Veterans that served our country deserve many things, including the ability to obtain easy financing for their home. VA loans provide that easy financing with lucrative terms, easy-to-qualify-for guidelines, and low costs. The VA guarantees these loans, but does not fund them; the lender that writes your loan provides the funds. Only certain lenders have the qualification to provide VA loans, so make sure to inquire whether or not a lender provides them before getting started. In general, veterans can obtain VA financing strictly on owner-occupied properties and they can only use their entitlement benefits once at a time. This is to keep the funding affordable and to decrease the risk of default, which would put the VA in a difficult position to guarantee every loan they approve.
There are many reasons veterans, their surviving spouses, certain members of the reserves, and those in active duty should consider VA financing. It is one of the very few programs, aside from USDA loans, that allow no down payment on the purchase of a home. They are also very flexible in terms of credit scores and provide low-interest rates. The VA, however, is very particular on the amount of disposable income a family has after they take on a new loan. If you will not have enough disposable income after the new VA loan, the VA will not approve you for a loan because they want to make sure every family can care for themselves without the struggle in order to not only protect families but to protect the reserves the VA has as well.
Maximum Loan Size
Just like FHA loans, every area of the country has differing maximum loan amounts. In general, just like conforming loans, $417,000 is the maximum loan amount, but this can differ in certain areas, such as high and low-cost areas. Areas in California, Alaska, and Maryland have higher limits because of the high cost of living. Every county in each state will have a different limit, which you can find directly on the VA website. If a lender decides to allow you to obtain a loan amount over the maximum VA limit for your area, you will need to a down payment on the home that is equal to the amount above the county limit for your area. For example, if your debt ratio, credit score, and income qualify you for a home that costs $425,000, you will need to put $8,000 down on the home in order to keep your loan size at $417,000.
Keep in mind, however, that the lender that provides your loan has the final say in the loan amount you qualify to receive. Your individual qualification factors play a role in what you qualify for in terms of a loan size. Your credit score, debt ratio, and the amount of your disposable income after you pay your bills will determine your loan amount. Before you shop for a loan, you should get pre-qualified with a VA approved lender to determine the home prices you need to stay within in order to get the loan you need.
The national average for minimum credit scores for VA loans is 620. This is not a number set in stone, however. Every lender creates their own minimums. In fact, many lenders don’t have a minimum; they base their decision on the overall factors of each loan file. Generally, the more compensating factors you provide, the less your credit score matters. Overall, most lenders will not allow a credit score lower than 580 no matter how many compensating factors are in place. Compensating factors can include:
- Several months of reserves on hand
- Money for a down payment
- Low debt ratio
- Solid credit history despite your low score
When VA lenders look at your credit report, they look for at least 2 active trade lines and a solid 12-month history with no more than one late payment on any trade lines excluding housing payments. The VA does not allow for even one late housing payment in the last 12 months. If you do not have any trade lines reporting because you were on active duty or you rented a home and do not have any credit cards or student loans, you can use alternative credit to qualify for a VA loan. In order to use alternative credit, which could be a utility payment or insurance payment, you need to provide evidence of 12 months of timely payments in addition to 2 years’ worth of rent payments to show a housing history.
As with FHA, VA, and USDA loans, special circumstances can alter your ability to get a VA loan. For example, if you have collections reporting on your credit report, you must pay them in full and provide proof of the payment. If you have any federal debt liens or judgments, you must pay them in full as well; there are no exceptions available for liens or judgments no matter how many compensating factors you have. Last, but not least, if you pay child support, your payments must be current. If you fell behind in the past, yet have a payment arrangement that you can prove on-time payments, you should still be eligible for a VA loan. If you filed for bankruptcy or had a foreclosure prior to applying for a VA loan, you will have to wait a specified period of time:
- Chapter 7 Bankruptcy – You must wait two years after the court discharges your bankruptcy. This is the date you start with a clean slate and no debts on your record.
- Chapter 13 Bankruptcy – You must wait 12 months from the date the payments started on your Chapter 13 BK. You must also provide proof of timely payments over that 12 month period and receive approval from the trustee overseeing your case.
