VA home loans are among the more attractive mortgage products on the market. They offer competitive rates and enticing perks to help active-duty service members, veterans and qualifying surviving spouses realize their homeownership goals.
If a VA Home loan is in your plans, it’s worth understanding the eligibility guidelines to avoid surprises when applying for funding. Read on to learn more about the history of these loans and the lending requirements you must meet to secure a VA mortgage product.
History and Purpose of VA Home Loans
The VA loan program was created in 1944 as a part of the Servicemen’s Readjustment Act, most commonly referred to as the GI Bill. It was initially designed to assist eligible World War II veterans with their transition from wartime to civilian life. It has since expanded to serve other members of the armed forces, including veterans and qualifying relatives.
Are VA Loans Hard to Qualify For?
VA loans are generally more flexible compared to traditional mortgages. Still, you must meet service requirements and other financial lending guidelines to qualify. More on these shortly.
Overview of Basic VA Home Loan Requirements
The following section dives into the lending guidelines for VA loans. There are service, financial, credit, income, employment, property and occupancy requirements to be aware of.
What are the Eligibility Requirements for a VA Home Loan?
Military Service Requirements
You may be eligible if you meet any of the following conditions:
- Active-duty service members and Veterans: 90 consecutive days of service during wartime
- Active-duty service members and Veterans: 181 days of active service during peacetime
- National Guard or Reserves: 6 years of service or 90 days under Title 32 orders (30 of which are consecutive)
Discharge Status
If you were honorably discharged, you may qualify for a VA loan. Any other discharge status likely means you’ll face challenges when applying for a VA-backed mortgage.
Certificate of Eligibility (COE)
The CEO is a must to qualify for a VA home loan, as it lets lenders know you meet service history and duty status guidelines.
How to Obtain a COE
You can request your COE by:
- Logging into the VA eBenefits portal
- Mailing a completed copy of VA Form 26-1880 to your regional VA Loan Center
- Submitting Form 26-1817 if you’re an unmarried surviving spouse
Online and Paper Application Process
The online process is quick and easy, and you’ll usually get a quick response. However, the paper form takes much longer, and you must include documents with your request. These include your separation or discharge papers (if applicable).
Financial and Credit Requirements
Minimum Credit Score Requirements, Exceptions, and Flexibilities
The VA does not have a minimum credit threshold. That said, most lenders require a score of at least 620 to consider you for a loan. If your score is lower, you could be subject to more stringent lending requirements if your mortgage application is approved.
Income and Employment Standards
Lenders want reassurance that you can afford to make timely monthly mortgage payments. So, they evaluate your income and employment history to determine if you’re a good fit for a new home loan.
More specifically, they assess your debt-to-income (DTI) ratio or the percentage of your gross monthly income used to cover debt payments. Ideally, you want this figure at or below 41% for the best approval odds unless other compensating factors exist.
Most lenders also complete employment verification as part of the lending process. This means you’ll need to provide your most recent pay stubs, W-2 forms and possibly tax returns.
Down Payment, Funding Fees, and Closing Costs
No Down Payment Requirement
A major draw of VA loans is the ability to secure 100% financing. This means you won’t have to make a down payment, which is uncommon with conventional loans and some other government-backed mortgages.
Funding Fee Structure
Unless you’re a veteran receiving compensation for a service-related disability, you’ll pay a VA funding fee. It’s typically 2.15% of the loan amount for first-time VA loan users (or 1.5% and 1.25% with a 5% or 10% down payment, respectively). You can pay it at closing or roll into the loan.
Associated Closing Costs
You’ll also pay closing costs of up to 5% of the loan amount. Keep in mind that you can receive up to 4% in seller contributions to minimize your out-of-pocket costs. And you can generally roll closing costs into the loan.
Property Requirements
Eligible Property Types: Single-Family, Multi-Unit, and Manufactured Homes
You can use VA loans to purchase single-family homes if used as your primary residence or multi-unit properties if you occupy at least one of the units as your primary residence. If you’re considering a manufactured home, it must meet specific standards to qualify for funding.
Minimum Property Requirements (MPRs)
The loan guidelines also state that properties must be sufficient in size, have adequate roofing, and fully operable heating, cooling, and electric systems. The sewage disposal system must also be sanitary and safe, and the crawl space must be properly vented and accessible. Lead-based paint is also prohibited in homes purchased with VA loans, along with fungus, dry rot or wood-destroying insects.
Property Condition and Appraisal
The lender will order an appraisal to confirm that the home meets the MPRs. If there are issues, remedies must be found before a formal loan approval can be issued.
VA Appraisal Process
It involves a licensed appraiser evaluating the property to confirm that the home meets MPRs and is worth the purchase price. Here’s a quick overview of the process:
- Step 1: The VA assigns a licensed appraiser.
- Step 2: The appraiser conducts an on-site evaluation of the property.
- Step 3: The appraiser prepares a report detailing the condition of the property and its estimated value.
Occupancy Rules
Primary Residence Requirement
As previously stated, you must use the property as your primary residence. This means second homes, including vacation homes and investment properties, are ineligible for purchase with a VA loan.
Spousal and Dependent Occupancy
The program guidelines also state that you must move into the property within 60 days of closing. You can push the occupancy date out for up to 12 months, but a valid reason must be provided. (Exceptions also apply for active-duty servicemembers who are deployed).
You should also know that spouses can fulfill the occupancy requirement in the event of a deployment or assignment elsewhere. Or your children can reside in the home with a caregiver to satisfy this requirement.
Additional Considerations
Residual Income Requirement
This means you need enough income left over after covering housing expenses. Your residual income is calculated based on family size and geographic location. The lender wants reassurance that you can comfortably manage basic necessities and everyday living expenses after making monthly mortgage payments.
Loan Limits: Conforming vs Jumbo VA Loans
VA home loans have specific loan limits tied to conforming and jumbo categories.
A conforming VA loan follows the limits set by the Federal Housing Finance Agency, which is $726,200 for most areas. Jumbo VA loans exceed these limits and may come with stricter requirements, like higher residual income standards and steeper minimum down payments.
Applying for a VA Home Loan
To apply for a VA home loan, you must gather a few key documents and follow a series of steps.
- Step 1: Obtain your Certificate of Eligibility (COE). This proves to your lender that you meet basic service requirements. You can get your COE online through the VA’s website, by mail, or with the lender’s assistance.
- Step 2: Find a lender. VA home loans are offered by VA-approved banks, credit unions and online mortgage lenders. The VA guarantees a portion of the loan, which allows the lender to offer better terms.
- Step 3: Complete the loan application. You will need to provide financial documents, such as recent pay stubs, tax returns and bank statements. The lender will also check your credit.
- Step 4: Get the home appraised. The lender will order an appraisal to determine the property’s market value and confirm it meets VA standards before clearing you to close on the loan.
Conclusion: The Importance of Understanding VA Home Loan Requirements
A VA home loan can help make homeownership more accessible and affordable if you are an active-duty service member or veteran. If you’re considering applying, take some time to learn more about the lending guidelines so you can be prepared when you formally apply for funding.
