VA loans are those that are offered to veterans that have served a certain amount of time in the military. The loan is funded by a bank but is backed by the U.S Department of Veteran’s Affairs. Only qualified lenders may provide these loans that are meant to help veterans and their spouses secure suitable housing for themselves and their families. The VA loan requirements are flexible, enabling many veterans to get the financing necessary to purchase a home. The largest requirement is that the home is owner-occupied – VA financing is not available for anyone purchasing a 2nd home or an investment home. There is a large group of people that are eligible for a VA loan aside from those in active duty; they are also available to some surviving spouses, those that have already served in the military, and those in the reserves.
There are many benefits that are offered with the VA loan that are not available with any other type of loan. Borrowers do not have to put any money down on the home; the credit guidelines are flexible; the loans are assumable (they can be passed on); and the interest rates are typically lower than any other rates available. There are certain VA loan requirements that you must abide by in order to show that you can afford the loan, however. As of right now, the VA has the lowest rate of default on their loans simply because they offer loans that the veterans can afford, rather than those that might put them into financial distress.
The maximum loans size available for a VA loan depends on the state and county that the home resides. Each county has its own limits that the VA will maximize their guarantee amount at, which makes it the highest loan amount you can get. In most counties, the maximum is $417,000 for a single unit property, but there are differing amounts in lower and higher cost areas. For example, certain counties in California have a single unit property maximum of $625,500 while other areas are $502,550. The VA uses these limits to maximize what they will guarantee, which maximizes the amount of the loan that lenders can provide.
As with any loan, however, the maximum amount for a loan in your area does not mean you will get that loan size. It will depend on your individual financial circumstances including your credit, income, debt-to-income ratio, and reserves on hand. The VA is very particular about discretionary income, which will be discussed below, which plays a large roll in your loan size. Overall, you are able to obtain 100% off the purchase price of the home as a loan, which means you will not have to put any money down, but you will be restricted to the amount that your individual circumstances allow you to qualify for.
In general, VA loan requirements do not state a specific minimum credit score. But that will vary by lender, as each lender puts their own restrictions on each loan. The lender is the one ultimately responsible for the funding of you loan so they tend to be stricter about the minimum credit score allowed. Overall, the average minimum credit score allowed by lenders is 620 for a VA loan. There are a few lenders that will allow a slightly lower credit score, sometimes down to 580, but you must show other compensating factors that make up for the risky credit score. These factors can include things like a higher down payment; adequate reserves; or a low debt ratio. These items make a lender realize that you are responsible and maybe hit a bad spot at one point that brought your credit down. As long as your most recent credit history is fairly clean, they may grant the exception.
In general, you must have at least 2 credit lines reporting on your credit report in order to be eligible, although some lenders do allow for alternative credit reporting, such as rent history or utility payment history if no credit is present. If alternative credit sources are used, they must have a 12-month on-time payment history. If you do not have a credit history or it is shorter than a 2-year period, you will be required to show a 2-year history of housing payments (rent), receipt of income and proof of assets.
There are unique situations that can occur on a credit report that the VA has certain ways to handle including:
- Late Payments – The last 12 months of your credit reporting needs to show no more than 1 30-day late payment. This excludes any mortgage payment history; no late payments in the last 12 months are allowed. The only exception to the rule is if you are doing a VA Streamline Refinance, in which case 1 30-day late is acceptable in the last 12 months.
- Collections – All collections must be paid in order to obtain VA financing. VA loan requirements make it necessary to take care of all collections despite their age; if they report delinquent, they must be paid.
- Bankruptcies – There must be a 2-year waiting period from the date of a Chapter 7 discharge to the date of application for the VA loan. If you filed a Chapter 13 bankruptcy, you must have made at least 12 months of timely payments to be considered. If you are still making payments, approval from the trustee of your bankruptcy must be obtained. If your payments are completed; you are considered a satisfactory credit risk.
- Federal Debt Liens – There is no exception for any federal debt liens or collections that report on your credit report.
- Judgement s- There is also no exception for judgements reporting on your credit report as long as they occurred within the last 12 months and are due and payable.
- Foreclosure –A foreclosure does not exclude you from a VA loan, but it does require a waiting period. If a loss of security occurred, you must wait 3 years to apply for a new VA loan. If security was not lost and the judgement is satisfied at least 12 months ago, you may be eligible again.
