Student loan debt is growing at an alarming rate in the United States, and the military is no exception.
The military greatly benefits from veterans’ education, but they can’t get away from student loan debt.
Debts can be for military personnel, spouses, or children. Student loan payments can vary widely, and a common question is, “How does the VA treat student loans?”
After mortgages, student loans are the highest category of domestic consumer debt. In 2021, more than 42 million borrowers owed $1.59 trillion in student loans
That’s student loans averaging over $30,000 per person. So what if you have student loans and apply for a VA loan?
The good news is student loan debt doesn’t necessarily make it harder to qualify for a VA loan.
However, with a national student loan default rate of about 15%, it’s important to keep track of student loans when applying for a VA loan.
Here we take a closer look at VA loan policies, including student loans, and how this type of debt affects VA loan eligibility.
You can utilize a VA home loan to purchase a new house or refinance an existing mortgage if you are a qualified active-duty service member, veteran, or surviving spouse.
There are many benefits to VA loans, such as not requiring a down payment, but there are also drawbacks.
It’s crucial to educate yourself on all the specifics of what it means to have a loan guaranteed by the VA when you start the mortgage application process.
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What is a VA Loan?
The U.S. Department of Veterans Affairs (VA) backs VA loans, but the funding isn’t from the government. Instead, these are provided by banks, mortgage firms, credit unions, and other types of mortgage lenders, and the VA ensures their payment in the event of default.
Only veterans, active-duty service members, and their surviving spouses are eligible for VA loans. Additionally, many qualified borrowers use VA loans.
The VA guaranteed more than 256,000 home loans worth more than $83 billion in the first quarter of 2022.
Pros and cons of a VA loan
When making a significant financial choice, it’s crucial to consider both the benefits and drawbacks and a VA loan is no different.
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Advantages of a VA Loan
VA loans offer potential homeowners a long list of great benefits. in advance. This is a big difference for many potential homebuyers.
According to recent data from Bankrate, 36% of those Americans who do not own a home said not being able to cover the down payment and closing costs was their top reason to keep renting.
No Mortgage Insurance – When comparing VA loans to FHA loans and traditional loans, there is one big difference with VA secured loans. Mortgage insurance is missing. This is the fee you pay on all FHA loans.
Both an upfront payment and an annual premium are required for the duration of the loan. If the down payment is less than 20%, you will also pay a private mortgage insurance premium on a traditional mortgage.
Low-Interest Rates – Lenders typically charge lower interest rates for VA loans than for traditional loans. That means you can save a lot of money in the long run. VA fees are typically about 0.5% lower than traditional fees.
Low Closing Costs – Closing costs associated with VA loans are often lower than those of other loans.
This is because the VA limits the processing fee a lender can charge to no more than 1% of the mortgage.
Easy to Accredit – VA has no minimum credit rating requirements, but it is important to note that all approval requirements are dependent on the lender. However, VA loans also allow for higher debt-to-income (DTI) ratios, which can help you qualify for more expensive or larger homes.
Convenient Refinancing Options – When it comes to refinancing, we have a VA payment refinancing option that allows you to finance up to 90% of your home’s value.
Alternatively, you can opt for an Interest Rate Reduction Refinancing Loan (IRRRL) that can potentially lower interest rates through a streamlined process that does not require the valuation.
Either refinancing option could make VA loans more attractive overall.
More resilient to financial hurdles — Relaxed credit standards also mean you won’t have to wait too long to get a VA loan if you experience foreclosure, bankruptcy, or a short sale.
The owner is a New York-based home appraisal company. “The waiting time for a VA loan can be half the time of a traditional loan: 2 years after a foreclosure, 2 years after a short sale, 4,444 years unless all payments are made on time – this, In that case, there is no waiting time – two years after the Chapter 7 bankruptcy and 12 months after the Chapter 13 payment,” Sherin said.
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Disadvantages of a VA Loan
Loan Fees – You don’t have to pay mortgage insurance premiums with a VA loan, but you do have to pay a loan fee when you close the loan (but this fee is applied to the loan and can increase the total amount you borrow).
If you take your first VA loan and don’t pay a down payment, the financing fee will be 2.3% of the loan.
If you plan to deposit money or have taken a VA loan in the past, fees range from 1.4% (if you are a first-time or repeat borrower and deposit at least 10%) to 3.6% (if you are a repeat borrower with no down payment). case). fraudulent payment).
Ownership Restrictions – VA loans limit the type of property that can be purchased (and for what purpose). Prefabricated houses first undergo a more detailed inspection, including a structural inspection.
Additionally, properties purchased with a VA loan are designed for personal use, making it more difficult to generate rental income using a VA-secured loan. However, it is possible if you live in one building of the apartment and rent the other building.
Less Flexibility – VA loans cannot avoid certain contingencies such as home inspections and appraisals to make loan offerings more attractive to sellers.
