VA loans are for those who served in the military. The main advantages are no required down payment, lower credit-score requirements and no mortgage insurance.
VA loans play an important role in helping those who serve and have served in the military buy a home. Here’s what you need to know about VA loans: how they work, who can get them, and all the other moving parts of a VA mortgage.
What is a VA loan?
A VA loan is issued by a private lender and insured by the Department of Veterans Affairs. It’s a valuable benefit — offering a mortgage with a lower-than-most interest rate that usually requires no down payment — for qualified U.S. veterans, active-duty military personnel and certain surviving spouses.
The process is much like any other kind of mortgage you may get with the credit union, but with some key differences along the way.
Who is eligible for a VA loan?
You are likely to be qualified for a VA mortgage if:
- You are active-duty military
- You were separated from military service in a situation “other than dishonorable discharge”
- As a veteran or active military, you meet specific length-of-service requirements
- You are a reservist or a member of the National Guard
- You are a qualified surviving spouse of a deceased veteran
In addition, there are these requirements:
- The home must be your primary residence
- You must have a valid certificate of eligibility from the VA
- Although the VA has no minimum credit score requirement, most lenders do
Benefits of a VA loan
A VA loan begins with one important distinction: relaxed credit-qualifying standards.
Although the VA has no minimum credit score requirement, lenders often require scores of at least 620. And a borrower must be able to afford a home. The VA takes a real-life view of affordability by estimating the ability to pay the home loan after accounting for other monthly expenses.
THE MAJOR BENEFITS:
- Down payments aren’t required unless the purchase price is more than the appraised value of the property or it’s higher than the local VA loan limit
- Mortgage rates are typically lower than rates on conventional loans
- No mortgage insurance is required
- Counseling is available to help borrowers retain a home through serious financial difficulties
- You can reuse your VA loan benefit
- VA loans limit the amount you can be charged for closing costs
- You don’t have to be a first-time home buyer
- VA-backed loans can be assumable — this means they can be taken over by someone you sell the house to, even if that person isn’t a service member
VA loan general requirements
While a VA mortgage’s qualifying requirements are more relaxed than those for a conventional loan, an applicant still needs to have decent credit and sufficient income to buy a home. And the home being financed must serve as the primary residence.
Credit score requirements
The VA doesn’t set a minimum credit score to qualify for a loan. Instead, it requires a lender “to review the entire loan profile to make a lending decision,” according to the VA. However, each lender you shop will have its own FICO score requirement (usually around 620+).
»MORE: Check your free credit score
VA loan debt-to-income ratio
The VA also doesn’t specify a maximum debt-to-income ratio. But if the total debt-to-income ratio is over 41%, lenders will need to provide proof of an applicant’s ability to repay the loan, says Greg Nelms, the VA’s chief of loan policy. They do this by assessing your “residual income,” accounting for all your monthly living expenses, as well as what your mortgage payment would be.
Down payment requirements
Under most circumstances, you don’t need to make a down payment. But if you decide to put some money down, it will likely reduce the VA funding fee. However, if the purchase price of the home is greater than its appraised value, you may have to make up at least a portion of the difference.
If you’re buying in a competitive market where buyers outnumber home sellers, you may need a down payment just to get your foot in the door. A bidding situation will require a deposit for the seller, and as a portion of your down payment, it shows you are a serious buyer.
While there is no mortgage insurance requirement, all Veterans using the VA Home Loan Guaranty benefit must pay a funding fee. This helps the VA cover the costs of mortgage foreclosures. The amount of the fee ranges from 1.25% to 3.3% of the loan amount, depending on the down payment, how long you served and for which branch of the military, and whether you’ve tapped your VA home loan benefit previously.
Many times this fee is added to the total loan amount, rather than being paid upfront. That will increase your monthly payment and the amount of interest you’ll pay during the loan term.
Veterans who receive VA disability compensation and qualified surviving spouses don’t have to pay the funding fee.
The Process of a VA Loan from Start to Home
Find a lender. You may want to get “pre-approved” at this point – that is, find out how big a loan you can afford.
Get a Certificate of Eligibility. The Certificate of Eligibility (COE) verifies to the lender that you meet the eligibility requirements for a VA loan. Learn more about the evidence you submit and how to apply for a COE on the VA’s Website.
Find a Home and Sign a Purchase Agreement. Work with a real estate professional and negotiate a purchase agreement. Make sure the purchase and sales agreement contains a “VA Option Clause.”You may also want the purchase agreement to allow you to “escape” from the contract without penalty if you can’t get a VA loan.
Apply for your VA Loan. Work with the lender to complete a loan application and gather the needed documents, such as pay stubs and bank statements.
Loan Processing. The lender orders a VA appraisal and begins to “process” all the credit and income information. The lending institution reviews the appraisal and all the documentation of credit, income, and assets. The lender then decides whether the loan should be granted.
Closing. The lender chooses a title company, an attorney, or one of their own representatives to conduct the closing. This person will coordinate the date/time and the property is transferred. You’re ready to move in!
Get Started! For active military and veterans looking for a VA loan, finding the right lender is important, but it doesn’t have to be a challenge. Contact our mortgage experts for a free consultation today!