What Is a VA Loan and What Are VA Loan Requirements?
Are you a Veteran or active-duty military person, who wants to own a house in reasonable financial due? VA loan may be a perfect choice for you.
Buying a home requires a pile of cash and a lot of struggle. But, those who qualify for the VA loan because of their military services can get to buy a home with little or no down payment. VA loan allows the veterans 103.3% financing without private mortgage insurance or a 20% second mortgage and up to $6,000 for energy-efficient improvements.
A variety of military personnel can get the loan with easy steps. Just you need to prove that you are eligible and have the financial means to pay the required costs of the loan. This article will further help you to know what VA loan is and what are the VA loan requirements so that you can prepare your required documents. Try to collect as much information about the loan, lenders, and the terms and conditions of the loan so that you can later save time when you apply for it.
VA loan explained
A VA loan is the United States government authorized mortgage loan by the Department of Veterans Affairs (VA) for the American veterans, military members currently serving in the US. military reservists and select serving spouses (given that they don’t remarry). The loan can be used to purchase single-family homes, multi-unit properties, condominiums, manufactured homes, and new construction. The department itself does not dispatch the loans but sets the rules for those who qualify, issues minimum guidelines and requirements, under which the lenders should offer the mortgage, and financially guarantees the loan that qualifies under the program.
The fundamental objective of the VA loan program is to supply home financing facilities to eligible veterans who can purchase properties with no down payments. The loan is issued by department-approved lenders.
The VA loans allow veterans 103.3% of financing without them being getting the private mortgage insurance (PMI), or a 20% second mortgage and up to $6,000 energy-efficient improvements. The VA charges a funding fee of 0 to 3.3% of the loan amount. This fee too can be financed and some veterans can qualify for the exemption. While making a purchase, veterans can borrow up to 103.3% of the sales price or reasonable price available of the property.
There is no monthly PMI, so more of the mortgage payment goes directly towards qualifying for the loan amount, allowing for the larger loans with the same payment. In the case of refinancing, the veterans are allowed to borrow up to 100% of a property’s reasonable value, wherever the state laws allow for it.
With VA loans, veterans are qualified for larger loan amounts than traditional Fannie Mae/conforming loans. Standard VA loans guidelines mention that the VA will insure the mortgage where monthly payment of the mortgage is up to 41% of the gross monthly income as compared to 28% of a confirming loan considering that the veteran has no pending monthly bills, whereas there is no hard limit to the DTI ratio for a VA home loan.
If there are other factors that strengthen the loan application of the veterans, they have been known to be approved with a DTI of up to 80%. These factors include a low loan-to-value (LTV), additional income received but not used to qualify for the loan, sufficient residual income, good credit, etc.
For the vast majority of military borrowers, VA loan is the most acquired lending program in the market. As there is no down payment for the VA loan, they are sometimes offered with looser credit standards. Given that, you still need to meet certain requirements, and the lenders still need to approve your application, if you qualify for the VA loan, you can attain the ownership of a home with less money you would need otherwise in the bank.
How does the VA loan work?
Typically, the VA loan works in a similar fashion as the other loans work; you have to submit your application, prove how you will repay the loan payment by providing the employment and income history, which will confirm from where you will arrange the money to pay closing costs.
However, there are some major differences between VA and FHA or conventional loans, mainly in a way to how loan amount costs and fees are charged and paid. Below are some points to notice in order to understand the process:
You have to verify your military service history: As the VA loans are exclusively for the military personnel who have served in the service, the veterans have to prove their service history in order to claim their eligibility for getting the loan.
You’ll pay a VA funding fee: you can consider a downside of the VA loans, that you have to pay the VA funding fee, which spans from 0.5% to 3.5% of the loan amount. The funding fee is charged to counteract the cost of the VA loan program to taxpayers and is typically rolled on top of the loan amount, even if you don’t make any down payment.
You don’t pay any mortgage insurance: Most of the low or no down payment loan programs require mortgage insurance from the borrowers in order to ensure the lender in case the buyer fell short in making the payments and they have to foreclose. VA loans, on the other hand, do not require veterans’ mortgage insurance for any of its loan types.
