As Veterans, one great benefit that we have is the ability to qualify for a VA Home Loan. However, VA loans are not for everyone, so you must do your research and make sure that it is the right choice. Today, not only will I be discussing How to apply for a VA Home Loan, but I will also be covering the following:
- How to determine if you are eligible.
- How to apply for a certificate of eligibility.
- Credit and income requirements.
- VA Funding fees, Loan Limits, and types of property eligible.
- Veteran mortgage relief.
- Assuming a VA loan.
- Top ten VA Home Loan benefits.
- When NOT to use a VA Home Loan.
Am I eligible for a VA Home Loan?
VA Home Loans are available to Veterans and military members alike, and once you are eligible for the VA Home Loan program, your eligibility never expires. To be eligible, you must fall into at least one of these categories:
1. Active-Duty, Reserve, or National Guard member (unless you were dishonorably discharged)
3. Surviving spouses of Veterans (with exceptions)
4. Cadets and Midshipmen at a military academy.
5. Officers at the National Oceanic and Atmospheric Administration.
6. Public Health Service Officer.
7. Merchant seaman during World War II
Along with falling into one or more of those categories, you must also meet at least one of these service requirements:
1. At least 181 days of active duty service during peacetime or at least 90 days of active-duty service during wartime.
2. At least six years in the National Guard or Reserves.
3. Your spouse was killed in the line of duty, AND you have NOT remarried.
How to Apply for your Certificate of Eligibility
So, your eligible for a Certificate of Eligibility (COE), excellent! Let’s talk about that. Right now, you probably have a ton of questions like what is a COE? Why do I need a COE? Does this mean I am guaranteed a loan? How do I apply for it? Well, here are the answers you’ve been seeking!
A COE is simply a form that serves as proof to lenders that you are eligible for a VA home loan. Your lender can typically get one for you online in a matter of seconds through the VA’s automated system. If you want to order your own, you can do so through your eBenefits portal.
A COE does NOT guarantee your VA loan approval. You must still qualify for the desired loan through their VA mortgage guidelines. The “Guarantee” means the VA will repay the lender the specified amount if you default on your loan.
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What are the Income and Credit Requirements for a VA Home Loan?
Even though you are eligible for a VA loan, that does not mean that you qualify for one. The VA has some qualification requirements, specifically based on your credit, debt, and income.
The VA has not established a minimum credit score requirement, but many VA mortgage lenders want you to have a 620 or higher FICO score. The VA’s underwriting guidelines require that the applicant has remained current and paid their obligations on time for the most recent 12 months preceding the loan. You will also have to wait two years after filing Chapter seven bankruptcy and, for Chapter 13 bankruptcy, you must make at least 12 on-time payments and get approval from your bankruptcy court.
Determine your debt-to-income (DTI) ratio by taking all of your monthly debt (including the new mortgage) and dividing that amount by your monthly gross income (before taxes). For example, if you pay $2,000 per month in bills and make $4,000 per month in pay before taxes, your DTI would be 50% (2,000/4,000). If your DTI is above 41%, you may need to use additional income sources to qualify.
VA Funding fees, Loan Limits, and types of property eligible
To help defray the costs of this program, the VA charges an up-front fee. This fee varies based on the loan’s purpose and down payment. The fee is paid as a lump sum and is typically wrapped into the loan. Note that you will not have to pay a funding fee if you:
- Have a service-connected disability for which you are receiving VA compensation, or you are eligible for VA compensation because of a service-connected disability but are getting active-duty or retirement pay instead.
- Are receiving Dependency and Indemnity Compensation as the surviving spouse of a Veteran who was totally disabled or died in service or from a service-connected disability.
- Receive a proposed or memorandum rating before the loan closing date, verifying that you are eligible for VA compensation because of a pre-discharge claim.
- Are a recipient of the Purple Heart.
VA loan limits in 2020
The Blue Water Navy Vietnam Veterans Act of 2019 has virtually eliminated loan limits as far as the VA is concerned. However, each lender may have limitations. You should check with your lender if your loan amount is above local conforming limits.
Eligible property types
You can utilize a VA loan to purchase a detached house, a condo, a manufactured home, a multi-unit property, or a newly built home. You can also use a VA mortgage to refinance any of those property types.
Federal regulations limit VA loans to purchase or refinance a “Primary Residences” only. However, the home in which you spend “most of the year” is considered your “primary residence.” So, if you own a home and want to purchase a second home somewhere else, you can do so. As long as you intend to live in the second home for at least six months of the year, it would be considered your “primary residence” and thereby be eligible for VA loan financing options. Also, you cannot buy a rental property with a VA loan. However, you can use a VA loan to refinance a home you once lived in and now rent out as an income property.
