The VA offers veterans a very special housing benefit if they serve adequate time in the service. They are able to secure 100% financing with a VA loan. The VA guarantees a portion of this loan for lenders. It helps them give out 100% financing to borrowers while still offering flexible guidelines.
What Does a VA Guarantee Mean?
The VA guarantees the loan for lenders. This is not a benefit your as the borrower. It is a back-up for the lender, giving them incentive to write loans for ‘risky’ borrowers. We say risky borrowers because the VA has very relaxed guidelines. They allow credit scores as low as 620 and debt ratios as high as 43%.
Compare that to the conventional loan guidelines of a credit score of at least 680 and a maximum total debt ratio of 36%. The VA has pretty relaxed guidelines, that make the loans seem risky. This is why the VA offers their guarantee. If you default on the loan, the VA will pay the lender back a portion of that loss.
Just how much will they pay? Let’s take a look below.
The Maximum Guarantee
The VA has maximum guarantees for different loan amounts. In general, they guarantee 25% of the loan amount up to the national conforming amount. Today, this means up to $453,100. If you had a loan for the maximum amount, the VA would guarantee $113,275.
However, if you have a smaller loan, the VA may guarantee less of it. They guarantee 25% of loans between $144,000 and $453,100. If your loan is between $56,251 and $144,000, the VA guarantees 40% of the mortgage up to $36,000. The VA guarantees $22,500 of smaller loan amounts between $45,001 to $56,250. Loan amounts less than $45,000 have a guarantee of 50% of the loan amount.
Qualifying for a VA Loan
Because of the guarantee the VA provides, the guidelines to obtain a VA loan are very relaxed. As we discussed above, you can have a low credit score and high debt ratio and still get a VA loan. This is because the VA focuses on one thing – your disposable income.
The VA feels that if you have adequate disposable income given your family size and the cost of living in your area, that you’ll comfortably make your mortgage payment. This is why they don’t have strict debt ratio guidelines. They don’t even publish a front-end ratio maximum. They base their decision on whether you meet the disposable income guidelines.
The VA actually has some of the lowest default rates out of any mortgage program. They are able to offer their guarantee to so many lenders because they don’t have to pay up often. If a veteran does default, though, they lose that portion of their entitlement.
Let’s say you defaulted on a $120,000 loan. You would lose $30,000 of your entitlement. Since you get $36,000 basic entitlement up front, you would only have $6,000 of it to use in the future if you qualify again.
The VA offers a great program for veterans by allowing them to get 100% financing with a low credit score and high debt ratio. You don’t have to put any money down and you can still secure a mortgage as high as the maximum conforming amount. It’s a great situation for veterans that can afford the mortgage as it helps them get into a home easily after leaving the service.