If you are a veteran of the military, you have the unique benefit of obtaining a VA loan. Whether you wish to purchase or refinance a home, the VA provides you with certain benefits that make owning a home affordable. In addition, VA loans in New Jersey offer flexible guidelines.
VA Loan Guide
- How the NJ VA Loan Works
- Qualifying for a VA Loan in New Jersey
- The Certificate of Eligibility
- NJ VA Streamline Refinance
- The VA Loan Approval Process
- Interest Rates on VA Loans in New Jersey
- Finding a Lender for VA Loans in New Jersey
If you have less than perfect credit or do not have money for a down payment, a VA loan is a great way to get the financing you need. In this article, we discuss the ins and outs of the VA loan. We also help you learn how to obtain one and what you need to qualify for it.
How the NJ VA Loan Works
First, you should understand how a VA loan works. The VA does not fund these loans. This means the money does not come from them. Instead, the lender who approves your application funds the loan. The VA provides that lender with the promise of repayment if you defaulted on the loan in the future. The VA repays lenders 25% of the amount borrowers default on. This is why when you apply for a VA loan, you must follow the VA’s rules as well as any rules the lender sets. Not every lender offers this program, though. You may have to shop around to find authorized lenders in your area.
The Types of VA Loans in New Jersey
VA loans are a great choice for a purchase or refinance. Purchasing a home with a VA loan does not require a down payment. It also offers flexible underwriting guidelines. The VA focuses mainly on your disposable income rather than debt ratios or even credit scores. They also offer low closing costs and competitive interest rates. With very little money out of your pocket, you can purchase a home and have an affordable mortgage payment. VA loans allow you to roll most of your closing costs into the loan. This enables you to come to the closing with little money out of your own pocket.
The VA also offers several refinance options for veterans. The most common is the VA Streamline Refinance. This loan is also known as the Interest Rate Reduction Refinance Loan. This streamlined process does not require proof of your income, assets, credit score, or even an appraisal. The catch is you must realize a benefit from the refinance. Typically, this means a lower interest rate, which translates into a lower payment. The exceptions to the rule pertain to loans that you want to refinance from an adjustable rate to a fixed rate. Because fixed rate mortgages are less risky than ARMs, the VA does not require your payment to decrease to be eligible for the IRRRL program. We will discuss the IRRRL program in more detail below.
If tapping into the equity of your home is necessary, you can refinance a VA loan into another VA loan with the cash-out refinance. Unlike the IRRRL, though, you must re-verify all aspects of your loan application. This includes your income, assets, credit score, and the value of your property. You must have a VA loan currently to use the program to take cash out of the property.
Lastly, while uncommon, you can refinance from another loan type into a VA loan. Veterans use this option when their home value dropped and they want a lower payment. If interest rates dropped, it may make sense to take out a VA loan and take advantage of the lower payment.
Qualifying for a VA Loan in New Jersey
Veterans must meet the VA’s and lender’s requirements for a VA loan. The VA sets the minimum requirements every borrower must meet. The lender can add requirements to them if they choose to do so. Each lender may have different requirements, which is why we encourage you to shop around. Check with various lenders and see what they require. You may not find a huge difference between interest rates, but the level of risk each lender takes does differ.
Here is an overview of the VA’s minimum requirements:
- You must have VA entitlement. To obtain this, you must serve adequate time in the service. Veterans who served during wartime must have at least 90 days of consecutive service. Veterans who served during peacetime must have at least 181 days of consecutive service. Those serving in the Reserves must have 6 years of service.
- The property must be owner-occupied for a VA loan used for a purchase.
- Your credit must be stable – the VA does not specify a specific credit score.
- The income of you and your co-borrower must be stable and adequate to cover all monthly debts.
- You must have a specific amount of disposable income left each month.
- Any past bankruptcies must be discharged for at least 2 years.
- Any past foreclosures must be at least 2 years ago. If the foreclosure was on a VA loan, you may have less entitlement for a future loan, though.
- Any past collections must be paid before closing on a VA loan.
- If you have any unpaid federal debts in your past, you will have to pay them off or show proof of a satisfactory payment plan in place.
