The VA home loan is arguably the best mortgage product on the market today. This type of home loan is only available to eligible veterans and active duty service members of the U.S. military.
Considering there are over 23 million veterans, according to a 2009 VA study, this program is available to a considerable portion of the U.S. population.
What is a VA home loan?
The Veteran’s Administration does not make the loans, but rather backs these loans so that lenders can offer more lenient guidelines to veterans. Because of this backing, private lenders can make loans per VA guidelines, without some of the requirements of other loan programs.
Here are a few things that set VA home loans apart:
- No down payment required
- No monthly mortgage insurance
- Lower closing costs
- The seller can pay for all closing costs in most cases
- Lenient credit guidelines
So how does someone go about getting a VA home loan? First you have to prove you are eligible.
VA home loan eligibility
Eligible veterans need to have served:
- 90 days or more in wartime
- 181 days or more in peacetime
- 24 months or the full period for which you were ordered, if now separated from service.
- 6 years, if in the National Guard or Reserves
In addition to these service time requirements, you must have been discharged under conditions other than dishonorable.
Unremarried spouses of veterans killed or missing in action may also be eligible. Veterans who were discharged due to a service-connected disability may also be eligible.
There are many other details having to do with VA home loan eligibility and a VA approved lender can request your COE and tell you if you are eligible.
Applying for a VA home loan & necessary documents
The VA home loan is much like any other mortgage, in that you must supply income, asset, credit, and property information to the lender. There are a few extra items that VA loans require however:
DD-214: This is the report of separation from military service. It details the veteran’s military service. This form is often needed to obtain the Certificate of Eligibility. If you don’t have your DD-214, it’s a good idea to request one from the National Personnel Records Center (NPRC).
Certificate of Eligibility (COE): The lender can often pull the COE directly from VA within minutes. Contacting a va-approved lender is the best way to obtain a COE. If the COE is not available right away, the lender will send your DD-214 and any other requested documentation to VA to obtain it.
Form 26-1880: This is the request for your COE. You will most likely complete this form as part of the loan application. It details you military service as well as VA home loan history. Get a sample of this form here.
Commanding Officer Statement of Service: If you are on active duty, you will not yet have a DD-214. In lieu of this document, you will need a statement detailing your service and expected remaining time on active duty from your commanding officer.
Verification of Child Care Expenses: Unlike any other home loan program, VA home loans require proof of monthly expenditure for child care, if you declare that you have dependents on the loan application. You will need to get a statement signed by your child care provider, or signed statement that your child care of free due to a stay-at-home spouse or family member.
VA home loan qualifying debt ratio
Typically the VA loan requires a debt-to-income ratio of 41% or less. This means that your proposed housing expense plus all monthly debt payments (credit cards, auto loans, student loans) equal 41% of your gross income.
So if your income were $5000 per month before taxes etc. are deducted, your debt payments plus mortgage payment, hoa dues if any, property taxes, and homeowners insurance should be less than $2050 per month.
That being said, applicants who make a down payment, have cash reserves, or have good credit may qualify with a higher debt ratio.
VA funding fee & loan limits
The current VA funding fee is typically 2.3% of the loan amount. It is added to the loan principal, reducing the amount of cash needed. For example, a veteran who buys a $250,000 home with 0% down will have a final loan amount of $255,750.
The funding fee goes directly to the VA to support the costs of the program.
The current VA loan limit is set at $647,200 but can be higher in VA-designated high-cost areas.
For instance, a veteran buying a home in Los Angeles can get a zero-down loan up to $970,800.
Keep in mind that you can open a loan for more than the VA loan limit. However, you would have to pay a 25% down payment on the portion of the loan that’s over the limit.
For example, if a veteran opened a loan in an area with a $647,200 limit that was worth $100,000 more than the limit, he or she would make a $25,000 down payment ($100,000 x 25%).
Choosing a property
Once you know you are eligible and are approved for a VA loan, it’s time to choose the property. VA loans have slightly more strict guidelines when it comes to properties, so it’s good to educate yourself on VA’s minimum property requirements, or MPRs.
MPRs are simply VA’s way of protecting you, the veteran, from buying a real lemon, or a home that won’t suit your needs. Here are the basics of MPRs:
- The home must have adequate living, sleeping, cooking, dining areas, as well as sanitary facilities.
- The heating, water, and electricity systems must be in working order with good life expectancy left on them.
- The roof and crawl space must be in good condition
- The home must be free of lead-based paint
- The home must not be too close to gas pipelines or high-voltage electric lines.
There are other property requirements in addition to these, and often the VA lender needs to make the final call on an issue with the home. Speak to a licensed VA loan officer if you have a concern on a property you are considering.
VA home loan property types
You can buy several types of homes with a VA loan. These are:
- Single family (1 unit) homes
- 2-4 unit homes, as long as you live in one of the units
- Manufactured homes
- Condominiums and townhomes (must be VA approved. Contact a VA lender to see if a condo building is approved.)
Keep in mind that not all lenders will offer loans on all properties. For instance, fewer lenders will approve a manufactured home loan than a single family home. Check around at other lenders if you are told “no” to the property you are interested in.
If I’m eligible, should I choose a VA loan?
VA home loans offer veterans and current service members advantages over other homebuyers.
For instance, on a $250,000 purchase, the homebuyer would pay these down payments at a minimum*:
- VA: $0
- Conventional: $12,500
- FHA: $8,750
In addition, here’s what a home buyer would pay in monthly mortgage insurance*:
- VA: $0
- Conventional: $209**
- FHA: $125
A VA loan can save eligible home buyers hundreds per month.
I’m ready to apply for a VA home loan
If you are eligible for a VA loan, consider yourself a fortunate home buyer. You have access to better terms and rates than other buyers.
And you’ve earned it. You’ve sacrificed to serve your country and this is a small way your country says “thanks.” Take advantage of your VA home loan benefit.
*Assumes property in WA, 700 credit score
**Per MGIC Ratefinder, 6/11/13