program, and terms under different lenders can vary. In addition, you are not allowed to receive any cash from the proceeds. If you need to obtain home equity out of your loan by refinancing, this is not the right program for you to apply for.
Determining If You Qualify for the IRRRL Program
Before you apply for the IRRRL program, you may want to know if you qualify for this refinance loan. The new refinance loan can also replace a loan that you previously used your VA loan eligibility on. If you have a second loan on your home, that loan must take a second position behind the new IRRRL loan. You will need to obtain a Certificate of Eligibility to confirm that you qualify for this loan, and your lender can typically assist you with this process.
What You Need to Know Before You Apply
If you are thinking about applying for a refinance loan through the IRRRL program, you should be aware that there are no closing costs associated with this loan. However, you will be responsible for paying the VA loan funding fee. The amount of this fee can vary. Many applicants will roll this fee into their loan, but you can also choose to pay for it in cash at the time of closing. Lenders or brokers may have their own fees, and you will need to shop around to compare fees. While the fees can be rolled into the loan as well, you need to ensure that the fees are competitive and that unnecessary fees are not rolled into your loan amount. You also need to be aware that the loan limit is typically set at four times $36,000, or four times the VA’s basic entitlement loan. You can exceed this loan limit, but you typically will need to pay money out of your pocket to do so.
Many military professionals and veterans are interested in using the IRRRL program through the VA to refinance their mortgage. This is a mortgage program that offers considerable benefits, but it is not the right solution for all needs. Those who currently have a VA loan in place should compare this program’s benefits, costs and drawbacks with other non-VA loan options available. By taking the time to do so, you may be able to set up the right loan for your current needs and budget.