By the way, some sellers are not inclined to accept VA loan financing offers. You might think that some myths about VA loans are true and that you value offers from buyers with traditional loans.
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VA Loan Guidelines with Student Loans
The debt-to-income (DTI) ratio is often where student debts have the biggest impact on your eligibility for a VA loan.
Your student loan payment is typically taken into account by lenders when determining your monthly debt-to-income (DTI) ratio.
Additionally, they’ll be on the lookout for any indications that you have skipped payments or defaulted on student loans, both of which might harm your ability to get a mortgage.
How Student Loans Affect Your DTI Ratio
Many state student loan programs give you a six- or nine-month “grace period” if you stop taking all courses.
This gives you time to prepare financially for a loan payment cycle that can last years or decades, depending on your specific circumstances.
However, this grace period does not apply to mortgage lenders.
They want to know the exact amount of your outstanding student loan payments and will make every effort to factor those costs into your monthly DTI ratio.
Six months is a drop in the ocean compared to the 360 months that make up a 30-year mortgage term.
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When Student Loans Count Against Your DTI
Policies may vary by lender, but in general, student loans count toward the DTI ratio when: United will calculate the payment as shown on your credit report or his 5% of your total loan balance divided by his 12 months, whichever is greater.
Borrowers whose actual monthly payments are less than this amount should discuss using this lower figure with their loan officer.
VA Student Loans Guidelines for Deferred Payments
Student loan debt frequently has deferred payments. As a result, no payments are required for a predetermined period of time.
This is typical for fresh student loans, recent grads, or enrolled students. VA divides deferred student loan debt into two groups:
- At least a year has passed since the mortgage’s closing date.
- delayed for less than a year after the mortgage’s closing date
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Student Loans Deferred Greater Than 12 Months
Many mortgages require lenders to make deferred student loan payments. Programs typically require payment of 1/2% to 1% of outstanding student loan balances.
However, student loan payments that are deferred more than 12 months after the mortgage closing date will not be counted under the VA’s Student Loan Policy. This is a huge advantage for qualifying buyers.
For example, a $50,000 student loan with a deferred balance will result in a payment of $500 using 1% of the balance.
Student Loans Less Than 12 Months
A student loan is handled slightly differently if its payments are due to resume in less than 12 months from the closing date of the mortgage.
Other loans continue to calculate balances at a rate of between 50% and 1%. But the regulations for VA student loans are better and distinct
The following is the VA student loan formula used for determining the VA debt-to-income ratio, as opposed to using up to 1% of student loan balances.
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VA Student Loans Guidelines When Payments Are Required
Payment is necessary when loans aren’t being deferred.
There are several different ways to make student loan payments, including progressive payments, income-based repayment, and fully amortized repayment (based on a fixed rate and duration).
The payment must be applied once it has been completely amortized.
But the VA demands the following when a payment is not fixed: Higher of the earlier calculation (balance x 5% / 12) or payment reporting on the credit report
Offsetting Student Loan Payments
In some cases, student loans are also available. When set off, income is recorded that effectively offsets the monthly liability.
Loan co-signatories have made at least 12 consecutive months of non-arrival payments. In this case, the payment must be made by the person legally obligated to make the loan.
There are 10 or fewer student loan payments remaining, and the payment is less than $100.
These are relatively close exceptions that do occur. In general, you should plan to include student loan payments in your overall debt-to-income ratio calculations.
In addition, this monthly commitment impacts your gross residual income, which plays an important role in qualifying for a VA loan.
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VA Loan Student Loan Guidelines. The debt-to-income (DTI) ratio is often where student debts have the biggest impact on your eligibility for a VA loan. Your student loan payment is typically taken into account by lenders when determining your monthly debt-to-income (DTI) ratio.
The only mortgage loan product that does not use DTI calculations for deferred student loans is VA Loans. But student loans must be postponed for at least a year. Veterans are excluded from having their deferred college loans included in calculations of their debt-to-income ratio.
For many borrowers, VA loans are a hit. But even if you qualify, a VA loan may not be the best choice.
“For example, if an eligible renter who currently owns a home wants to sell and buy another prime home and earn a large down payment (20% or more) from the sale, the VA loans may not make sense for your next property,” says Rob Killinger, a senior loan officer at Mortgage Network in Massachusetts.
On the other hand, with VA loans, you may be required to pay VA loan fees when using VA loans, whereas traditional loan programs do not charge such fees. No other financing.
“For example, an eligible borrower might want to buy and live in a property with 2 units to him with a VA-free loan rather than a single-family home,” says Killinger.
Nonetheless, subsidies can be expensive. If he plans to stay at home for less than two years, it may not be worth paying this fee to get a VA loan.
If you are still not sure if a VA loan is right for you, work closely with your loan officer.