Personal Finance

VA Loans: Who’s Ginnie Mae?

Nov 29, 2018

There are a lot of unusual names that pop up in discussions about home loans and the mortgage industry. Maybe you’ve wondered who Ginnie Mae is and what she has to do with home loans. Freddie Mac or Fannie Mae are also brought up frequently. Are they related to Ginnie Mae? And then there’s “Irle.” He’s pretty popular. He sounds British, right? These “names” are familiar to mortgage professionals, but often mean little to the average consumer. Ginnie Mae, “Irle,” Freddie Mac, and Fannie Mae are a “family” in a sense. They are all acronyms related to different mortgage loan entities and programs:

“Ginnie Mae” is the Government National Mortgage Association (GNMA)
“Fannie Mae” is the Federal National Mortgage Association (FNMA)
“Freddie Mac” is Federal Home Loan Mortgage Corporation (FHLMC)
“Irle” is the Interest Rate Reduction Refinance Loan (IRRRL)

How Are Ginnie Mae, VA loans, and IRRRL Related?

Ginnie Mae falls within the Department of Housing and Urban Development (HUD). Its roots go as far back as the Great Depression, and it exists to promote home ownership. Ginnie Mae is the primary financing arm for government loans. VA loans are a type of government loan and are guaranteed by the U.S Department of Veterans Affairs (VA). An IRRRL is a special VA refinance loan.

VA Home Loan Program

The primary purpose of the VA home loan program is to help eligible veterans finance the purchase of homes with favorable loan terms and at competitive interest rates. The term “veteran” includes active duty Servicemembers, Veterans, Reservists, National Guard members, and certain surviving spouses.

In addition to purchasing a home, VA loans can be used to refinance existing mortgages.

A Cash-Out Refinance Loan can be used to pay off debt, fund college, make home improvements, or refinance a non-VA home loan into a VA home loan. Veterans also have access to an IRRRL, a streamlined refinance program.

Borrowers don’t contact Ginnie Mae or the VA when they’re interested in a VA loan. Like other home loans, they are done through private lenders, such as banks and mortgage companies.

Benefits of VA Mortgages

There are a number of benefits to selecting a VA loan:

Lower interest rates
No down payment
No mortgage insurance
Lower credit scores
Closing cost limits

1. Lower Interest Rates

The VA guarantees a portion of each VA loan, and this guarantee helps protect the lender from loss if the borrower fails to repay the loan. Because VA loans offer less risk than other types of mortgage loans, lenders are comfortable offering a lower interest rate. A lower interest rate can benefit a borrower during the application process by allowing them to qualify for a larger loan amount. It can also result in the borrower paying less in interest over the life of the loan.

2. No Down Payment

A VA loan doesn’t require a down payment as long as the sale price doesn’t exceed the appraised value of the property. In contrast, other loan programs require a down payment of anywhere from 3.5 percent to 20 percent. Having the ability to finance 100 percent of the purchase price could allow a borrower to buy a home sooner when compared to other loan programs.

3. No Mortgage Insurance

Borrowers are typically required to purchase mortgage insurance if they don’t make a 20 percent down payment. This insurance policy compensates the lender or investor if the borrower doesn’t make the mortgage payments and the loan goes into default. However, because a VA loan is guaranteed, mortgage insurance is not required and results in a savings for the borrower.

4. Lower Credit Scores

Credit scores are an important part of qualifying for any home loan. A borrower with a lower credit score is considered to be a higher risk than a borrower with a higher credit score. The VA does not set credit score minimums for VA loans. The minimums vary depending on the lender. However, because a VA loan is guaranteed, the borrower can expect more flexibility and the result is often a lower credit score minimum than what would be accepted for other types of loans.

5. Closing Cost Limits

Every mortgage comes with fees and closing costs, but VA loans have set limits for these expenses. The VA allows lenders to charge a maximum of 1 percent of the loan amount to cover all of the lender’s costs and services. This includes origination, processing, and underwriting costs. In addition, a VA borrower can negotiate to have the seller pay all or part of the closing costs, including the VA appraisal, credit report, recording fees, and state and local taxes.

