The men and women who make up the US Armed Forces deserve to have a roof over their heads when they return from service. That’s why VA home loans exist – to make the home buying process easier and more affordable for millions of eligible veterans.
If you’re a United States veteran or current active duty service member, you may be wondering how these loans work and how you can use one to buy a home. In this guide, we’ll explain the ins and outs of VA loans, answer your most frequently asked questions, and help you find a qualified lender.
What is a VA Loan?
Created by the government in 1944, the purpose of VA loans is to help veterans, active duty members of the armed forces, and their families afford a home. But they aren’t just for houses; you can use a VA loan to buy a condo, a manufactured home, or even for new construction.
Even though VA loans are funded by the US government, the government doesn’t actually make these loans directly. VA loans are instead financed by qualified private lenders like Associate Home Loans, who receive a loan guarantee from the federal government to cover part of the cost.
VA home loans are an incredibly popular lending option, both for veterans and lending companies. This is because if you default on a VA loan, the federal government will cover 25% of what you borrowed – this is called an entitlement. The entitlement gives the lender the same protection as if you paid a 25% down payment, meaning less risk for them and more relaxed approval requirements for you.
Here are some more benefits of VA loans to consider:
- 0% Down Payment: While traditional mortgages typically require a down payment between 15% and 30%, VA loans are one of the few 0% down payment loans available today.
- Fewer Requirements: Eligibility for VA home loans is based on military service. While certain lenders will require a minimum credit score and DTI (debt-to-income ratio), these requirements are not nearly as strict.
- No Mortgage Insurance: Because they’re backed by the government, VA loans do not require you to buy Private Mortgage Insurance (PMI). Without the cost of monthly PMI payments, more money goes directly toward mortgage payments, allowing veterans to take out larger loans.
With so many benefits, it’s easy to see why most veterans choose to finance their home purchase with a VA loan. But before you can enjoy these benefits, you have to make sure you qualify for the program.
How Do You Qualify for a VA Loan?
Being enrolled in the US military does not automatically make you eligible for a VA loan. There are requirements that you’ll have to meet first in order to qualify.
You’ll need to meet certain service requirements depending on when you joined the military and whether or not you are/were full-time active duty military personnel.
You are eligible for a VA home loan if you:
- Served in the US Armed Forces for 90 consecutive days of active duty during wartime
- Served in the US Armed Forces 181 consecutive days of active duty during peacetime.
- Served in the National Guard or served reserve duty for at least 6 years
- Are the spouse of a veteran who died while on active duty or died later as a result of an injury/disability related to their service.
To prove you meet one of these service requirements, you’ll need to obtain a Certificate of Eligibility. You can apply for a COE online or by submitting an official request form to the Department of Veterans Affairs by mail. A qualified lender will also be able to obtain the certificate on your behalf.
The U.S. Department of Veterans Affairs does not require a minimum credit score or income. However, the individual lenders who fund the loans typically will. They will still analyze your finances like they would for any other loan by looking at your credit score, income, and debt-to-income ratio.
The credit score benchmark varies greatly from lender to lender, but on average, most will want a score of at least 620. With the national average currently around 695, this is a pretty borrower-friendly deal.
Working to raise your credit score won’t just increase your chances of approval – the higher your score, the lower your mortgage rate will be. If you aren’t in a hurry to purchase a home, we recommend doing some prep work and raising your score before you apply. For tips on how to build credit quickly, check out this guide.
As for income, you will need to show proof that you can afford the house you’re trying to purchase along with any debts you’re currently working on paying off. A lender will subtract the cost of these payments to determine your monthly residual income. This is the income you have left over to pay for day to day expenses like gas, food, and utilities.
The minimum residual income a VA lender requires varies depending on location and how many people will be living in the household. The more people, the higher your residual income should be.
That being said, lenders know that every situation is unique. They don’t just assess your income – they look at the bigger picture. If your residual income is low but you can show that your employment has been incredibly stable over the years, that will likely compensate for the lower income.
If you are self-employed, determining your income can be tricky. Check out this guide for tips on how to navigate the home loan process as a self-employed person.
How to Apply: Step by Step
Once you’re confident that you meet the requirements above, you can take the next step and apply for a VA home loan.
- As we mentioned earlier, you’ll need to obtain your COE, or Certificate of Eligibility from the Department of Veterans Affairs.
- Find a VA-approved lender. Obtaining a VA loan is very different from the process of obtaining a conventional or FHA loan, so you’ll want to work with someone who has experience working with military clients. Local private lending companies like Associates Home Loan of Florida, Inc., can connect you with a qualified VA lender.
