The mortgage program with the lowest default rate of any also has a few limitations that other mortgage programs don’t have. These restrictions do nothing to bolster the performance of VA mortgages in general but the fact is they are restricted to certain individuals as well as having characteristics that conventional loans such as those underwritten to Fannie Mae or Freddie Mac standards have. What are some of the restrictions for someone using a VA loan for the first time to buy and finance a home?
The first restriction is who can actually take advantage of this loan program. Established in 1944 to help returning soldiers more quickly assimilate into civilian life the VA loan program was part of the original package and allowed veterans to buy a home without the need for a down payment, something that was essentially unheard of. In addition, the veteran is restricted from paying certain closing costs. The combination of no down payment and reduced closing fees is a very attractive feature. Borrowers are restricted from paying an underwriting fee, document preparation and loan processing for example.
However, only veterans who have served and honorably discharged from the armed forces are eligible for this program. In addition, active duty personnel may qualify if they have served for at least 181 days. For those who have six years of service in the National Guard or Armed Forces Reserves, they also may be eligible for this program. Surviving spouses who have not remarried whose spouse died as a result of a service related injury are also eligible. For those who do not fall into any of these categories, the VA mortgage loan will not be available to them.
The VA mortgage is also restricted to a primary residence. When a veteran buys a first home and uses the VA option, it may only be used by an occupying borrower and cannot be used to finance a vacation home or a rental property. It is permissible however to finance a primary residence with a VA home loan and later on decide to buy another property and keep the original as a rental unit. Conventional mortgages do in fact allow for the purchase and financing of an investment property but not VA mortgages.
Yet beyond these unique features the VA mortgage process is much like any other. The borrowers can expect to provide pay check stubs and show a two year employment history. Two years’ worth of income tax returns may be needed and the approved VA lender will also ask to see some bank statement showing there are enough funds in checking or savings account to cover closing costs associated with the loan and the lender may require a minimum credit score as well.