You are not restricted by federal loan limit: Currently, there are no loan limits set by the government, although the lenders can specify their own maximum similar to the conforming loan limits for conventional loans. The conforming loan limit for single-family homes is $647,200 in most parts of the country in recent times.
Your lender can’t charge you more than 1% in closing costs: VA lenders are allowed and limited to charge you not more than 1% of the loan amount as their fee. That saves money at your end at closing and makes VA closing costs more affordable than other government-backed loan programs.
Types of VA loans
VA loans can be used by veterans to buy, refinance, renovate, and even build a home. Here are some of the types of VA loans:
VA Purchase loan
If veterans or service members want to purchase a new house, they can apply for the purchase loan with a $0 down payment. They can buy single-family homes, manufactured homes, condominiums, multi-unit properties (like a duplex), or even new construction.
You have to check the policies and guidelines with your lenders because not all lenders make all of these types of VA purchase loans.
VA cash-out refinance
With a VA cash-out refinances the loan, the qualified homeowners can refinance their mortgage and take out cash from their home’s equity. These loans are available for the service members with or without current VA loans. Qualified homeowners can refinance up to 90% of their home’s value.
When you apply for the loan, you can check the lending guidelines, as they vary by lender. Homeowners are not required to take out this amount which suggests that veterans with a non-VA mortgage can use this option as a basic rate-and-term refinance.
Eligible VA borrowers can take equity up to 90% of their home’s value with a VA-cash-out refinance, which is 10% more than the FHA or conventional cash-out allow.
The VA Interest Rate Reduction Refinance Loan is one of the VA loan program’s two available refinance loan options and the one which is chosen by most service members.
They are called VA Streamlines because they are simple and don’t require lengthy submission procedures, low-cost refinance loans, that might not require, in many cases lengthy underwriting, an appraisal, or income verification.
The VA IRRRL is only for those veterans who already possess VA loans, given that their current loan rate is smaller than the older rate and have a limit on the time it takes to recoup the fees and costs. All of which help ensure the service members realize the full financial benefit.
VA energy efficient mortgage
The VA allows the veterans to borrow a sum of money to finance the energy efficiency improvements to a home, as part of their home purchase, or refinance. The service members can borrow up to $6,000 to cover the cost of the qualified improvements, like thermal or storm windows, heat pumps, and solar heating and cooling systems. However, this amount cannot be used by the homeowners to purchase the appliances, window airconditioning system, or other non-permanent additions for their homes.
This up to $6,000 amount can be used for your effort to “go green” and potentially save on your utility bills with a VA energy efficient mortgage (EEM). You can also combine the VA IRRRL with an EEM without having to document income history, as long as your new payment does not exceed by more than 20%.
VA no-equity regular refinance
With this type of loan, you can borrow up to 100% of your home’s value and roll your closing costs in. you can also pay off your FHA and conventional loan with this type of loan.
VA supplemental loans
This amount can be taken as an add-on for your current loan amount or a separate loan that can be used for smaller home maintenance projects.
VA renovation loans
With this loan, the military veterans can buy or refinance a fixer-upper home and roll remodeling and repair costs into the loan. You can also finance up to 100% of the home’s value, which is more than what the home improvement loan program allows.
VA construction loan
If you want to build a house, you can use this loan with no down payment using the one-time or two-time close program. The one-time close option covers the cost of building the home and is automatically converted into a permanent loan once the construction of the home is completed. The two-time close option includes two loan closings; one for the dedicated construction loan to build the home followed by the other that pays off the construction loan.
VA loan eligibility
The eligibility criteria for the VA loan are not only limited to veterans but contrary to the popular belief, there is a list of other military members who can apply for the VA loan as they are eligible to get it. They include:
- Active-duty service member
- Cadets at the US. military, Air Force, or Coast Guard Academy
- Members of the National Guard
- Surviving spouses of the veterans
- Midshipmen at the US. Naval Academy
- Officers at the National Oceanic and Atmospheric Administration
The other thing that counts for the eligibility criteria is the minimum service term. To be eligible, the veteran should meet one of the following service term requirements:
- You’ve served 181 days of active duty during peacetime
- You’ve served 90 days of active duty during wartime
- Your spouse was killed in the line of duty, and you have not remarried
- You’ve served six years in the Reserves and National Guard
In order to show a mortgage company that you are eligible for the VA loan, you have to produce a Certificate of Eligibility (COE) to them. Getting COE is not hard, in fact, it takes some minutes to get the certificate online.
