VA Mortgage & Student LoansYour debt-to-income ratio is an important factor in your home loan application, whether you are applying for a VA loan or another type of loan. The debt-to-income ratio looks at how much money you have coming in and compares it to how much money you have going out in payments. Student loans are a huge chunk of debt for most people, and since student loan payments are usually fairly large, they can be a big factor in a home loan application. They also make it harder to save up for a down payment and closing costs. And so, can you get a VA loan with student loans? Having student loans is not enough to automatically make you unable to get a home loan. However, missing payments or defaulting on your loans can harm your chances of obtaining a mortgage.
Lowering Your Debt-to-Income RatioMost mortgage lenders will require you to have a debt-to-income ratio below 30 percent, sometimes up to 36 percent. If your student loans are interfering with that, you can look into lowering the amount you have left to pay off, refinance or consolidate your loans to lower your monthly payments or enroll in an income-based repayment plan. Those allow you to lower your payments to be aligned with your income level. They can lower your payments down to 10 to 15 percent of your monthly income.
DefermentOne way you can keep your student loans from interfering with your VA home loan application and debt-to-income ratio is by having them deferred. While your loan is in deferment, you will likely have no payment or a significantly reduced payment. If you have federal student loans, they are automatically deferred for six months following your graduation, so if you can get them deferred for an additional six months, the loans will not impact your VA home loan. One thing that is tricky with this method is that if they are deferred due to financial hardship, this can make them count against you instead of for you. If you deferred your loan because you cannot afford it, the lenders will assume you also cannot afford a monthly mortgage payment. Some of the reasons you can get your loan deferred are:
- You are currently enrolled in school at least half-time or are in a career school
- Serving active duty
- Unemployment or under-employment
- Economic hardship
No More VA Home Loan Limits
Removing the loan limits for new VA home loans is a huge win for veterans and military families for the new year. The elimination of loan limits doesn’t mean unlimited borrowing power. Borrowers will still need to have sufficient income and meet a lender’s credit requirements to qualify for the loan amount. The good news is that veterans stationed in costlier real estate markets can now stretch the zero-down buying power of their benefit. It is important to note that loan limits will still apply to veterans who have one or more active VA loans, or have defaulted on a previous loan. Existing loans will follow the same county guidelines set by the Federal Housing Finance Agency; which in 2020 is $510,400 in a typical county and higher in more expensive housing markets. If a homebuyer is subject to VA loan limits, the lender, like American Financial Resources, will require a down payment if the purchase price is above the loan limit.
VA Funding Fee Increases for Some
The VA funding fee is a congressionally mandated fee associated with the VA home loan. For the next two years, veterans and service members will see a slight increase of 0.15 to 0.30% in their funding fee, while National Guard and Reserve members will see a slight decrease in their fee. Veterans with service-connected disabilities, some surviving spouses, and other potential borrowers are exempt from the VA loan funding fee and will not be impacted by this change. The VA funding fee paid will depend on the down payment amount and whether this is a first or subsequent VA home loan for the borrower. The fee for first-use, zero-down loans is 2.3% of the loan amount in 2020, up from 2.15% for active-duty military and veterans in 2019. The fee for subsequent use loans will be 3.6% of the loan amount, up from 3.3%. These fee levels will stay in place for two years, return to 2019 levels from 2022 through Sept. 30, 2029, and then drop further after that. Again, active-duty service members who have received a Purple Heart are now exempt from the funding fee.
Benefits of VA Home Loans
While it is important for eligible borrowers to understand the recent changes, veterans and active military should also be clear on the benefits of VA loans. 100% Financing VA loans are one of the only no-money-down options still available. Instead of waiting years to save up for a home, eligible borrowers can move forward with a home purchase, as well as borrow additional funds for renovations on the home, all with zero down payment. Locked-In, Low Interest Rates Since eligible borrowers can purchase or refinance a home, and the cost of repairs or updates, all in a single mortgage loan, a VA loan provides considerable savings when compared with other programs that might require a second mortgage. Fewer Added Costs Eligible borrowers using a VA loan not only enjoy limited closing costs with a single appraisal, but there’s also no mortgage insurance requirement, which could add up to savings on monthly mortgage payments. And, eligible borrowers don’t have to worry about being charged any prepayment penalties if they are able to pay off their mortgage earlier than expected. Continued Support If borrowers are experiencing periods of temporary financial difficulties and are struggling to make mortgage payments, the Department of Veterans Affairs can provide assistance to help them retain their home. For 75 years, VA home loans have enabled thousands of deserving families to become homeowners. At AFR, we’re proud to provide these benefits to the brave men and women who have served our country and will continue to help many more generations of veterans come home.