- Get pre-approved. This is not a necessary step, but it is highly recommended. Pre-approval does not guarantee 100% that you’ll be approved for the loan, but it will help you gather information about what you can actually afford and keep you from wasting time looking at homes outside of your price range. To get pre-approved, you’ll need to provide your lender with your ID, pay stubs, and tax documents from the last 2 years.
- Sign a purchase agreement. For most homebuyers, this is the fun part – shopping for your dream home! With no down payment to worry about and relaxed credit and income requirements, you’ll have more freedom to shop around than if you were financing your home purchase with a conventional loan. Once you’ve settled on a home within your budget, sign the purchase agreement to move on to the next step.
- Get a VA appraisal. Once you’ve signed a purchase agreement, your lender will order a professional VA appraisal of the home. The purpose of this inspection is to make sure the home meets the VA’s minimum property requirements (MPRs). Some of these requirements include functioning heating and cooling systems, clean water, and an infrastructure that’s in good condition. The appraisal process can take up to 10 days, so use this time to submit whatever remaining documents your lender needs to approve you for the loan.
- Close on the house! Once the home is appraised and your loan is approved, you’re ready to close. You will need to provide proof of homeowners insurance and,in some cases, pay closing costs. But once everything is signed and squared away, you’ll have the keys to your brand new home!
How Much House Can You Afford with a VA Loan?
The government backs 25% of your VA loan. But what’s the limit on the loan amount? How much house can you afford?
To put things in perspective, a total of 610,512 loans were guaranteed by the Department of Veterans Affairs in 2018. The average loan amount was $264,197. The loan you qualify for may be higher or lower depending on your location, income, and debt-to-income (DTI) ratio.
To calculate the loan amount, your lender will look at your monthly income and monthly debts to come up with a DTI. For example, say you make $5,000 per month. The total monthly cost of your mortgage, car payments, and other debts comes to a total of $2,000 per month. Because 40% of your monthly income goes toward paying debts, your DTI is 40.
For VA loans, your DTI cannot exceed 41. But even if you have a very low DTI, remember that it will be considered along with your credit score.
Of course, real finances aren’t so simple, but don’t worry – during the pre-approval process, your lender will work with you to come up with the amount you’re able to borrow. And just because you can borrow a certain amount doesn’t mean you should. Borrow only what you are comfortable paying back every month.
Should You Get a Co-Signer?
Done correctly, having a co-signer on a VA loan can increase your income and get you more money for a home. But if you go about it the wrong way, it can actually hurt your chances of being approved.
The Department of Veterans Affairs allows other veterans and eligible spouses to co-sign on a VA loan. This keeps the down payment at 0% and lets each borrower use a portion of their entitlement. Or, if you prefer, the primary borrower can use only their entitlement – it’s up to you.
The rules are different for non-VA-eligible co-signers. If someone other than your spouse or a veteran is your co-signer, you will have to pay a down payment of at least 12.5%. This is because the VA does not guarantee non-veteran co-signers, cutting the usual 25% maximum guarantee in half.
One last thing to keep in mind when deciding if you should get someone to co-sign your mortgage loan is that lenders will look at their credit and income history as thoroughly as they look at yours. If they have a history of debt or foreclosure, having them on the application will do more harm than good.
How Many Times Can You Use a VA Loan?
You can use your VA loan benefit multiple times. You can even have several loans at one time if you have remaining entitlement and a second lender approves the loan based on your income and credit.
You can also have your entitlement restored. Let’s say you sell your home and use that money to pay off your existing mortgage. You want to use a VA loan to purchase a new home listed at $300,000. If your remaining entitlement is $50,000, that is less than 25% of the home’s cost, and you would be eligible for entitlement restoration, which you would obtain by applying for a new Certificate of Eligibility.
What is the Interest Rate on a VA Loan?
Compared with other loan types, VA home loan interest rates are relatively low – in January, the average was 4.83%. That’s considerably lower than both conventional and FHA loans, which both had average interest rates over 5%.
Are There Any Closing Costs?
Yes – in most cases, you will have to pay a funding fee of 2.15%. This fee is waived for certain disabled veterans, and goes up to 2.4% for National Guard and reserve-duty borrowers. You can lower the fee to 1.5% by paying a 10% down payment.
The second time you purchase a home using a VA loan with 0% down payment, that fee will jump up to around 3.3%.
Apply for a VA Loan with a Qualified Lender
VA home loans are one of the best home financing options available, and for good reason. But while they make the process of qualifying for a loan much easier, finding a reputable VA-approved lender is still just as difficult as finding a good conventional lender. Instead of wasting time searching for a needle in a haystack, let the professionals at Associates Home Loan of Florida, Inc., connect you with knowledgeable VA-approved lenders near you.
To learn how we can help you get approved for a VA home loan, get in touch with us by calling (813) 316-2006 or filling out our quick online contact form – we look forward to hearing from you!