VA Eligibility

VA loans are not a guarantee to purchase a home. The VA borrower must have satisfactory credit, sufficient income to make mortgage payments, and a valid Certificate of Eligibility (COE) to be eligible for a VA home loan. When purchasing a property, the home must be for the borrower’s own personal occupancy. Generally, VA loans can’t be used to buy rental properties. VA refinance loans can offer more flexibility when it comes to who lives in the property.

The eligibility requirements to obtain a VA loan are quite expansive and fall into a number of categories. Active duty personnel can establish eligibility after 90 days of continuous active duty. In addition to active duty personnel, Veterans, Reservists, National Guard members, and certain surviving spouses are also eligible. The U.S. Department of Veterans Affairs provides a detailed list of Eligibility Requirements for VA Home Loans on their website.

Certificate of Eligibility (COE)

Once borrowers have established that they are eligible for the VA loan program, they will need to secure a Certificate of Eligibility (COE). It verifies to the lender that the borrower is eligible for a VA loan. Borrowers can apply for a COE online, by mail, or through a lender. A current statement of service or a DD Form 214 (Certificate of Release or Discharge from Active Duty) is generally the documentation required to get the COE.

VA Funding Fee

Anyone using a VA loan must pay a VA Funding Fee, with a few exceptions. The funding fee is a percentage of the loan amount. This percentage varies based on the type of loan, the borrower’s military category, if the borrower has used the VA program before, and whether the borrower makes a down payment. The funding fee is due at the time the loan is closed. It can be included in the loan amount or paid in cash.

The funding fee is not required when:

The borrower is receiving VA compensation for a service-connected disability.
The borrower would be entitled to receive compensation for a service-connected disability if they did not receive retirement or active duty pay.
The borrower is the surviving spouse of a Veteran who died in service or from a service-connected disability.

Second-time users of the VA loan program who don’t make a down payment are charged a slightly higher funding fee. National Guard and Reserve Veterans also pay a slightly higher funding fee percentage.

The Interest Rate Reduction Refinance Loan (IRRRL)

The Interest Rate Reduction Refinance Loan (IRRRL) is a special “streamlined” VA loan program used exclusively to refinance properties on which borrowers have already used their VA loan eligibility. It’s a VA-to-VA refinance program that reuses the original VA entitlement. It can be used to lower the interest rate of an existing VA home loan, to refinance an adjustable-rate mortgage (ARM) into a fixed-rate mortgage, or to lower monthly mortgage payments.

An IRRRL is considered a streamlined refinance because it is faster and simpler than a standard refinance.

Some highlights of the IRRRL program include:

No appraisal is required for the property.
There aren’t any income limits for the borrower(s).
No credit review is performed by the lender.
There are no out-of-pocket costs to the borrower.
The borrower doesn’t need to currently occupy the home.

Is a VA Loan Right for You?

VA loans are just one member in the diverse family of mortgage products. They can be a good option for many active duty Servicemembers, Veterans, and eligible surviving spouses looking to purchase a home or refinance an existing mortgage. Because a VA purchase loan doesn’t require a down payment, it may allow a VA borrower to purchase a home sooner than under other loan programs. The VA loan program can also be used to refinance an existing VA loan or even a non-VA loan. And, the streamlined IRRRL loan program can help veterans refinance quickly and easily to take advantage of lower interest rates or monthly payments.

The VA encourages borrowers to contact several lenders to see if a VA loan is right for them. A knowledgeable lender will provide a borrower with a number of loan options to consider and take the time to review the benefits of each type of loan program and the associated fees and closing costs.

For more information on VA Loans available at Axos Bank, a federally insured institution, and how we support the home ownership dreams of active duty personnel and Veterans; please contact us at 888-546-2634 today.