For the men and women that have volunteered to serve our country in one of the armed forces, a VA mortgage is a great benefit. There are many rules to the loan but having a good understanding of them will make the purchase process easier for qualified applicants.
Listed below are the most important VA guidelines that every veteran should know.
VA Loans are Backed by the Federal Government
A certain portion of every approved VA mortgage is guaranteed by the Federal Government.
This means that even if the veteran finds themselves unable to make all the payments and the home is foreclosed, the government will repay the designated portion.
This single feature makes the loan more attractive for a wide range of lenders to offer to their customers.
VA Loans Have No Down Payment Option
This single feature is likely one of the biggest reasons that qualified veterans use the VA loan to buy a house.
Compared to other types of loans that may require as little as 3% and as much as 20% of the purchase price for a down payment, the no money down option can save homebuyers thousands of dollars in out of pocket costs.
The VA loan is one of the few true no down payment requirement home loans.
VA Loans Have Relaxed Rules for Approving Applicants
Conventional loans are typically designed for people with the absolute best credit scores.
The VA loan will approve top credit scores and less than perfect scores.
The department of Veterans Affairs wishes to make it easier for veterans to get a loan, so their VA guidelines are a bit more relaxed.
No Private Mortgage Insurance Requirement
With the majority of mortgage loans, the lender will place private mortgage insurance fees on the loan if the borrower pays less than 20% of the purchase price as the upfront payment.
So, considering the previous point of a no down payment option with VA home loans, it would seem that the VA charges more for private mortgage insurance.
However, the opposite is true.
The VA does not add a private mortgage insurance fee to any loan, making the overall cost of the loan lower than similar loans.
Limit on Closing Costs
The VA also institutes certain limits on particular fees that are charged by mortgage lenders for closing the loan.
Any approved VA mortgage lender can provide you with a closing cost estimate for a conventional mortgage and the VA mortgage and you can see the differences in the costs associated with the two mortgages.
VA Loans Offer Competitive Interest Rates
Since the VA authorizes banks, mortgage lenders, and other financial institutions to provide the VA home loan, this makes the loan very competitive with conventional and FHA loans.
For this reason, the mortgage rates are very comparable to those loans. In certain areas rates for VA home loans may even be lower than some conventional loans.
Multiple Ways to Use a VA Mortgage
Veterans may buy a home with a fixed rate over a fixed term, such as a 30-year fixed loan.
Or, it can be offered with an adjustable-rate to offer a bit of saving in the first few years of the mortgage.
The loan can also be used to refinance an existing mortgage.
Even better, the VA loan can be used to make minor repairs and modest improvements to an existing home.
VA Loans Do Not Charge a Penalty for Early Payoff
Some loans charge a penalty if the loan is paid off within a certain period, usually within the first 5 years of the loan.
VA guidelines prohibit such a penalty. If you decide to sell the home just a couple of years after buying, you will simply owe the outstanding balance on the home. Similarly, if you should come into a large sum of money like an inheritance or lottery winnings, you could also pay off the balance with no penalty.
An Existing VA Mortgage Can Be Assumed by Another Qualified Buyer
If you find that you would like to sell your home, another qualified veteran can assume your existing loan.
This can be a great selling point if the rates have risen and the buyer would like to keep the low rate that you currently have on your mortgage.
VA Loans have Rules About Eligibility
The Department of Veterans Affairs has a list of people that may be allowed to apply for a VA mortgage based on service. In summary, the following people can apply for the loan:
- Individuals that served in either the National Guard or Army Reserve
- Enrolled cadets of the Air Force Academy, Coast Guard Academy, or U.S. Military Academy
- Students of the U.S. Naval Academy also referred to as Midshipmen
- The surviving wife or husband of a veteran that has passed away
- Any person that is currently serving full time in the Army, Marines, Navy, Air Force, or Coast Guard
- A person that was honorably discharged from the Army or Marines or Navy or Air Force or Coast Guard
There is length of service restrictions for each category of people. Active duty people usually have the shortest service time restrictions while members of the National Guard or Army Reserve typically have the longest service time requirements.
The VA Certificate of Eligibility
VA guidelines dictate that Before applying for a VA mortgage, you will first need to obtain a copy of your Certificate of Eligibility, also called the COE. This is a document from the Veterans Affairs office that determines the amount of guaranty that will be offered to you for the VA Loan. An approved VA Mortgage lender can get the COE for you online.
If you prefer, you may obtain the COE on your own through the Veterans portal online via the Department of Veterans Affairs.
The VA COE is NOT a Guarantee For the Loan
The COE does not mean that you are approved for the home loan.
Instead, the COE shows that you have met the service requirements to apply for the loan.
The loan application is then submitted by your lender to get approval from the mortgage underwriter.
The rule of thumb used by a mortgage underwriter is that an applicant’s debt to income ratio should not be higher than 41%. There are instances where the 41% ratio can be exceeded with automated underwriter approval. Talk to your mortgage lender to see if that’s an option for you if you’re above the 41% threshold.
This is a simple calculation. The underwriter will take the applicant’s current monthly debt payments, plus the new housing payment, and divide that by the applicant’s gross monthly income.
For example, suppose a borrower makes $60,000 on their current job. This means that before taxes and other items are cut from their pay, their monthly gross income is $5,000. 41% of $5,000 is $2,050. This means that the borrower’s new house payment, plus their debt payments like a car payment, credit card payments, student loans, and other debt cannot be over $2,050.
VA Loans Also Calculate Residual Income to Protect the Borrower
To prevent the borrower from collecting too much debt and causing financial hardship, the VA underwriters also do a residual income calculation.
