VA loan requirements may differ slightly from lender to lender. It is important to understand that the Department of Veterans Affairs does not lend the money but rather backs the loan if for some reason it would go into default. By doing this it gives lenders the ability to lend money in confidence knowing that the loan is backed by the US government.
According to Government statistics, 610,000 VA Home Loans were guaranteed by The Department of Veterans Affairs in 2018. Now consider that there are 21 million veterans currently living in the United States. That leaves a lot of people out there who may be overlooking a great way to meet a lifetime investment. Have you thought about it? Are you worried about having to cut through a ton of red tape? That’s completely understandable. Sometimes the rules and regulations surrounding VA loan requirements can be overwhelming. That’s why it’s our goal at National VA Loans to educate you as much as possible. We can help you make decisions that are right for you. In this article we will outline some VA home loan requirements that are most important to get you started.
VA Loan Requirement Guidelines
Below are some basic VA loan requirements to keep in mind when thinking about purchasing a new home. Getting all your documents organized and established makes the home buying process a much smoother experience.
- A Decent Credit Score
- A Certificate of Elgibility
- Sufficient Income
- Certification of primary residence of occupancy
- Organization of tax records and financial documents
What exactly is a VA home loan? It’s like a conventional mortgage, in that the money is loaned to you by a private lender. The difference is, the VA backs 25% of loans that are over $144,000. In other words, the Federal Government guarantees lenders that if you default on your loan, they will be paid back 25% of the loan amount. This means lenders are able to relax traditional requirements and lower the threshold to make VA home loan qualifications much easier to obtain. It gives them much more confidence when approving loans, and as you can imagine…the more confidence a lender has in you the better!
You have a lot of options on how you can use your VA purchase loan. You aren’t limited to buying a single family home. You can buy a condo in a VA-approved project, or a manufactured home. You can use it to upgrade your current home with energy efficient features, such as solar power. With a VA home renovation loan, you can buy a fixer-upper or a foreclosed property and get more bang for your buck. In some cases, you can even build a brand new home! Your lender will go over all your options with you and help choose the best one for you and your family.
So why is a VA loan to your benefit? Buying a home is not an easy feat for most people. For one thing, you need a substantial amount of cash on hand to qualify for conventional funding. The average price of homes sold in the United States in 2019 is $234,000. To get the best rates and qualify for the best conventional mortgages, a 20% down payment is ideal. How long would it take you to save $46,000, or more if you live in a high cost community? With a VA loan, there is no down payment required and VA loan rates are usually lower. That’s right, you can finance 100% of your home loan with no cash needed up front. Not having to wait years to come up with a down payment is one of the biggest draws of a VA loan for most people. This is especially helpful for first-time home buyers.
Conventional mortgages also add Private Mortgage Insurance (PMI) for any loan with less than a 20% down payment. PMI protects the lender if you happen to default on your mortgage. This is not an issue with a VA loan, because the VA guarantees the loan for you. Not having a PMI payment could save you hundreds of dollars every month. You redirect that money into savings, or enjoy some extra buying power.
Another benefit is that interest rates on VA loans are often lower than conventional rates. In June of 2019, a fixed-rate VA loan was listed at 4.20%, compared to 4.41% for a traditional fixed-rate loan. Combined that with relaxed credit and income requirements and it sounds like a win-win, right? Absolutely, but who can get a VA loan?
If you are a Veteran, Active Duty Servicemember, or a former/current member of the National Guard or Reserves, you will most likely qualify to take advantage of a VA home loan. You do need to meet the minimum service requirements, which vary based on time period. For instance, you only need to have served 90 consecutive days if you served during a period of war. If you served in a post-war period, your requirement could be 181 days for post-Vietnam war, or 24 continuous months if you served between 1980 and 1990.
If you do not meet the minimum service requirements, you may still qualify if you were discharged for reasons beyond your control. These reasons include things such as hardship, certain medical conditions or a reduction in force. Unfortunately, if you received a bad conduct or dishonorable discharge, you are not eligible to receive a VA loan.
Ok, you’ve checked it out, and you meet the minimum service requirements. There is one more thing to do before applying for a loan. You need to get a VA loan Certificate of Eligibility, also known as a COE. This is an official document that tells the lender you meet the standards for VA loan eligibility. The evidence you’ll need to show to get your COE depends on your situation. If you are a Veteran, you’ll need a DD Form 214. If you are an Active Duty Service member, you’ll need a current statement of service. Surviving spouses are also able to obtain COE’s. The documents are different depending on whether you receive Dependency and Indemnity Compensation or not. provided by the VA.