About American Financial Resources, Inc.
American Financial Resources, Inc. (AFR) is the leading FHA 203(k) lender for sponsored originations in the country and an innovator in the construction and renovation lending area, as well as being ranked among the nation’s leading mortgage lenders. AFR utilizes the latest technology and delivers educational resources to mortgage brokers, loan originators and their customers. American Financial Resources, Inc. is an Equal Housing Lender: Lender NMLS 2826 at https://www.nmlsconsumeraccess.org/. For more information, visit https://www.afrwholesale.com/. *Lender NMLS 2826. https://www.nmlsconsumeraccess.org/. American Financial Resources, Inc. (AFR) is a wholesale and correspondent lender. This is not a commitment to lend. All loans subject to credit approval. Guidelines subject to change without prior notice. This information is provided to assist business professionals only and is not an advertisement extended to the consumer as defined by Section 226.2 Regulation Z. Equal Housing Lender. Corporate Headquarters: 9 Sylvan Way, Parsippany, NJ 07054. https://www.afrwholesale.com/ ** https://www.benefits.va.gov/benefits/blue-water-navy.asp
VA Loans & ForeclosureWhen a major financial hardship happens in life, and you find yourself not being able to make your mortgage payments, if this goes on long enough you may find yourself facing foreclosure. Foreclosure is what happens when a homeowner cannot make their mortgage payments and defaults on the loan. In this case, the lender will choose to take possession of the property so they can recover some of the loss. This is a stressful time for you, as you lose your home and your credit score goes down, sometimes by as much as 160 points; this can take months or years to repair. Since the VA has more flexible requirements for credit scores, you may not have to wait until your credit has gotten back to what it was before you defaulted on your loan.
Avoiding ForeclosureThere is a lot of time and money involved in the foreclosure process for the lender, and in some states, they even have to involve the court system. To avoid all of that, some lenders will give you alternatives to foreclosure. The VA can help you retain your home and avoid foreclosure. The VA has free mortgage counselors available who can help you and give you advice to help get you back on track with your mortgage. They will work directly with your lender to help negotiate an alternative to foreclosure for you. A repayment plan is one of the options the VA has, which means you will continue making your mortgage payment, plus a little extra to make up for what is missing. You may be able to get special forbearance, which will stall the foreclosure so you can make your missing payments. Sometimes, a loan modification is available, that creates a new payment schedule, which includes your missed payments. You may be able to have a deed-in-lieu of foreclosure, where you hand the deed back to the lender instead of foreclosing. The last option is a short sale, where the lender lets you sell the home for less than you owe on the loan. If you go with the short sale or deed-in-lieu of foreclosure, they will still harm your credit, and there will be a waiting period before you can obtain a new home loan.
Getting a New VA Loan After ForeclosureSince the VA loan is set up a little differently than other loans, if it has been at least two years since the foreclosure, they can disregard it when looking at your qualifications for the loan. If you had a foreclosure from an FHA loan, there is a three-year waiting period. This waiting period will allow you to rebuild your credit after the foreclosure. Your VA loan entitlement will be reduced by the foreclosure, which will limit the amount of money you can borrow without a down payment. You can get your entitlement back if you pay back the VA in full. If you did not use all of your entitlement on the home that was foreclosed upon, you can use what you have remaining on your new loan.
Can You Use a VA Loan Twice?One of the great things about the VA loan benefit is that you can use it multiple times to buy homes. There is no limit to the amount of VA home loans that veterans can use with the VA loan program; it is a life-long benefit. To secure an additional loan, your lender will look into your VA loan entitlement. The VA funding fee will go up slightly for you from what it was when you bought your first home.
What is the VA Funding Fee?The VA funding fee goes to the Department of Veterans Affairs to help them keep the cover any losses on the loan and to keep their loan guarantee going. This fee can be rolled into your mortgage, but it will slightly increase your monthly mortgage payments. You can ask your seller to pay all or part of the funding fee on your behalf, and some sellers are willing to do this, but it is most commonly rolled into the mortgage. You are exempt from paying the funding fee if:
- –You are receiving VA disability compensation or are entitled to it.
- –You are in active service and have been awarded a Purple Heart.
- –You are the spouse of a veteran who died in service or from a disability connected to their service.
How Much is the Fee?The fee ranges from 0.5 percent to 2.3 percent of the total loan amount for a first-time borrower, though the amount can be reduced if they choose to make a down payment. For a subsequent home purchase, the fee is usually 3.3 percent, but it can also be affected by a down payment.