- Foreclosure – You must wait 3 years from the date you lost your home to apply for a VA loan. If you did not lose your home, yet gave it up in a short sale instead, you may be eligible for an exception and have a 12-month waiting period.
Debt Ratio Requirements
VA loans do not have a set-in-stone debt ratio maximum, but lenders tend to use the standard 29/41 ratios for qualification purposes. Just like most other requirements, however, there are exceptions to the rule. For example, if your principal, interest, taxes, and insurance payment totaled more than 29 percent of your monthly income, but you meet the residual income requirements for your area, an exception may be granted, especially if you have a high credit score.
Most lenders will not allow a new mortgage with higher than a 41 percent back-end ratio. This means that your total monthly debts in addition to your mortgage payment take up more than 41 percent of your monthly gross income. Any debts taking up more than 41 percent of your monthly income make it very difficult to meet the discretionary income guidelines for your area. Of course, there are exceptions to the rule, which is why every file gets its own ruling. If there are enough compensating factors in place, some loan applications get through automated underwriting without a second glance, even with a higher than usual debt ratio.
Because the VA places such importance on discretionary or residual income, it is important to know the amount required for each area. For example, a family of four living in the Northeast needs to have $1,025 in extra money every month, while the same family living in the Midwest or Southern areas only need $1,003, and if they lived in the Western states, they would need $1,017. The amount of residual income required changes with the number of dependents along with the area you live.
Income is a crucial component of any loan application as it determines your debt ratio and the amount of the loan you can qualify to receive. Unlike FHA and conventional loans, VA loans enable you to use the income of just your spouse if he/she is on the loan. This enables you to use your credit score and entitlement benefits, yet not have an income. In order to prove your income, the same standards that apply to any other loan preside. If you have a salaried or hourly position as an employee, you need to provide your last 2 years’ W-2s and last 2 pay stubs covering the last month of income. If you own your own business; work on commission or bonuses; or have a part-time income you will need to provide your last two years’ worth of tax returns to show consistent receipt of the income.
Every veteran must have a Certificate of Eligibility in order to qualify for VA financing. Most veterans have eligibility unless they did not have an honorable discharge or have not served enough time; however, the time constraints are rather low in order to receive a Certificate of Entitlement. Veterans that served in WWII, the Korean War, or the Vietnam War, need 90 days of non-stop service; and any veterans serving post-WWII, Korean War, or Vietnam War require 181 days of non-stop service to qualify. Veterans serving time after Vietnam simply need 2 years of service or less if their designated period was less than that amount of time. The exception to this rule is anyone serving in the Reserves – you then need 6 years of service. If a veteran loses his life during active duty or becomes disabled as a result of serving his country, his spouse may receive the Certificate of Entitlement.
VA loans do not require you to have reserves on hand; as stated above, they simply want discretionary income available. The exception to this rule, however, is if your VA loan is for a multiple unit property. Any property with 3 or more units requires 6 months of reserves. This means you must have 6 months of principal, interest, taxes, and insurance on hand in order to qualify.
Mortgage Insurance Requirements
Most government-backed loans have mortgage insurance the homeowner pays on a monthly basis in order to fund the agency’s reserve funds. These reserve funds are what helps the agency pay for loans homeowners default on down the road. VA loans are a bit different, however. Because the VA strives to provide affordable financing for veterans, they do not charge annual mortgage insurance. They do charge a funding fee, which you pay at the closing, though. This fee is 2.15 percent of the original loan amount for military personnel and 2.4 percent for those in the Reserves. The only way this amount changes is if you put money down on the home – any down payment between 5 and 10 percent decreases the funding fee to 1.5 percent because your loan becomes less risky because you have “skin in the game” and will do whatever is necessary to keep your home.
Help with Closing Costs
VA loans have similar closing costs to FHA and USDA loans. The lender must provide reasonable costs, but the VA understands that the lender needs to cover their own costs as well. As an added benefit, however, the seller can help VA borrowers with their closing costs by as much as 4 percent of the loan amount. The money the seller contributes can go towards the funding fee, discount points, and any pre-paid closing costs.