One way is to ask your lender to order the COE through VA’s automated system, as every VA-approved lender has the access to do that. Alternatively, you can order your COE through the VA benefits portal. If you are unable to get the certificate in, either way, you’ll need to provide your DD-214 form to your lender or the VA.
Note that your COE is not the guarantee for the approval of your VA loan. The certificate only confirms that you are eligible for getting the loan and you still need to qualify for the loan.
VA loan qualification
Being eligible is not enough for you to get the VA loan, albeit you still have to qualify for the VA loan based on your debt, credit, and income.
Minimum credit score for the loan
The VA has not established any minimum credit score for a VA mortgage, however, some lenders may require you to have a minimum FICO score of 620 or higher. The credit score is not fixed for every lender, so if you have a credit score issue, you can visit multiple lenders unless you get a better deal.
VA underwriting guidelines mention that applicants must have paid their obligations on time for at least the most recent 12 months to be considered satisfactory credit score risks.
Also, VA requires a two-year waiting period for Chapter 7 bankruptcy or foreclosure before it will insure a loan. Borrowers that’s why make at least 12 one-time payments and secure the approval of the bankruptcy court.
VA loan debt-to-income ratio
The relation between your debt and income makes debt-to-income ratio or DTI.
In order to confirm that are you able to finance the payment of the loan, VA lenders divide your monthly debts such as credit cards, and other accounts, car payments, your proposed housing expense by your gross (before tax) income to calculate your debt-to-income ratio.
For instance, If your gross income is $4,000 a month, and your total monthly debt is $1,500 (including the new mortgage, property taxes, and homeowners insurance, plus other debt payments), then your DTI would be $0.375. A DTI over 41% means the lender has to apply for additional formulas to see if you qualify under residual income guidelines.
VA residual income rules
In order to calculate your actual residual costs, VA underwriters perform additional calculations that can affect the mortgage approval. They factor in your estimated monthly expenses, your estimated taxes on income, and your residential area, and conclude your ‘true’ costs of living.
This figure is then subtracted from your income to find out your residual income, which is your leftover money each month.
For instance, a family of four which is purchasing a 2,000 square foot home on a $5,000 monthly income:
- Future house payment, plus other debt payments: $2,500
- Monthly estimated utilities at $0.14 per square foot: $280
- Monthly estimated income taxes: $1,000
This leaves the residual income calculation of $1,220.
Now, for calculating this residual income to VA residual income requirements for a family of four:
- West region: $1,117
- South region: $1,003
- Midwest region: $1,003
- Northeast region: $1,025
The above example shows that the borrower exceeds the VA’s residual income standards in all parts of the country. Resultantly, despite the borrower’s DTI ratio of 50%, the borrower could get approved for a VA loan.
Qualifying for VA loan with part-time income
You can qualify for this type of financing even if you are earning part-time income or multiple jobs. You have to show proof of consistent income history from your part-time job and stability in the number of hours’ work.
VA loan requirements
Once you prove that you are eligible to get the VA loan, you have to fulfill the following requirements to finally get benefits from the loan:
To be eligible for no down payment, you have to borrow the loan on your own, with a spouse, or with another eligible veteran. If you don’t you may need to make a down payment.
Residual income test
The residual income is the amount that is left with you based on your after-tax income. The minimum required depends on your family size and home as well as on your residential area.
Maximum DTI ratio requirement
Your DTI ratio measures the total amount of monthly debt (including your new mortgage payment) divide by your gross income. The VA requires a 41% DTI ratio, but it is not static and can change if you have enough residual income.
Federal debt default tracking
VA-approved lenders use the Credit Alert Interactive Reporting System to check for the defaulted federal debt, such as student loans or previous VA loans.