The residual income is the amount of money left over after paying monthly debt and paying utilities and income taxes. The necessary residual income amount is based on the size of the family and the region of the country where the borrower plans to live.
The residual income test is one of the main reasons why the VA home loan has the lowest percentage of foreclosures among most types of mortgage loans.
VA Requires the Borrower to Reside Within the Home
The VA home loan is intended for applicants that plan to reside within the home as their primary property. This mortgage is not allowed for vacation homes or rental properties.
Although the VA guidelines state that it is possible to use the VA home loan to purchase a multi-family home such as a duplex or triplex, it is very difficult to find a lender that will approve that type of purchase.
The VA charges a Funding Fee
To have a reserve of money needed to pay the infrequent guarantee to a lender if a home is foreclosed, the VA charges a funding fee on each loan.
The percentage of the funding fee will depend on the loan amount and the purpose of the loan. Thankfully, this fee is not required to be paid up-front. Instead, the fee is added to the loan amount and financed over time.
The following chart shows the percentage applied to each type of loan.
Fees when purchasing a home
|Down payment percentage||Fee for First time home buyer||Fee for each use after|
|5% to 9.99%||1.65%||1.65%|
|10% or more||1.4%||1.4%|
The funding fee for a cash-out refinance loan is 2.3% for the first use and then 3.6% for each use after.
VA Has No Set Maximum for Loan Amounts
There was a time when the VA restricted the amount of money that could be loaned out on each loan. However, that restriction was removed in the year 2019 with the Blue Water Navy Vietnam Veterans Act.
The only limit will be the previously mentioned debt to income ratios and the residual income test.
VA Will Allow Purchase of a Condo Unit
The VA Home loan can be used to purchase an existing single-family home or a new construction home. Keep in mind that in order to purchase a new construction home, the VA builder MUST have a VA Builder ID.
Also, the VA will allow the purchase of a condo unit.
The Department of Veterans Affairs has a listing of condo projects that are currently approved for VA financing. You can use their website to see if a condo you are considering is on their list.
If the condo project you are considering is not on the VA approved list, it will be extremely difficult to qualify for VA financing.
The Property Must Pass Certain Requirements
The VA wants each qualifying veteran to have an adequate home to live in when using the VA mortgage. For this reason, each home that is approved for VA lending must pass certain requirements.
These VA guidelines deal with the overall safety of the home to ensure that the veteran will have a comfortable and adequate home.
The majority of the VA property requirements deal with items such as the electrical, plumbing, and heating systems as well as the condition of the roof, foundation, and access to clean water.
Necessary Income For the Mortgage Needs to Be Consistent and Dependable
Some people are under the false idea that they will need a high-ranking career with several years on the job to be approved for the VA mortgage. This is not true.
Refer back to the earlier point about debt-to-income ratios and the residual income guideline. The underwriter will look to make sure these rules are met.
Then, the underwriter will look at the source of the income. Whether it is one full-time job, or 2 part-time jobs, or service disability plus a part-time job, it does not matter. So long as you can document your income for a minimum of 24 months and that the income has either stayed the same or increased over that time, then you should be fine.
In Certain Situations, It is Possible to Have TWO VA Mortgages at the Same Time
Earlier we described that the veteran must plan to live in the home as their main residence in order to qualify for the VA mortgage. However, there are a few, well-defined situations in which a veteran may have two separate VA mortgages on two separate homes at the same time.
This is called VA Second-Tier entitlement. The most common situation is when a full-time service member receives a new PCS and must relocate. More information about this type of VA mortgage loan can be found at the following link.
The VA Offers a Streamlined Refinance Option If Rates Go Down
The Department of Veterans Affairs has a popular option known as the interest rate reduction refinance loan, or IRRRL for short. This makes it easy to refinance with reduced paperwork under certain circumstances.
Before applying for the IRRRL, the person must currently have a VA mortgage on a home that is their primary residence. They also must have a clean payment record on the mortgage for at least the past 12 months.
The IRRRL is intended to help people lower their interest rate on their mortgage so that they have a lower overall payment. Or, it can help someone move from an adjustable-rate mortgage to a fixed-rate mortgage.
For people that have been paying on their home loan for 10 years or more, they may be able to keep their payments the same but drop down to a 15 year fixed mortgage and save a lot on interest over the remainder of the loan.
Summing Up VA Guidelines Every Veteran Should Know
The above list represents the most important VA guidelines that every veteran should understand. Being familiar with these rules will help you prepare for the loan application and also give you a better overall knowledge of the loan process so that you feel comfortable during the journey to buying your home.
Additional Helpful VA Mortgage Resources:
The VA loan has a lot of moving parts. Knowing each step of the process and what to expect, can make the home buying process so much better. Jeff Nelson has a great article explaining what you need to know about the VA loan and the steps to expect while you go through your home buying journey.
There are many benefits of a VA mortgage as Bill Gassett details in his blog post on the topic. From no down payment options to no private mortgage insurance, Bill’s article articulates the many benefits of VA mortgages.
There are a ton of reasons to apply for a VA loan. The pros outweigh the cons of a VA mortgage but there are certain circumstances where a VA loan is not for you. Take a look at this post to learn the pros and cons of VA loans.
This post on RealtyTimes goes through the most common myths and counters them with facts about VA loans.
The VA loan is one of only a few mortgage programs that have a no down payment option. Kyle Hiscock has an informative article about the pros and cons of low down payment programs that will help you make an informed decision on whether or not it is a good idea for you.