What is Entitlement?All veterans and active service members who meet the VA’s loan eligibility requirements have entitlement. This is the amount of money the VA will pay the lender if the borrower defaults on the loan. Usually, the entitlement is approximately $36,000 the first time and a secondary entitlement of $68,250 for if the veteran buys a home that is over $144,00. When you use your VA loan, you are using that entitlement.
Can Entitlement be Restored?If you use your entitlement, it can be restored when the loan is fully repaid, by submitting an application to the VA. To have your full entitlement restored, you have to sell the home for the original loan and pay off the mortgage. So long as you keep selling and paying off your previous VA loan, you can have your entitlement restored as many times as you want or need to. However, if the mortgage is paid off, you can use a one-time restoration benefit that will let you keep it as a vacation home or rental property.
Can I Have Two VA Loans at Once?You can have two VA loans at the same time, usually, this is done because an active service member has a permanent change of station but wants to keep the old house. If you have enough entitlement left, you can then buy a new home at your new station. Another use of this is for a veteran who lost their home to a VA loan foreclosure, they may be able to later use their entitlement to buy a new home.
How Much Are Closing Costs?
While the exact amount can vary in different parts of the country, they usually average between three and five percent on a less expensive home. There are online loan estimate forms that can help you determine an approximation of what your total closing costs will be. These costs are paid for by you out of pocket, but in some cases, the seller will pay up to four percent of the closing costs for the buyer. This is discussed in negotiations with the seller, and they can help pay for any of the fees, up to the four percent mark. There are also programs that can help you pay for closing costs if you need financial assistance.
What Fees Are Included in Closing Costs?
While most of the closing costs you will pay are the same for a VA loan and another type of loan, the VA does have some differences. There are some fees that the VA prohibits, including mortgage broker commissions, prepayment penalties, attorney fees, and settlement charges. The only attorney fees that the VA will allow are for title work, no other fees will be included in closing costs. While the fees included in your closing costs can vary, depending on your location, these are some that can give you a general idea of what you can expect.
The cost of an appraisal can vary, but it is usually around $500. The VA sets the cost of the appraisal, and it does need to be paid upfront. The appraisal is to determine the full value of the house, to ensure you are not overpaying, and to make sure the home meets the VA’s minimum standards.
The lender will use this to determine if the home is in a flood zone; this is usually around $20. If it is, you will need to purchase flood insurance too. Flood insurance is an ongoing insurance policy that is required by your lender and is not usually covered by a standard homeowner’s insurance policy. The first year’s premium is due at closing, and depending on how much it is, you may end up having a lot more money added to your closing costs.
Homeowners Association (HOA) Fees
Often HOAs will charge you annual dues, which are not necessarily included in your closing fees, but you may want to factor the amount due into what you will need for closing.
The full year’s premium for homeowner’s insurance is due at closing. The standard policy does not protect against flooding, and it may not cover damage from natural disasters like earthquakes. Usually, these policies only cover things like trees falling on homes, fires, and other things like that.
Loan Origination Fee
This is the lender’s compensation for the loan, which the VA limits to one percent of the total loan amount. The lender might not include fees for underwriting or processing the loan in this fee. The lender can itemize the fees up to one percent or they can charge a flat rate of one percent. If they choose the flat rate option, they are not allowed to charge you additional processing fees. This is unique to the VA loans.
Your local area sets this fee, and it is to make the sale public record. It can be as little as $20 or up into the hundreds of dollars.
Reserves for Tax and Insurance
This is another fee that varies by the taxes and insurance on the home and the area. This escrow is intended to cover the taxes and insurance premiums when they become due. Your lender can help you establish how much you will need for this.
A company will come out to the property to determine where the physical property lines are. While this is not usually required, it is recommended so you know exactly where the boundary lines are on your property. This usually costs around $400.
This fee is difficult to average, because it is dependent on the loan amount, purchase price of the home, and your location; ranging from a few hundred dollars to over $1,000. The title report and title insurance protect both the owner and the lender from someone claiming ownership to the house and winning in a lawsuit. If that happens, both the owner and the lender are reimbursed for the loss.
VA Funding Fee
This is a one-time fee the VA charges most borrowers for their loan benefit, and it can be rolled into the mortgage if desired. If a veteran is receiving VA disability, they are exempt from paying the VA funding fee. This fee helps fund future loans for other veterans. The fee can be anywhere between 0.5 percent and 3.3 percent, depending on the loan amount.
Who is Considered Self-Employed?You are considered self-employed if you have sole ownership or at least 25 percent ownership in a business or if you are a freelancer or contract worker whose income is mostly covered under IRS Form 1099-MISC.
