What is a VA loan?
The VA Loan is a zero-interest mortgage program that helps military members, veterans, and their eligible spouses buy a home. This is a great military advantage because borrowers can buy with little money out of pocket and avoid additional fees like private mortgage insurance. The program can also help existing homeowners refinance at a lower interest rate or cash out the equity in their home.
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How does a VA loan work?
VA loans are backed by the Department of Veterans Affairs. The government, however, does not issue funds — it only guarantees the loans. This insurance provides additional security for VA mortgage lenders, allowing them to offer special loan benefits to veterans, including low interest rates, no down payment, and no private mortgage insurance (PMI).
To obtain a VA loan, you must contact a private lender approved to offer this program. Fortunately, almost all major lenders are licensed by VA. This includes banks, credit unions, mortgage companies, and online lenders.
Your mortgage lender will verify your eligibility for the VA loan program, review your personal finances, and tell you how much you are able to borrow. Your lender will also determine your interest rate. VA loan program mortgage rates are generally lower than other home loan options.
Who qualifies for a VA loan?
VA home loans are available to active duty members, reservists, members of the National Guard, and eligible surviving spouses of service members.
Those applying must meet one of the requirements below:
- Served 90 consecutive days of active wartime duty
- Served 181 days of active duty in peacetime
- Served more than six years in the National Guard or Reserves (or 90 days under Title 32 with at least 30 of those consecutive days)
- You are the surviving spouse of a military member who died in the line of duty or from a service-related disability
You can check your eligibility for the VA loan program on the VA eBenefits portal or contact a mortgage lender and have it checked on your behalf. Lenders can verify your VA eligibility quickly and easily.
VA loan requirements
Having an eligible service history does not automatically qualify you for a VA mortgage. You must also meet the financial requirements of your lender. The VA sets minimum financial guidelines for borrowers, but lenders are allowed to set their own stricter requirements if they wish, so the guidelines may vary from company to company.
Below are the standard requirements imposed by VA to qualify for a VA home loan.
VA Loan Credit Score Requirements
The Department of Veterans Affairs does not set a minimum credit score for loan approval. Instead, each lender sets their own minimum.
The minimum FICO score for a VA loan is often 620. But that can be slightly higher or lower depending on the lender. Some lenders may require a minimum score of 640 or higher, while others allow a score as low as 580 or 600.
Keep in mind that lenders also check your credit history, not just your score. Many lenders only allow one 30-day overdue payment in the last 12 months. Additionally, there is a waiting period for approval after bankruptcy or foreclosure.
You can expect a waiting period of one year after a Chapter 13 bankruptcy and two years after a Chapter 7 bankruptcy. If you had a recent foreclosure, the waiting period for a VA loan is two years.
VA loan income requirements
There is no income limit for a VA loan. However, you must check that your income is stable and sufficient to make the repayments of your new mortgage.
With your application, you will provide the lender with proof of income. This includes:
- Your latest payslips
- W-2 of the last two years
- Tax declarations for the last two years
- Most recent bank accounts and investment statements
- Proof of spousal or child support (payments must continue for at least 36 months after closing)
- Year-to-date profit and loss statement (if you are also self-employed and using this income for qualifying purposes)
Lenders generally want to see a stable two-year income and employment history, and they want to know that your income is reasonably expected to continue after the loan closes. That said, there are certain circumstances in which you can get a home loan without having worked for two years.
PV loan debt-to-income ratio requirements
Your lender will also look at your debt to equity ratio (DTI). This is the percentage of your gross monthly income that you spend each month paying off your debts. Typically, a VA loan allows a maximum DTI of 41%. This means that your monthly debt, including the mortgage, is no more than 41% of your monthly pre-tax income.
You can calculate your DTI ratio by dividing your total monthly debt payments by your gross monthly income. Debt payments include regular and recurring items like credit card minimum payments, car and student loan payments, and your future mortgage payment. They do not include living expenses like utilities or phone bills.
For example, if your debt payments are $1,500 and you have a gross monthly income of $5,000, your debt-to-income ratio is 30%.
Other VA Loan Program Details
There are a few other features that set the VA loan program apart from other home loan options. Here’s what you need to know.
Certificate of eligibility
You must obtain a Certificate of Eligibility (COE) before being approved for a VA loan. This certificate is proof of your eligibility as a veteran or service member, and it provides information to lenders about your VA entitlement. You can get your COE through the VA’s eBenefits online portal or ask a VA-approved lender to pick up the document from the VA’s website.
VA Loan Entitlement
Your VA loan entitlement determines how much you can borrow. Homebuyers who have never used the VA loan program before should have “full entitlement,” as should borrowers who have used a VA loan in the past but paid it off in full.
Technically, there is no loan limit for borrowers eligible for full PV. But many lenders set their own cap equal to the conforming loan limit, which is currently $ in most parts of the United States. With many lenders, if your loan exceeds this amount, it’s considered a “VA jumbo loan” and you may be required to make a down payment.
VA financing fees
VA loans do not require a down payment or private mortgage insurance. But borrowers pay a one-time upfront financing fee.
VA finance fees support the VA loan program. It ranges from 0.5% to 3.6% of the loan amount, but most first-time home buyers with no down payment pay 2.3%. You can pay these fees upfront at closing or roll them into the mortgage balance.
Minimum VA Ownership Requirements
Also keep in mind that VA loans have minimum ownership requirements (MPR). MPRs are basic guidelines for the types of homes the VA will insure and the condition a property must be in to qualify for a VA loan. Generally, homes must be accessible, safe, and have up-to-date utilities to be eligible for VA financing.
You can use this loan program only for a principal residence or when buying a multi-unit house and you live in one of the units yourself. You cannot use a VA loan for the purpose of buying a vacation home or rental property, although you are allowed to rent out a former primary residence.
How to Get a VA Loan
Here are the steps to apply for a VA loan:
1. Contact a VA Approved Mortgage Lender
These include banks, credit unions, and mortgage companies approved by the Department of Veterans Affairs. Check lenders’ websites to see if they offer VA loans before applying. Contact at least three lenders to compare interest rates and find your best VA loan deal.
2. Obtain your certificate of eligibility
Visit the VA’s eBenefits portal to acquire your COE or ask your lender to access the database on your behalf. This document confirms your eligibility for the VA program and provides information about your VA rights. The COE will help your lender determine how much money you can borrow and whether or not you need to make a down payment.
3. Get pre-approved
Complete a VA mortgage application and provide your lender with supporting documentation such as pay stubs, bank statements, tax returns, and proof of other income. Your lender uses this information to determine your loan amount and interest rate, and then issues a pre-approval letter. You will need this pre-approval letter to make a serious offer on a home you want to buy.
4. Buy a house
After getting pre-approved, contact a real estate agent to begin the home search. Once a seller agrees to your purchase price, your lender reviews the purchase agreement and prepares a loan estimate. This document provides information about the terms of your mortgage, including the estimated interest rate, monthly payment, closing costs, and fees. Your lender will then complete the underwriting process (which includes ordering a home appraisal) and set a closing date.
Start Your VA Loan
The VA loan is an incredibly valuable benefit for eligible veterans and military personnel. With no down payment, low interest rates, and no ongoing mortgage insurance, this is one of the most affordable home loan programs available.
If you have past or current military service and are considering buying a home or refinancing, consider the VA loan. Most mortgage lenders are licensed to do VA mortgages and can easily tell you if you qualify for the program.
The information contained on The Mortgage Reports website is provided for informational purposes only and does not constitute advertising for products offered by Full Beaker. The views and opinions expressed herein are those of the author and do not reflect the policy or position of Full Beaker, its officers, parent company or affiliates.