Similarly, you can buy a duplex, triplex, or quad-plex with a VA loan, but you must live in one of the units. There are some additional underwriting requirements for buying a multi-unit home with a VA loan. If you want to know more about this, you can check the VA’s website. The VA also keeps a schedule of thousands of condo units across the U.S. approved for you to buy with a VA loan. If you are looking for a condo and want to use a VA loan to finance it, make sure it is approved. If it isn’t, you will have to forego VA financing.
Veteran mortgage relief with the VA loan
The VA can assist you with retaining your home in some instances. If you are struggling to make your mortgage payments, the VA will work with loan providers to develop mutually agreeable repayment options and prevent foreclosure. This program has saved American taxpayers an estimated $2.6 Billion and, more importantly, helped over 100,000 Veterans retain their homes!
Assuming a VA Home Loan
Another option that is sometimes appealing is to assume an existing VA loan. There are a couple of ways you can do this. One way is that a qualified buyer can “exchange” their VA eligibility for the seller’s eligibility. The other way, to qualify through VA standards for the mortgage payment. The lender and or the VA must approve the VA loan assumption. This process could be quick if the lender has automatic authority but could take several weeks to send it to the VA for processing.
If you assume a VA loan, your loan servicer’s responsibility is to ensure that you meet all requirements for the assumption. Those requirements include:
- There must not be any past due amount on the existing loan at closing.
- The purchaser must meet VA credit and income qualification standards and assume all mortgage obligations.
- The new owner or the original owner must pay 0.5% of the existing principal loan balance as a VA funding fee.
- Advanced payment of fees for processing and the credit report is required.
Top Ten Benefits of a VA Home Loan
- No down payment is required. Typically, you are required to make a down payment to purchase a home. With a VA loan, you need no down payment. You can finance 100% of the purchase price and funding fee.
- There is no private mortgage insurance (PMI) requirement. With a standard mortgage, lenders require you to pay mortgage insurance if you do not have at least 20% equity in the home. This PMI is not needed when the VA backs your loan.
- VA loans are guaranteed by the federal government, which means a percentage of the loan will be repaid by the government if you default. This guarantee allows lenders to offer more favorable rates and terms.
- You can still shop around for the best rates and terms based on your budget because VA loans are not funded or originated by the VA.
- There cannot be a prepayment penalty on a VA-backed loan, no matter how quickly you refinance or sell your home.
- There are no restrictions on refinancing your VA loan. You can refinance via the VA’s Interest Rate Reduction Refinance Loan program or a conventional loan at any time. There are a variety of VA mortgages available. Whether it is an adjustable-rate or a fixed rate, used to buy a home or refinance one, the choice is yours!
- VA loans are easier to qualify for due to their flexibility and the VA loan guarantee.
- Closing costs are lower with VA loans. The VA sets limits on how much lenders can charge VA applicants.
- Although there may be a funding fee, there is flexibility, and it can be financed into the loan.
- VA loans are assumable. That means that if a future buyer is eligible for a VA home loan, you can transfer your loan to them! Assumable loans are a fantastic benefit for both sides. Especially if you got a great rate and interest rates are rising year after year.
When NOT to use a VA Home Loan
If you can afford to pay a 20% down payment and have good credit, then a VA home loan may not be the right option for you. One of the main advantages of a VA loan is that you do not have to have PMI. If you have a 20% down payment, you do not have to have PMI, and you can avoid the VA funding fee.
Also, consumers on the Credit Alert Verification Reporting System, a database of consumers who have defaulted on government obligations, will not be eligible for the VA loan program.
If you have a non-veteran co-borrower that is not your spouse, you may want to consider other options as well. The VA home loan only covers the Veteran’s half of the loan, and the lender may require additional down payments for the portion not guaranteed.
If your spouse has a low credit rating, and you live in a state with community property laws, the VA must consider their credit and financial obligations with yours. Regardless if you list your spouse on the mortgage or not, this law still applies. The following states have community property laws:
- New Mexico
If your spouse does not have good credit or owes child support, alimony, or other maintenance, your VA approval will be more challenging. However, your spouse’s financial history and status are not considered unless they are on the loan application with a conventional loan.
The VA home loan program aims to help Veterans and active-duty service members buy and live in their own homes, not build a real estate portfolio. If you want to purchase multiple properties, you will need to use conventional loans to do so.
Now that you know how to apply for a VA home loan, it’s time to prepare yourself. As you can see, there is a lot of information to learn before you apply for any new home loan. Ensure you do your research and are ready to commit to a pretty large financial obligation. Compare offers from multiple lenders and understand how a VA loan will affect your finances.
It is easy to get your COE if you are eligible, but that doesn’t mean you are guaranteed to get the loan. A VA loan is a fantastic benefit and can help you accomplish your dream of homeownership. Good luck! As always, thank you for reading. Please feel free to leave any questions or comments you have below! To see how this and other VA Benefits are changing in 2021 and beyond, check out this article!
This is a great resource too!