VA: Loan Explained

Serving our country is a great sacrifice and one that our government doesn’t take lightly. That’s why there are several programs for active-duty service members, veterans and eligible surviving spouses are designed to give them benefits.

The VA loan is among those perks. Such a loan product allows the parties mentioned above to finance a home with no down payment, no mortgage insurance and enjoy lenient credit requirements. But it might not be the right choice in all situations. Understanding how a VA loan works will help you determine if it’s the right mortgage for your purchase or refinance plans.

Benefits of a VA Loan

On the surface, VA loan functions like any other mortgage program. You’ll be asked to complete a loan application, provide statements related to earnings and credit history and verify you have enough money saved up to cover closing costs.

However, when you dig into the details there are some considerable differences between VA loans and conventional or FHA loans, especially when it comes to the details.

Here are some key points:

• Plan to be asked to verify your military service history to determine if you meet eligibility requirements. 

• You don’t pay any mortgage insurance. Most low- or no-down-payment loan programs require mortgage insurance. That’s because lenders want the peace of mind in case you default on your payments and they have to foreclose. However, the VA doesn’t require mortgage insurance on the loans it guarantees.

• Expect to pay a VA funding fee in most cases. Despite the perk mentioned above, one of the downsides to a VA loan is having to pay the VA funding fee cost of 0.5% to 3.6%. This revenue is used to offset the cost of the VA loan program to taxpayers and is typically rolled on top of the loan amount, even if you make no down payment.

• Your lender can’t charge you more than 1% in closing costs. This low rate means you’ll save money at closing. This is another reason why VA loans are more affordable than other government-backed loan programs.

• You’re not restricted by federal loan limits. There are currently no VA loan limits, although some lenders may set their own maximums similar to the conforming loan limits for conventional loans. Currently, the conforming loan limit is $647,200 for a single-family home in most parts of the country, per the Federal Housing Finance Agency.

Who’s eligible?

Not everyone can qualify for a VA loan, even if they fall into the groups mentioned above. Besides meeting the VA loan requirements for income, assets and credit, there are criteria related to military service to consider. Your DD Form 214 will reflect the number of years you served in the military.

According to the VA, you meet the minimum service requirement if you served at least this amount of time:  

• 90 continuous days of active duty
• 90 consecutive days during wartime
• 181 days during peacetime
• More than six years in the National Guard or Reserve
• Certificate of eligibility (COE)
• A certificate of eligibility (COE) is a document that shows the mortgage lender you qualify for a VA loan. To obtain a COE, you’ll need to show proof that you served — you can verify your eligibility by obtaining an online COE or mailing a completed form VA Form 26-1880 to the VA processing center in your region.

Determining eligibility

Once you prove that you’re eligible, there are additional requirements you’ll need to meet to qualify.

For one, to buy a property without a down payment, you must borrow on your own, with a spouse or with another eligible veteran. If you don’t, you may need to make a down payment. There are also stipulations related to income, too. Lenders will look at your debt-to-income (DTI) ratio, which measures your total monthly debt (including your new mortgage payment) divided by your gross (before-tax) income. The VA recommends a maximum 41% DTI ratio, generally speaking. Another income-related matter is the residual income test. Lenders look at your financials to calculate how much free cash you have each month based on your after-tax income. The minimum required depends on your home and family size, as well as geography.

There are other hurdles to tackle, such as federal debt default tracking. VA-approved lenders use the Credit Alert Interactive Reporting System (CAIVRS) to check for defaulted federal debt, such as past VA loans or student loans. On the note of history, lenders will review past employment. They like to see a steady, two-year job track record on the job, but may make exceptions for recently discharged veterans.

Other variables that should be on your radar a credit score minimum. Although the VA guidelines don’t require a minimum credit score, many lenders set their minimum at 620. Occupancy is another item on the VA Loan checklist. That’s because the VA requires you to live in the home you intend to finance with a VA loan — a “primary residence.” In other words, you can’t use a VA loan to buy a second home or investment property. Last, be prepared to encounter appraisal requirements. Only VA-approved appraisers can complete a VA appraisal. Plus, they typically cost from $500 to $1,200 — much more than the $300-$400 usually spent on a conventional appraisal.

In short, VA loans can offer a simple and effective pathway to homeownership for military members and veterans who qualify. It can mean owning a home without a down payment, private mortgage insurance or even a flawless credit score.

As mentioned above, eligibility requirements are strict, and borrowers might have to jump through more hoops than with a conventional loan. That means it’s essential to understand the qualification process, how a VA home loan works and what you will need for closing. That way, you’ll be able to avoid unnecessary delays and added stress and unlock your dreams of homeownership.

Know that you don’t have to go it alone. if you’re unsure if a VA Loan is the best option for your and your family, know that we’re here to offer expert advice and guidance. We love working with military and veterans! We’ll help you make an educated decision based on your unique financial situation and goals. Even if you can't purchase a home immediately, we'll help you create a realistic plan to make homeownership a reality in the future.