Documentation You NeedIf you are self-employed, you will need to provide your lender with a year-to-date profit and loss statement, and something to show your current finances, two years of your individual tax returns and business tax returns, and a list of your partners and/or stockholders. The lender may also want to see your business license and a letter from a CPA stating that you are still in business. This is more in-depth than you would have to provide as an individual because your lender needs to ensure that you have the income necessary to make your mortgage payments. They need two years of income records to ensure that your income is not dropping every year and is either remaining steady or increasing. If you do have a significant drop every year, you will need to provide a written explanation for this drop, but if it is too big, your lender is likely to decline your loan application. The process of proving your income is a little easier if you have recently taken over a family business, if the business has a proven track record of success. In this case, you only need to provide one year of income, though the more you give the lender, the better they can determine how much to give you for your mortgage loan.
Net IncomeOne area the lenders will focus on is the business losses and expenses. Your net income is what you make after your expenses, so everything you write off on your taxes is not taken into account by lenders. The tax write offs are something that businesses like to utilize on their taxes, but having too many expenses can be problematic when seeking a loan. Writing off expenses gives you less taxable income, which is all that lenders are allowed to count when they process your loan application. For example, you made $80,000 last year, but you wrote off $25,000 of it in expenses. This means that your net income for the last year is only $55,000, which is all the lender will count in your income.
Keep Personal and Business Accounts SeparateProving your income is difficult enough when you are self-employed, so keeping your personal and business finances separate is important. If you work alone, it can be easier, since you know which expenses are personal and which are business, but if you have a partner it can be a little bit trickier.
For months now, we’ve read the news covering the trade war between China and the U.S., particularly regarding the tariffs placed on China’s exports to the U.S. While people on one side of the aisle are saying, “It’s about time,” the other side says, “this is not going to end well.”
Most recent in a series of economic strategic moves, the Federal Reserve bank announced cutting interest rates by a quarter of a percent. What that means, basically, is that banks and borrowers are going to pay a lower interest rate to borrow money from each other. Designed to bolster confidence in borrowing, and therefore spending and hiring, a federal interest rate cut intends to keep wind in the sails of the American economy as prices of some items rise and people dependent upon favorable U.S.-China trade relations struggle.
While a lower federal interest rate could impact you in some ways, it’s not directly linked to mortgage interest rates. It’s more of a domino effect where, as banks’ interest rates are lowered, interest rates in other industries follow suit. While no one grins at the prospect of an economic downturn and all that could come with it, if you’re considering purchasing a home in the near future, it could work out in your favor.
Broadly speaking, people and government entities who have some control over economic decisions lower interest rates in order to make it easier for people to keep spending their money because
- it’s easier for your to put money into a house if your mortgage interest rate isn’t sky-high
- it’s easier to make renovations or furnish your home if your credit card company’s interest rates go lower, which could be another by-product of a lower federal interest rate.
So, what should you do?
If you’re considering buying a home and you have a steady, reliable source of income, this may be the time to make a move. Start doing the research and getting names of potential mortgage lenders, and find out what kind of rate you can get. If it’s four percent or lower, that’s pretty good.
Already own a home and a mortgage? This could be an opportunity to renegotiate your interest rate and refinance your home. If you’ve lived in the home for a year or longer, you may be eligible. Check with your current lender to find out what kind of rate you could get if you refinance, and what that process would look like. It could lower your monthly payment and the total that you pay for your home when it’s all said and done. If your income allows for a higher monthly payment, you can change the terms of your loan, turning a 30-year loan into a 15-year loan. You’ll speed up the rate at which you build equity in your home and get that much closer to being debt free. Your mortgage lender can guide you through your options and shed a lot of light on the outlook in the mortgage industry to know if now’s your best chance or if a better rate might be just around the corner.
But if experts are saying the economy is slowing down and may get worse…
We like that you’re thinking in that direction. It literally pays to be smart with your money. What would be great is if the U.S. and China could work out this trade war RIGHT after you secure that low mortgage rate. Recession crisis averted, jobs secure, and a collective sigh of relief rings out across the land.
Meanwhile, know that these industries are the ones currently most affected by the tariffs. If you’re employed in one of them, it might be a scary time to take on a new debt. As it was once said by a great king, everything exists in a delicate balance. Industries not directly affected by current economic policies may still feel some ripples. If you do take advantage of lower rates on your mortgage, your credit cards, or even student loans, it’s wise to still keep a level head. Increasing your budget and spending more than you originally had in mind is likely not in your best interest, but it may be the perfect time for you to make some reasonable investments for a better deal than you would have gotten in the past, and perhaps better than you’ll get if you wait longer.