Many a qualified veteran has passed on applying for a guaranteed home loan believing in the myth that it takes an exemplary credit score to qualify for today's VA home loan rates. Untrue! While lenders may set their minimums at 620 or higher, the U.S. Department of Veterans Affairs stipulates that there is "no minimum credit score requirement; instead VA requires a lender to review the entire loan profile to make a lending decision." While the average FICO for VA purchasers is considerably higher at 701, that's more than 50 points lower than the average FICO score for approved conventional (non-government) purchase mortgages, according to Ellie Mae.
Let's look at other myths about VA guaranteed loans:
Myth: A VA-financed home cannot be refinanced at better VA loan rates
Truth: For borrowers who would like to lower their VA home loan rates, the VA has developed the VA Interest Rate Reduction Refinance Loan (IRRRL). The IRRRL cannot be used for any property other than a residence financed with a VA loan. This loan requires no home appraisal, and the VA does not require credit underwriting or income verification either. Applicants simply re-use their Certificate of Eligibility (COE) when qualifying.
Myth: The VA caps its loan amounts and allows financing of modest properties only
Truth: The VA has set a maximum guarantee amount, not a cap on the value of the property to be financed at VA home loan rates. In most locations, the federal guarantee covers 25 percent of a $417,000 loan amount. In high-cost areas, it's more -- for instance, the guarantee backs as much as 25 percent of $1,094,625 in Nantucket. But wait; there's more. A little-known VA rule allows borrowers to exceed their limits by putting down 25 percent of the price that exceeds the VA loan limit. For example, someone buying a $1.5 million property in Nantucket could put down $101,344 (25 percent of $1,500,000 - $1,094,625) and get a VA loan. That amounts to a 6.75 percent down payment for a multi-million dollar house.
Myth: VA loans are tied to high note rates.
Truth: 30-year VA home loan rates are typically lower than those of FHA and conventional loans, according to the October 2014 Ellie Mae Origination Insight Report for October 2014. That makes current VA home loan rates attractive since Ellie May reports that "the average 30-year interest rate for all loans declined for the sixth consecutive month, dropping to 4.371, the lowest average since July 2013."
Myth: Only veterans with an honorable discharge can qualify for VA home loan rates.
Truth: Active duty servicemembers, National Guard and Reserve personnel are also eligible. In addition, certain spouses can qualify for VA loans:
- An unremarried spouse of a veteran killed in action, deceased from a service-related disability, or is missing in action or a prisoner of war
- Surviving spouses of certain totally disabled veterans whose disability may not have been the cause of death
Myth: The VA home loan program can only be used to finance a single-family home.
Truth: There are no such restrictions. Qualified veterans can use a guaranteed VA home loan to purchase a single-family house, a two- to four-unit home, VA-approved condominium, co-op or attached townhouse, or a manufactured home (down payments are required for manufactured homes).
VA loans are a great benefit for qualified veterans and servicemembers. Anyone eligible should consider them when shopping for home financing.