- Child Support – Any child support that is unpaid must be brought current according to the VA loan requirements. If there is a payment arrangement and it is being adhered to, the child support will be considered in good standing.
Your debt-to-income ratios or the amount of money you make compared to your monthly expenses plays an important role in the VA loan process. Generally, there is not a steadfast maximum for either the front or back-end ratio for a VA loan, but most lenders stick to the 29/41 ratios. This means that your monthly mortgage payment cannot exceed 29% of your income and the mortgage payment combined with your monthly obligations (credit card debt, car payments) cannot exceed 41 percent of your income. In certain cases, such as the use of automated underwriting or when compensating factors are in place, a higher debt ratio can be accepted.
The highest value is placed on the back-end ratio maximum of 41 percent. If your debt ratio is higher than 41% on the back-end, it will be necessary for you to have excessive residual income. This income is the money that is left over after you pay your mortgage debt as well as your other monthly obligations. Some people also know this amount of money as their discretionary income. In fact, the VA holds the discretionary income at a much higher level than the debt-to-income ratio and is why they have been able to maintain a low level of default on their loans.
The amount of residual or discretionary income that is required in order to obtain a VA loan depends on the area that you live. If you do not meet the residual income requirements, you will not be eligible for a VA loan. The amount of discretionary income required depends not only on the area that you live, but also the number of dependents that you have. For example, a family of 4 in different parts of the country will have different maximums:
- Northeast – $1,025
- Midwest – $1,003
- South – $1,003
- West – $1,117
Documenting your income will differ slightly for VA loan requirements. If you are eligible for a VA loan, you can use your own income or strictly that of your applying spouse if it is sufficient to meet the requirements of the loan. The requirements to prove the income is fairly standard, as it is for any other type of loan:
- 2 years W-2s for employed applicants
- 2 years complete tax returns for self-employed applicants
- Proof of 2 years of part-time income if being used for qualifying purposes
- Proof of military income and its continuance if being used for qualifying purposes
- Other income may be eligible, but will be up to each lender’s discretion
Certificate of Eligibility
In order to be eligible for VA financing, you must have a Certificate of Eligibility (COE). This certificate is provided to most veterans, unless there was a dishonorable discharge. The amount of service that must be met will differ based on the time period that you served:
If you served in:
- WWII – 90 days are required
- Post WWII – 181 consecutive days are required
- Korean War – 90 days are required
- Post Korean War – 181 consecutive days are required
- Vietnam War – 90 days are required
- Post-Vietnam – 181 consecutive days are required
Any time period after Vietnam requires 24 months of active duty or the fulfillment of the full period for which you were called (some will be 90 days and others 181 days). If you are a member of the National Reserves, 6 years of service is required to receive your COE.
In some cases, spouses can be eligible for the COE. If the veteran died in the line of duty or while in service or he went missing in action, the spouse may be eligible for benefits. Some surviving spouses of veterans that were completely disabled are also eligible even if their spouse did not die as a result of the military.
Unlike other government backed loans, VA loans do not have monthly mortgage insurance. They do, however, have a funding fee. This fee is a percentage of the loan amount and can either be paid upfront or rolled into the loan, financing it over the term of the loan. The amount of the down payment and whether or not you used the benefit before will determine your upfront funding fee. For example, if you do not put any money down and have never used the veteran’s benefit, you will pay 2.15% of the loan amount in a funding fee, if you served in the regular military. If you served in the reserves, and had the same situation as above, you would pay 2.4% of the loan amount. The more money you put down on the loan, the more your fee goes down. For example, if you put down between 5-10%, your funding fee would go down to 1.5%.
VA loan requirements allow the seller to contribute to the closing costs to make it more affordable for the veteran. As of right now, sellers can contribute up to 4% of the sales price of the home. The concessions can be applied to the following costs:
- The VA funding fee
- Discount points
- Help to pay down or pay off judgments to allow for VA funding
- Pre-paid closing costs
The actual closing costs that you must pay depend on the lender used. Every lender has their own costs when it comes to underwriting, credit reporting, origination fees, processing fees, title, termite, inspection, and appraisal fees. It pays to shop around to ensure you are getting the lowest costs for the VA loan you are taking out.
Reserves are not a requirement for VA loans, but they do become a necessity when you are trying to finance a 3 or 4 unit property. In this case, you must have 6 months of your entire mortgage payment on hand, which means your principal, interest, taxes, and insurance. This situation can change depending on the lender’s requirements, as this is privy to the lender overlay.