The VA guarantees loans. This is how VA lenders are able to give you a loan with no down payment without requiring crazy hard requirements. In fact, the VA has some of the most relaxed requirements of any loan program today. The VA guarantees the loans in an effort to encourage VA lenders to provide veterans with loans.
The VA guaranty means that the VA will pay the lender back a portion of the money they lose should you default on your VA loan. This does not mean that you, the veteran, will receive anything – the benefit is strictly for the lender. But in return, you do get a benefit since you are able to get a loan with more relaxed guidelines.
The Basic Guaranty
The most common guaranty the VA offers is 25% of the loan amount. This pertains to any loan amounts of $144,000 or more. $144,000 is the VA’s basic entitlement. Since they guaranty 25% of the amount, the basic entitlement is $36,000. In other words, a lender would receive a payment of $36,000 if you defaulted on your $144,000 loan.
The VA also provides bonus entitlement. This is just entitlement that exceeds the $144,000 loan amount. The VA will provide a guaranty up to loan amounts of $484,350. This means a full guaranty of $121,087.
Borrowing Less Than $144,000
If you borrow less than $144,000, the VA guarantees a greater amount of the loan. If you borrow between $56,251 and $144,000, the VA guarantees 40% of the loan amount. If you borrow $45,001 to $56,250, the VA guarantees $22,500. Finally, if you borrow $45,000 or less, the VA guarantees 50% of the loan amount.
You Must Qualify
Despite the amount that the VA will guaranty for you, it’s important that you qualify for the VA loan. In other words, you prove that you can afford the loan. The VA will only off their guarantee on the loan if they know that you will pay it back on time.
The VA does have simple guidelines for you to meet, though. For example, you need just a 620 credit score for most lenders. The VA doesn’t specify a specific credit score you must have. Instead, they leave it up to the VA lenders. On average, VA lenders require a 620 score, but some may require a higher score.
The VA does require that your total debt ratio doesn’t exceed 43% of yore gross monthly income. They don’t have a front-end or housing ratio like the one most lenders have, but they won’t allow a borrower to have debts that exceed 43%.
In addition to the debt ratio requirement, the VA has a disposable income requirement. They specify how much disposable income you must have based on where you live and your family size. If you live in an area where the cost of living is higher, you will need more disposable income than someone that lives in an area with a lower cost of living. The VA puts more emphasis on the disposable income requirement than the debt ratio requirement.
The remaining requirements are similar to most other loan programs. You need to be able to prove that you have stable income and employment. If you don’t work, you must prove that you have enough income coming in that you will receive for at least the next three years. There also must be at least 2 years in between the date you apply for the mortgage and any bankruptcies or foreclosures in your past.
While the VA guaranty doesn’t benefit you directly, it does help you. Without the guaranty, you would need a down payment even for a VA loan. The guaranty takes away the need for a down payment and makes it easier for veterans to buy a home.Click to See the Latest Mortgage Rates»