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.
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:
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:
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.