If you are a Veteran of the United States Armed forces, thank you for your service. If you currently receive income due to a service-related disability, you may be wondering whether said income can be used to buy a house. The short answer is, yes…but veteran-borrowers should be aware of some of the additional questions or issues that could arise during the application process. Read on for answers and solutions that could be of interest to disabled veterans. It is also recommended that you contact your Regional Office of Veterans Affairs (Regional VA) and/or your VA-experienced mortgage loan officer for guidance before entering into a purchase contract.
A VA loan would be the most logical choice. In addition to recognizing VA disability income, the VA loan program allows veteran-borrowers to finance 100% of the home’s appraised value or purchase price (whichever is less). Also, disabled veterans are exempted from paying the VA Funding Fee of approximately 3% of the loan amount. The VA does not require private mortgage insurance when making home loans for disabled veterans. No VA loans have the prepayment penalties that come with some other loan types.
Conventional and FHA loans might also be an option. Talk to your loan originator (L.O.) about the options available. If you need to get connected with an experienced L.O. visit www.ruoff.com/find-a-loan-officer.
Spousal or co-borrower income can be included on a loan. This will necessitate that the second borrower’s credit and debts also be considered. Other types of income, such as child support, alimony, or secondary income from a side job could be considered. Every income type has its own documentation requirements. Keep in mind that any income must be properly reported on your taxes to be recognized by the underwriter.
Typical monthly payments such as installment debt (cars or furniture loans), revolving payments (credit cards), and child support payments will be included in the debt-to-income ratio (DTI). The underwriter will add all monthly debts and divide that number by the amount of qualified income to determine a percentage. Each loan product is different, but borrowers generally need a DTI of below 45% to qualify for a mortgage. Veteran-borrowers applying for a VA loan could be approved with a DTI up to 50% based on the underwriter’s discretion, but a DTI closer to 40% is preferred. (Source: VA Lender’s Handbook, Chapter 4)
The veteran-applicant can prove eligibility for the VA benefit of a VA mortgage by obtaining a Certificate of Eligibility (COE). This document will be required for loan approval. Veterans can apply for a COE at the eBenefits page.
For income verification, your lender can advise on specific documents required. Verification of VA disability income might require a VA Benefit Summary Letter, also called simply an “award letter.” Your lender will likely require proof that disability income is not temporary if it is to be counted toward the DTI. In other words, the underwriter will want to know that the income being used for loan payments is likely to continue.
VA lenders usually like to see a lower DTI of 41% or less, but the underwriter does have some discretion here (source: The VA Lender’s Handbook). As with any VA loan, the veteran-borrower must be considered eligible and furnish a COE. All borrowers on the loan must present an acceptable credit history, whether via traditional or non-traditional credit verification.
VA loans also have two major benefits: no down payment requirement and lower closing costs for the veteran-borrower. VA borrowers pay a “funding fee,” which is charged as a percentage of the loan amount. The funding fee is intended to cover closing costs while keeping VA loans affordable. Some other costs may be passed on to the VA borrower, but these are limited.
Also, know that VA loans require that the appraiser adhere to VA standards. This means that the appraisal will be especially critical of deficiencies and/or marketability issues within the subject property. The VA appraisal process was designed for the benefit of the veteran-borrower and seeks to ensure that the home being purchased has the value expected by both the borrower and the lender. The VA appraiser will follow the usual Uniform Standard Appraisal Practices (USPAP) in addition to VA-required standards. Additional considerations on a VA appraisal include “minimum property requirements” as defined by the VA. This ensures that the subject property is structurally fit and free of health hazards.
If you need help finding a VA Office in your region, visit https://www.va.gov/find-locations. If you’re ready to explore VA loan options, the experienced team at Ruoff Mortgage is ready to get started for you!