Credit score minimum
Although there is not a specific credit score limit required by the VA credit guidelines, some lenders may set their minimum FICO score at 620.
You have to provide proof of steady, two-year employment and income history but they can make exceptions for recently discharged veterans.
Only VA-approved appraisers can fulfill a VA appraisal, and they generally cost from $500- $1,200, which is much more than $300-$400, which is usually spent on conventional loans.
The VA requires you to live in the home which you buy from the VA loan amount, which they call in the lender’s term as “primary residence”. You can’t use the VA loan to buy a second home or make an investment in another way.
How to apply for a VA loan
Applying for a VA loan is similar to applying for other types of home loans. There are some differences, however, which you can find in the following steps:
- Confirm your VA eligibility
As mentioned above, veterans, active-duty military personnel, surviving spouses of the veterans, and other categories of people related to the service are eligible for the loan. Plus the number of years you have served depends on wartime or peacetime. These factors make you eligible for applying for the loan, so check if you don’t fall short on any of the requirements, then you can move to the next step.
2. Apply for the Certificate of Eligibility (COE)
Your lender requires you to provide a Certificate of Eligibility as proof that you qualify for the loan. Veterans typically need a copy of their discharge or separation papers (DD form 214) while active duty members may need a statement of service signed by their commander or another officer.
You can apply for a Certificate of Eligibility from the website or your lender can also get it automatically from your VA form. Surviving spouses may also need COE. The details of the COE for surviving spouses are available on the VA website.
3. Shop for a VA lender
VA loans are backed by the federal goverenment but are provided by private lenders which means you can visit around to multiple lenders to check the interest rates, and terms just like you can shop for other types of mortgages.
Note that you can’t go to any lender, only lenders approved by the Department of Veteran Affairs can originate the loan, secondly, some lenders focus only on conventional loans while others exclusively concentrate on the VA loan program for military clients. Processing your information from the VA lender can excessively ease your process of application.
4. Apply for a VA loan
As you get your lender, the next step for you is to get pre-approved or pre-qualify for your loan. For pre-qualify, you’ll need to have a conversation with your lender about your income, credit history, employment status, marital status and provide your financial and income documents. Providing these details to your lender before underwriting can save your time and resolve hustle later on.
Getting pre-approved can help you understand how much money you may be able to borrow and can help the seller confidence you will get the mortgage you need to buy their house. Although your prequalification letter gives you a ballpark price range for house hunting, it does not guarantee that you will be approved for the loan as the lender has to verify all the information you provide. Getting the loan requires later final approval by underwriting once the documents are received, reviewed, and verified.
5. Go house hunting and sign a purchase agreement
Here you can go visit homes that you might consider purchasing. Focus on finding a real estate professional who is an expert in the VA process because he can greatly help you get the most out of your benefits. Because VA allows certain fees and costs to be paid by the seller in case the seller and you agree, the knowledgeable agent will help you in negotiating seller-paid fees.
Once you’ve got a signed purchase agreement, you can move to the loan process
6. Your lender processes the application and orders VA appraisal
A signed purchase contract is the document that you’ll need to finish your initial application. Once your lender gets the contract, they will move it for the VA appraisal. Note that not any appraisal can do but only professionals who are certified will perform an appraisal. Only they will evaluate the home being considered for VA financing.
Another very important part of the VA appraisal is to inspect the potential home to make sure it meets the minimum property requirements. The Department of Veterans Affairs gives 10 days’ time to appraisers to complete the process of appraisal. If the home passes appraisal for value and VA minimum property requirements and it’s verified by the lender that the borrower qualifies for the loan, the underwriter will give his/her approval stamp.
7. Close on your loan and move on
As the underwriting is done, all you need to do is to close and move in. during the closing, the property legally transfers from the former owner to you. This step also requires you to sign documents that will confirm that you understand and agree on the terms of the loan. You will be required to provide proof of homeowner insurance, and if required, pay closing costs.
Once you have all the documents, you will get the keys to your new home.
When not to use a VA loan?