You may notice the VA does not require a specific debt-to-income ratio or credit score. In most cases, lenders will not entertain credit scores lower than 620. If, however, you have some compensating factors, such as a low debt ratio or adequate reserves, the lender may allow a lower credit score. The VA would also prefer debt ratios below 41%, but they do not enforce it. What they do enforce is the amount of disposable income you must have. They break the required amount up by the area you live. Disposable income is the money you have left after you pay your mortgage and any other loans you have outstanding. Requiring a specific amount of disposable income ensures that you do not have to sacrifice to make ends meet just because of your loan. The VA’s focus on this factor helps keep their foreclosure rates low. Make sure you discuss the disposable income requirements in your area with your lender.
The Certificate of Eligibility
In order to secure VA financing, you must have a Certificate of Eligibility. Either you or your lender can obtain a copy of this certificate. You can apply for the certificate online through the eBenefits portal or via mail. If you wish to go through your lender, they can usually obtain your certificate within a few minutes of applying for it. If you met the above service requirements and had an honorable discharge, you should not have a problem securing your certificate. The certificate is required in order to process any VA loan.
Amount of Entitlement
The VA does not have a maximum loan amount they allow. Instead, they have a maximum amount they will guarantee. In general, they guarantee 25% of the loan amount up to the FHA maximum loan amounts in your given area. Generally, this means a maximum loan amount of $424,100. In some areas, the amount is higher or lower, depending on the cost of living and the average cost of homes in the area. For a standard $424,100 loan, the VA would guarantee ¼ of that amount or $106,025. You can see the actual loan limits for each area here.
If you do not use the entire amount of your entitlement on a purchase, you may be eligible to use the remainder on a subsequent home down the road. However, since you must live in the property, you would have to meet the VA’s extenuating circumstances guidelines. For example, if you are active in the military and receive a new assignment, you may want to purchase a home at the new base without selling your current home. The VA may grant you the exception to purchase another home with your remaining VA entitlement while keeping your existing home. You must obtain VA approval before you may use your entitlement again.
Generally, however, the only way to use your entitlement again is to sell your current home. You must then prove that you paid off your current VA loan. At this point, the VA may reinstate your entitlement and allow you to use it again on another home.
VA loans have the unique property of being assumable. This means another person can take over your loan where you left off. However, this person must qualify for the loan. They cannot just walk in off the street and take over. The bank must qualify them. Usually, this also means the borrower must be a veteran with available entitlement. This way the new borrower uses their entitlement for the loan, allowing you to reuse your entitlement on a new property. Not every lender allows loan assumption, so you may have to ask around if this is of concern to you.
NJ VA Streamline Refinance
Once you have a VA loan, you have the ability to refinance very easily. The VA uses your housing payment history to determine your eligibility for a refinance. If you strictly want to lower your interest rate, you can do so with proof of timely mortgage payments over the last 12 months. The VA does not require a new credit report or any other supporting documents. However, if you have any late housing payments within the last 12 months, you may not qualify for the Interest Rate Refinance Reduction program. You must also prove there is a benefit for the refinance. As the name of the program suggests, a lower payment will suffice. The VA provides the benefit to veterans to help make their payment more affordable. By focusing on the housing history, they determine if you paid your higher payment on time, you will be better off with a lower payment.
In general, you must prove the following for a VA Streamline Refinance:
- You occupied the property up until the date of application for the refinance
- You can lower your interest rate and/or payment
- You have a VA loan now
- You have a clean mortgage history over the last 12 months
Some lenders may verify your employment or even pull your credit report. However, if you shop around, you will likely find a lender who abides strictly by the VA’s requirements.
One of the best aspects about this loan is the ability to refinance no matter the value of your home. This means borrowers who have not yet seen an increase in their property’s value can still refinance. Yes, even if you are upside down on your mortgage, you can secure a lower interest rate.
The VA Loan Approval Process
Applying for a VA loan is not as tedious as many people make it out to be. The VA loan was often overlooked because of its complexity. However, if you have everything necessary to process the loan, it can go just as quick as any other loan process. Because of the amazing benefits veterans receive, you should not overlook this program.
Get Preapproved for VA Mortgage
You should start the process by finding an approved VA lender. This makes all the difference in the world. Not every lender has VA approval. Talk with several lenders and ask not only if they are approved to offer VA loans, but also what experience they have with the program. VA loans have certain nuances that experienced lenders understand. Talk to a few lenders about their experience and choose the one that is right for you from their answers.