Once you get the correct documentation, the easiest way to apply for a COE is to ask your lender. Many lenders have access to an online database that can issue a COE in seconds. This method will only work if the VA has enough information about you stored in their database. If this fails, you can also apply by mail or use your eBenefits portal at www.ebenefits.va.gov.
Getting your COE is a great start, but it does not entitle you to a loan by itself. You still need to meet some minimum guidelines set by both the VA and the lender to qualify for your VA home loan. How do you qualify for a VA loan?
The first thing lenders tend to look at is your credit score. While the VA doesn’t require a minimum credit score to qualify for a loan, banks still use it as a measure of your overall credit risk. Lenders tend to be more lenient with regards to your credit score because the loan is partially guaranteed by the VA. In general, most lenders will need a minimum credit score of 620, although some lenders may go as low as 580. There are many ways to check your credit score for free, so it’s a good idea to find out where you stand before you start the loan process. If you find your score is below 600, it’s best to take some time to improve your credit before applying for a loan.
You must also show that you and/or your spouse maintains a stable income that allows for proper care of the home and additional expenses. Lenders call this your debt-to-income ratio, or DTI. The VA recommends a DTI no greater than 41%. What expenses do lenders look at when determining your DTI? Your mortgage will be the biggest expense, followed by installment loans such as car loans, student loans. and financing of recreational vehicles. Credit card payments are also included, as well as any alimony payments or child support payments. For a VA loan, lenders may also look at child care costs and utility bills.
Another area the VA looks at is what’s called residual income. They want to make absolutely sure you have enough income left after paying your monthly bills to handle day to day expenses. The residual income is related to your debt-to-income ratio, but not the same. To find your residual income, you need to subtract the expenses used in figuring your DTI from your monthly income.
The VA bases how much residual income is needed based on the size of your family and where in the country you live. The country is broken down into four segments: Northeast, Midwest, South and West. For example, a family of 4 in Massachusetts has a residual income threshold of $1,025.00. That means that after your regular expenses are paid, you must have at least this amount left over to cover living expenses for the month. This system of using residual income as a qualifier is one of the reasons that VA loans have such a low default rate. The entire process is meant as a guide to get a clear picture of your finances. They want you to be successful in paying for and maintaining your home.
Are there other VA loan rules you need to know about? Yes, a few. There are maximum backing VA Loan limits set by the VA. As mentioned earlier, the VA guarantees 25% of the balance of the loan in case of default. For most areas in the United States, they will guarantee 25% of a loan up to a maximum of $484,350. However, Veteran Affairs is aware that there are many places where the cost of living is much higher than the average. In certain counties, they will guarantee 25% of up to $726,525. You can borrow more if it suits you. Say you decide to buy a $900,000 house in a high cost living area. The VA will still only back 25% of $726,525. The amount you can borrow is still decided by the lender based on your overall credit worthiness.
Let’s talk about home occupancy requirements. Your VA home loan must be used for your primary residence. You are not able to use your benefit toward an investment property or a second home. You must be able to show that you will be living in the home full time. You are required to move into the home within 60 days of the loan closing. If there is work being done on the property that prevents you from moving in during the time frame, this is known as a delayed occupancy. You must be able to show that you will move into the home right after work is completed. If you are called to active duty, your spouse may meet the occupancy rule by living at the home full time. The same goes for adult children if both parents are called to active duty.
There are also rules in place if you are close to retirement age. The VA requires that if you are within 12 months of retiring, you need to present an application stating as much. You will also need to establish that you’ll have the necessary stable income to meet the debt-to-income and residual income requirements mentioned above. Income that counts toward retirement includes your social security, military pension, and any pension you collect from private-sector employment.
Up until now, we’ve talked about all the good stuff. Let’s look at what happens if you run into trouble. No one likes to think about it, but sometimes the unthinkable happens. You may experience a reduction in pay, a job loss or an illness within the family. What should you do if you can’t make your mortgage payment?
The first thing is to call your lender. Often you can work out an agreement to get caught up on missed payments. Lenders appreciate open communication, and it goes even further if you reach out to them before they come looking for you. Try and find places to trim expenses and luxuries. If you are experiencing a more serious, long-term financial hardship, the VA has Regional Loan Centers that provide financial counseling geared toward helping you avoid foreclosure. Keep in mind that if you default on a VA loan, that 25% guarantee will need to be paid out to the lender. Under certain circumstances, you as the borrower may incur this as a debt owed to the government. For more information on this topic, click here.
There you have it. We know it sounds like a lot. That’s why it’s important to choose a lender that knows the process inside and out. Our VA home loan specialists are available to help you in any way we can. Just call us at 855-956-4040 and we can get you started. Thank you for reading. And from all of us at National VA Loans, thank you for your service.