by Sean Hess, broker and manager, St. Augustine Team Realty
Happy Veteran’s Day and thanks to service members past and present for all that you’ve done for our country for keeping freedom alive!
Since it’s Veteran’s Day I thought we’d do a quick look at the VA loan and how it works. Like all things government it gets a bit confusing.
Basically, service members who have served 90 consecutive days wartime and 181 days peacetime are eligible to get a VA loan, plus surviving spouses. There are several exceptions and other criteria based on the time period you served. I’ll include links at the bottom where you can see the exact VA regulations.
The VA loan guarantees up to 25% of the total loan amount if a buyer defaults. The maximum the VA will guarantee is $104,250. So typically, the maximum a lender will loan is $417,000.
You have to apply for what is called a Certificate of Eligibility from the Department of Veterans affairs. This Certificate determines your “entitlement.” Right now the maximum entitlement is $360,000, but that does not mean you get a loan of $360,000. Basically the entitlement is the total amount of loans you can take in a lifetime that the VA will guarantee up to 25% of. If you’ve never had a VA loan before, chances are your entitlment will be $360,000. If you’ve used a VA loan before, your entitlement will be less, based on the amount of any previous loans.
Typically a lender wants your entitlement plus your downpayment to equal 25% of the loan. It your entitlement is at or above 25% you may not have to put anything down.
Even if you have a high entitlement you still have to qualify for a loan based on your monthly income and your monthly debts. How do you do this?
After you get your Certificate of Eligibility you need a lender to help you determine the maximum amount of your loan. Basically, the monthly payment on your new home loan (including escrowed taxes and insurance), along with any car payments, personal loan payments, credit card payments, student loans, etc., cannot exceed 41% of your gross monthly income. So you almost have to figure it out in reverse by finding out what 41% of your gross income is, then subtracting car payments, etc. from that. And then you estimate taxes and escrow (usually pretty easy), take a look what the going interest rate is, and based on that figure out how much you can be loaned.
At this point you will have the maximum amount a bank will lend you on a home. Now it’s time to go shopping and find a home.
There are just a few more hurdles.
Since the VA does NOT cover closing costs you will need to cover those yourselves. Or, you can structure the real estate deal where the seller pays the closing costs. This is sometimes done by adding the closing costs to the price of the home, and then the seller pays for the costs at closing. But the total amount cannot be greater than the house appraises for.
There is also a VA funding fee that will be cost the buyer anywhere between 1.25% and 3.3% of the loan amount that is paid at closing. It varies depending on your eligibility, including whether or not this is the first time you’ve ever used a VA loan, are disabled, or are a Native American. For most first time users it’s 2.2%, for most second-time or “subsequent” users it’s 3.3%.
You can visit the VA website to get eligibility requirements. Another good resource is VAloans.com.
That’s it in a nutshell, and again, Happy Veteran’s Day!