The VA Hybrid ARM is a product that allows a lower fixed rate and payment for the veteran than the more commonly used VA 30 year fixed rate loan or even the 15 year fixed.  The initial fixed interest rate will be good for a period of three (3/1 ARM) or five years (5/1 ARM), and then adjusts annually after the designated fixed period. The 3/1 and 5/1 VA Hybrid ARM programs allow up to a 1% annual interest rate adjustment after the initial fixed interest rate period, and a 5% interest rate cap over the life of the loan.

INDEX AND MARGINS
The index is the weekly average yield on U.S. Treasury Securities adjusted to a constant maturity of one year. Also known as the 1-Year Constant Maturity Index. VA ARM loans have either a 2.00% margin or a 2.25% margin.

ADJUSTMENT CAP
One percent (1%) annually after the initial fixed rate period of 3 or 5 years. This differs from a conventional ARM or even an FHA ARM loan that has a higher adjustment cap of 2-5%.

LIFE CAP
The most the interest rate can adjust during the life of the VA ARM loan is 5% above the initial note rate. So for example, if the initial note rate is 3.75%, the very most it could ever be is 8.75% and this could not happen until at least 5 years after the initial fixed rate period.

FIRST ADJUSTMENT DATES
Government loans only adjust 4 times per year (January 1, April 1, July 1, and October 1). The first adjustment will occur within the period that follows the initial fixed period. For example, if the initial period ends in February, the rate will adjust in April and then annually thereafter until maturity.

3/1 VA Hybrid ARM: the first rate adjustment will occur between the 36th and the 42nd payment due date.

5/1 VA Hybrid ARM: the first rate adjustment will occur between the 60th and the 66th payment due date.

QUALIFYING RATE
Unlike Fannie Mae ARM loans (Conventional) that uses the greater of the fully indexed rate or the note rate + 2.0% to qualify the borrower when the fixed periods are 5 years or less, VA ARM loans use the initial note rate. This is a huge benefit for veterans with higher debt ratios that would not qualify for a loan otherwise.

As an example, let’s say you’re purchasing a new home for $300,000 but for some reason, (high debt balances, single income, tax write offs reduced your yearly income, etc.), you cannot qualify for the higher payment on a 30 year fixed rate loan. So you’re only option is an ARM. With a conventional ARM loan, you would need to qualify on a payment with a rate at least 2% above the initial note rate. So if you could not qualify for the 30 year fixed rate loan, you are sure not to qualify for the conventional ARM loan as that qualifying rate would be at least 1% higher than the fixed rate loan.

BENEFITS

• Lower Rate
• Lower Payment
• Lower rate adjustments than Conventional and FHA ARM products
• Easier to qualify for
• Greater monthly savings

All in all, the VA Hybrid ARM is a very good product but if you have a choice, you should consider carefully. Get more information from a VA Loan Specialist and save thousands when you use FreeVAloan.com.

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VA home loan useful, but watch for snags

For eligible service members and veterans, the Veterans Affairs Department’s home loan guarantee program can be a curse or blessing in today’s housing market. Among the advantages:

• It is among the few mortgage programs now available that does not require a down payment.

• In most locations, lenders will allow purchases of a home worth up to $417,000 without a down payment — and more than $1 million in some high-cost areas.

• Credit underwriting is a little easier with VA loans than with other mortgages. A buyer’s credit scores don’t have to be as high, and loans are possible with as few as six months of work history — not the minimum two years required for most mortgages.

• An inspection of the home is required to ensure it is safe and livable, which provides extra protection for first-time buyers.

But there are disadvantages:

• Not all lenders are willing to work with VA loans.

• A percentage of the loan fee (funding fee), charged by VA to offset the risk of having no mortgage insurance, could be wrapped into the mortgage, ranging from 0 percent for veterans with a service connected disability to 3.3 percent for second time or more use. I corrected this from the original post.

• There are limits on what fees can be charged to the buyer at closing; some sellers don’t want to be part of a sale that could force them to pay more closing costs.  This becomes a non-factor when a veteran works with a VA lender that charges Zero fees.

• A strict home inspection and appraisal process often can make it impossible to buy a home “as is.” If the seller won’t agree to repairs, either done in advance of settlement or by putting money into an escrow account, a VA loan may not be approved. Of course, this should be in the advantage category really, as it is there to protect the veteran from purchasing a “lemon” or “money pit” home that could cost thousands. Conventional loans don’t have this kind of protection. I personally found out the hard way when I got a conventional loan to purchase my house and since have put in THOUSANDS of dollars in repairs that the inspector my realtor recommended didn’t catch. I’ll talk more about this in a separate post.

• Many sellers and their agents believe VA loans involve more red tape than other loans. Many sellers and agents don’t understand VA loans either. This is up to your lender to step in and help them understand the steps involved and relieve them of the mis-guided anxiety they may feel. VA loans should take no longer than a conventional loan if you have the right VA lender working for you.

• Generally, VA home loans are more likely to be accepted in housing markets where troops, veterans and military retirees are a sizable part of the market. This seems like a very one sided comment. It is true but I’m not sure where I see this as a disadvantage…. or an advantage. VA loans are accepted throughout the country, regardless of demographics. Just make sure if you are building a home, you are working with a reputable builder that is approved by VA. Again, I’ll talk more about this in a separate post.