Once you choose a lender or two, secure a preapproval. This differs from a prequalification. If you are not quite serious about shopping for a home yet, you can just get a prequalification. This gives you an estimate of what you can afford. The VA lender will base your prequalification on today’s VA interest rates and fees. If, however, you will start home shopping right away, take the extra step and secure a VA preapproval. This means you provide the lender with your documents including:
- Tax returns
- Asset statements
- Certificate of Eligibility
The lender uses the “real” information to determine how much VA financing you qualify to receive. This helps you shop for a home within your budget right off the bat.
Shop for a Home
Once you have the preapproval, you can start shopping for a home. Your preapproval letter will let realtors and sellers know that you have the ability to secure financing for a specific amount. It also lets them know you will use VA financing. Keep in mind that some sellers prefer not to work with VA financing. This is why having the preapproval letter helps guide you in the right direction. If a seller will not work with VA financing, they can let you know up front so no time gets wasted.
You should work with a realtor that is familiar with VA financing, so everyone is on the same page. VA loans do not differentiate between properties much differently than any other program, but there are certain appraisal requirements the home must meet.
The VA Appraisal Requirements
As stated above, the VA appraisal is not much different from any other appraisal process. However, the VA does have a list of Minimum Property Requirements the home must meet. The VA put this list together to ensure the property is safe and sanitary for veterans. The entire premise behind the VA loan program is to help veterans secure housing that is affordable. The last thing they want is to provide funding for a home that becomes a money pit, making it hard for the veteran to afford everyday expenses.
The VA Underwriting Process
Once the underwriter has all of your pertinent documents, he can underwrite your loan. If you had a preapproval, part of the process is already done. The lender approved your finances and credit. Now they must wait for the sales contract and the appraisal. The underwriter will ensure the home is worth at least the amount you agree to pay for the home. He will also ensure all property requirements are met. During this phase, the underwriter may ask you for additional documentation if anything comes up during the evaluation of your finances and/or credit.
Closing the VA Loan
The final step is closing your VA loan. This is when you sign the loan documents, use your VA entitlement, and take possession of the home. Once you use your VA entitlement, you cannot use it again until you pay off the existing VA loan. The closing process works just like any other loan.
The VA Funding Fee
In order for the VA to afford to guarantee the loans they allow every year, they must charge a funding fee. This fee helps stock up the VA’s reserve. When a borrower defaults on their loan, the VA uses the reserves to pay the lender back. Because the VA has unique guidelines, they do pride themselves on their low default rate. The VA loan is unique, however, because they are the only government-backed loan that does not charge annual mortgage insurance. You pay a one-time funding fee at the closing and that is it.
The circumstances of your VA loan help to determine how much you pay for a funding fee. A few examples follow:
- Veterans using their benefit for the first time and with less than 5% down pay 2.15% of the loan amount
- Veterans using their benefit for the first time but putting down between 5-10% pay 1.5% of the loan amount
- Veterans in the National Guard or Reserves using their benefit for the first time pay 2.4% of the loan amount
These percentages apply to purchases. If you wish to take cash out of your home with a VA cash-out refinance, you pay the funding fee of 2.15% again. However, if you refinance with the VA Streamline Program, you only pay 0.5% for the funding fee. Most lenders allow you to roll your funding fee into your loan amount, decreasing the money you need at the closing.
Interest Rates on VA Loans in New Jersey
Generally speaking, interest rates on VA loans are much lower than any other no down payment program. Lenders have the luxury of providing flexible guidelines and low interest rates because of the government guarantee the VA provides. Normally, a loan with no down payment is very risky. However, with the VA’s guidelines combined with their guarantee, lenders are willing to provide veterans with this affordable financing option.
Of course, just as is the case with any other loan, any risk factors of your loan increase your interest rate. For example, borrowers with lower credit scores will pay a higher rate than someone with great credit. The same goes for debt ratios or other risk factors. The risky you are, the higher interest rate you will pay. Even with the adjustments, however, VA interest rates are usually very competitive with other programs.
Finding a Lender for VA Loans in New Jersey
You might be surprised to learn of how many lenders offer VA loans in New Jersey. Again, you should take the time to shop around, though. Talk with several lenders to get an idea of their experience level and offerings. Some lenders will have higher interest rates and/or fees than others. Some lenders may not entertain a certain factor you bring to the table, either. Starting with your basic information, you can get an idea of which lender will work best for you. Credit bureaus do not penalize you for applying with several lenders within a 45-day period, so use this to your advantage and shop around. We will help you find the right VA lender in New Jersey. We want to make the VA loan process as simple as possible for you. After all, you deserve the VA benefits offered to you as a thank you for your service to our country!