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When VA Home Loans Aren't a Good Fit for Veterans

Four Minute Read

Written by Ed Andrews III on April 15th, 2020

When you can’t refinance a VA loan or buy a home with no down payment

As awesome as the VA home loan is, there are some veterans who’ll find themselves either better off with a different loan program or possibly unable to qualify for a VA loan to begin with.

Here’s a short list of veterans who may need to look elsewhere for their home financing needs.

1. Veterans who are recently separated and working in a new field

VA underwriters are required to determine whether a veterans employment is stable and likely to continue. For veterans who have been separated from the military and on their new job for less than 12 months, this means ensuring that their education, training, and/or military service prepared them for their current job duties.

Which basically means there should be some parallels between what your current job duties are, and what you did in the military. For some this is a non-issue. If you were an aircraft mechanic in the Air Force, and now you’re an aircraft mechanic for American Airlines you’ll have no problems. However, if you’re a retired Navy pilot now working as an insurance agent; you’re likely going to need 12 months on the job. In fact if it’s commission based, you may need 24 months on the job.

An exception for this is a veteran taking a job in their field of study. If an Air Force aircraft mechanic used his/her time in the military to pursue a degree in Information Technology, it stands to reason that they may enter that career field upon separating from the military.

2. Veterans with less than 12 months left on their enlistment

Keeping with the theme of ensuring veterans have stable employment, if you’re within a year of separating you may face some challenges. If you’ve already signed your papers to re-enlist this is a non-issue. But if you haven’t you’ll need the following:

a. Letter from your commanding officer stating you’re eligible to re-enlist, and to their knowledge there’s no reason why it wouldn’t be granted.

b. Letter from you stating that you intend to re-enlist.

If you don’t intend to re-enlist you’ll need an offer letter from a civilian employer. But keep in mind the limitations for veterans who have less than one year on the job after separating. Determining the stability of the job offer may be contingent on how closely the job duties resemble your current job duties, or if you’ve received formal education to prepare you for that position.

3. Veterans who want to refinance a VA loan on a home with 20% equity

Two of the major advantages when you refinance with VA loan are not needing much equity, and not having to pay private mortgage insurance (watch my video on the advantages of VA loans if you haven’t already).

However, if you are refinancing your home and you have at least 20% equity (meaning the amount you need to borrow is 80% or less than the total value of your home) you won’t have to worry about equity or paying PMI. So this may be the perfect time to refinance VA loan to conventional.

4. Veterans looking for cash out VA loan refinance in Texas

You may not know this, but Texas actually has its own constitution. Section 50 of Article 16 of the Texas Constitution governs home equity loans in the state of Texas. One of the stipulations is that the Texan’s home must be the only collateral for the loan. When veterans obtain a loan from the VA, the VA guarantees a portion of the loan to the bank extending that loan.

This guaranty is viewed as a form of “collateral” and thus a VA cash out loan is automatically a violation of the Texas Constitution . Veterans seeking a VA loan with cash out will have to look to other loan products.

*The cash out VA loan for refinance is available in other states. Though Texas cannot refinance VA loan with cash out, there are other loan products available to accomplish this.

5. Veterans seeking a no down payment VA loan with a non-spouse

The VA will guarantee a loan for a veteran and their spouse, but not for anyone else who is a co-borrower with the veteran. In that instance the VA guaranty will only apply to half of the loan. That means half of the loan is financed at 100%, but the other half of the loan will require a 25% down payment. Let’s break down this example of when you would need a down payment on VA loan.

For example, if a veteran wants to buy a $250,000 home with their brother, the veterans half of the loan ($125,000) is guaranteed. But the brother’s half of the loan (also $125,000) requires a 25% down payment, which equates to $31,250.

That being said the same loan with conventional financing may only require a total down payment of 5%, which would be $12,500. Granted, they’ll be forced to pay private mortgage insurance. In addition, the rate will likely be higher than what they would qualify for with VA. However, if keeping out of pocket costs low is paramount this may be the best option.

Which I’m sure at this point you’re asking, “Well, how much are the VA closing costs anyway”.

So be sure to watch my video, “How much are VA closing costs?” where I break this down in detail.

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About the Author:
Ed Andrews III

Ed Andrews III is a mortgage loan officer, and U.S. veteran of the Iraq & Afghanistan Wars. He is an expert on VA home loans, and dedicated to helping veterans achieve home-ownership.