Although the loans are offered with no down payment and with other benefits, you need to take care of the following things to avoid using the loan and search for other available options:
If you have good credit and a 20% down payment
The major advantage of the VA home loan is the exemption of mortgage insurance. However, the loan is not granted without charging you anything. Borrowers have to pay an upfront funding fee, which is merged into the loan amount.
The fee ranges from 1.4% to 3.6% of the percentage of the down payment and whether the home buyer has already spent his/her mortgage eligibility. The most common fee is 2.3%, however. For instance, on a $200,000 purchase, the 2.3% fee would be $4,600.
This amount can be exempted if the buyer chooses to get a conventional mortgage and put 20% down to avoid mortgage insurance and upfront fee if you feel the mortgage insurance is an unnecessary expense.
If you have a non-veteran co-borrower
Veteran may buy the home with non-veteran which is a possible choice but not the best one because being a veteran, your income must cover half of the loan payment, but the non-veteran’s income cannot compensate for the veteran’s insufficient income.
Also, when a non-veteran owns half of the loan, then VA only guarantees half of the loan amount. In this case, the non-veteran has to pay a 12.5% down payment for the non-guaranteed portion. The conventional 97 mortgage, in this case, allows down payment as low as 3%. You can pay a 3.5% down payment with the FHA home loan program and with the USDA home loan, there is zero down payment with similar rates to VA loans.
If you are on the CAIVRS list
To qualify for the VA loan, you have to prove that you have not fallen on previous government loans such as student loans or car payments, etc and that you have paid the taxes. But if you assume that you cannot make it from this Credit Alert Verification Reporting System, you can think of other options.
If you apply with a credit challenged spouse
In the states with more strict community property laws, the lenders will comprehensively check the credit ratings and financial obligations of your spouse. This rule is even applied in the case when your spouse is not in the home’s title or even on the mortgage.
The following states come under this rule:
- New Mexico
If your spouse has less than perfect credit scores or who owes you alimony, child care, and other maintenance can make your VA approval more challenging.
If you want to purchase a high-end home
From January 2020, there are no limits on the size of the mortgage, a lender can approve, so you need to check and carefully read the guidelines as the lenders can establish their own limits for VA loans.
If you want to buy a vacation home or investment property
The primary purpose of the VA loan is to help the active-duty veterans to buy or build a home and live there. The loan is not granted for making any investments or making real estate portfolios. So you can’t use these loans for any reason other than residential purposes. However, if you want a ski cabin or rental, you can apply for a conventional loan.
FAQs about VA loans
How many times can I use the VA loan benefit?
As long as you have sufficient entitlement to buy a home and purchase a primary residence, you can use the loan as often as you wish.
How much are VA loan closing costs?
You’ll have to pay 2% to 6% in a VA loan closing costs depending on your loan size. However, as the Department of Veterans suggests, the lenders can’t charge you more than 1% of your loan amount for loan-related fees, including document preparation, origination, underwriting, and other miscellaneous fees.
Do VA loans require PMI?
No, instead of PMI, VA loans offer a guarantee that covers the cost of VA-approved lender losses equaling up to 25% of your loan amount if you default. The VA also charges you a funding fee from 0.5% to 3.6% to balance the program cost to taxpayers.
Can I refinance my VA loan to lower my rate?
Sure, the VA IRRRL program makes it easy to refinance to a lower rate with no income verification or appraisal required.
What is the required down payment for a VA loan?
Eligible veterans do not require any down payment. However, you may need to pay in case you have an outstanding VA loan on another home and don’t have enough entitlement to cover the guarantee on the new loan.
The VA loan is a mortgage that is guaranteed by the US. Department of Veteran Affairs and issued by private lenders such as big banks, mortgage companies, or credit unions. The loan is provided to different categories of military personnel, who are serving or have been serving in the military for some time. The loan can typically make purchasing a home easier because it does not require any down payment.
Those who are eligible and qualified to get the loan can find a suitable lender who can offer reasonable interest rates and terms for the loan which correspond with the needs of the borrower. The process is simple and easy once you have collected all the required documents and prove your stable employment and income history. VA loans are in many ways a great benefit for the military people who have been giving their services in the US. military and the Department of Veterans Affairs insure that you get the best services.