What Are The VA Loan Requirements?
Veterans Affairs (VA) loans are provided by lenders, such as banks and credit unions, and tend to have more favorable terms like a lower down payment requirement compared to conventional mortgages. The Department of Veterans Affairs guarantees a portion of the loan which encourages the lender to provide you a better deal through a VA loan.
How Can I Become Eligible for a VA Loan?
Given that the mortgage loan is backed by the VA, you must be a veteran, active-duty service member, a member of the National Guard, reserve or the surviving spouse of a veteran to qualify for a VA loan. A Certificate of Eligibility (COE) from the VA is required. You can apply for your COE online, by mail or your lender can get it for you.
You can check the full list of eligibility here.
VA loans usually have no or low down payment requirements, and lower interest rates than traditional mortgage products. They also tend to be more flexible, allowing for a higher debt-to-income (DTI) ratio and lower credit scores, and they don’t require mortgage insurance.
Requirements vary based on whether you are active duty or a former member of the military, if you served or are serving in the National Guard or Reserve, and when you served. Here are the VA’s general guidelines:
- Current active-duty members are eligible after 90 days of continuous service during wartime.
- Veterans who served after August 2, 1990 are eligible if they have 24 continuous months of active-duty service with a discharge type, other than dishonorable.
- National Guard members and reservists are eligible after 90 days of active service, or six years of guard and reserve service.
Credit and Debt Requirements
There is no minimum credit score requirement for a VA loan. Instead, the VA requires the lender “to review the entire loan profile.” This means the financial institution should take all of a loan applicant’s qualifications into consideration, not just credit scores. This includes your assets, DTI ratio, current job status and employment history.
It’s generally recommended for borrowers to have minimum credit scores of 580 to 620 to qualify for a VA loan.
As for the debt requirement, the VA does not have a maximum DTI for the loans it guarantees. However, the agency does state that “the lender must provide compensating factors if the total debt ratio is more than 41%.”
A general rule of thumb should be to keep your home costs, which include mortgage payment, property taxes and insurance no more than 25% to 36% of your take-home pay.
The VA requires lenders to verify that your income is stable, reliable, expected to continue during the foreseeable future and enough to pay back your loan. Lenders must also verify a minimum of two years employment. If you have been employed at your current job for less than two years, then the lender must verify your prior employment covering a total of two years.
The VA also has residual income guidelines regarding how much money a borrower must have left over after all debts and living expenses are considered. The VA defines residual income as “the amount of net income remaining (after deduction of debts and obligations and monthly shelter expenses) to cover family living expenses such as food, health care, clothing and gasoline.”
Residual income varies by location, loan amount and family size.
The VA instructs lenders to reduce the residual income figure by a minimum of 5% if you or your spouse are active-duty or retired military; and it is clear you will continue to receive the benefits resulting from use of military-based facilities located near the property.
The exception to this 5% rule is if the local VA office has its own established percentage that is higher, which would be applied in that case.
Down Payment Requirements
VA loans typically don’t require a down payment as long as the sales price is at or below the home’s appraised value. That’s largely because the VA guarantees that it will reimburse a portion to the lender if they incur a loss due to foreclosure.
However, if you choose to make a down payment, it will help lower both your monthly payment and overall outstanding loan amount. Also, if your down payment is at least 5%, you can pay a lower VA funding fee, if you are not already exempt.
A VA loan can only be used to fund the purchase of a home that will be your primary residence—you cannot use the property as a seasonal vacation home. The VA has established Minimum Property Requirements (MPRs) that your desired home must meet before your application can be approved.
The VA requires a home appraisal to estimate the value of the property to ensure it is sufficient for the amount of the proposed loan. This is not to be confused with a home inspection, which would note any needed repairs and conduct operational checks of appliances.
If you are buying a condo, the VA maintains a list of approved condos. If the condo is not on the list, the project must be submitted to the VA for review to ensure that it complies with their requirements.
How to Apply For a VA Loan
You can shop around and apply for a VA loan through a lender of your choice once you obtain the VA COE. You will need the COE to confirm you have met the service requirements necessary to get a VA loan. You will need one every time you apply for a VA loan. There are a couple of ways to get yours:
- Apply online through the VA’s eBenefits portal
- Apply by mail
- Ask your lender if they can get it for you
Even with a COE, you may need to provide some additional service-related documentation.
Other VA Loans and Grants
Apart from a VA-backed purchase loan, there are additional loan options and grants available through the agency.
Cash-Out Refinance Loan
A VA cash-out refinance loan allows you to replace your current loan with a new one under different terms. It also lets you take cash out of your home or refinance a non-VA loan into a VA-backed loan.
Native American Direct Loan
If you’re a Veteran, and either you or your spouse is Native American, the VA’s Native American Direct Loan (NADL) program can help you get a loan to buy, build or improve a home on federal trust land. You may also get a loan to refinance an existing NADL and reduce your interest rate.
Interest Rate Reduction Refinance Loan
If you already have a VA loan and you want to reduce your monthly mortgage payments—or make your payments more stable—an interest rate reduction refinance loan (IRRRL) may be right for you.
Often referred to as a streamline refinance, an IRRRL helps you to lower your monthly mortgage payment by getting you a lower interest rate; or shift from a loan with an adjustable interest rate to one that’s fixed over the life of the loan.
Disability Housing Grants
You can qualify for a Specially Adapted Housing (SAH) grant or a Special Home Adaptation (SHA) grant from the VA if you’re using the grant money to buy, build or change your permanent home–one that you plan to live in for a long time. You must also plan to own the home and have a qualifying service-connected disability.
If you qualify for an SAH grant, you can get up to $101,754 for the fiscal year 2022. As for the SHA grant, you can get up to $20,387 for the fiscal year 2022 once qualified.
You can apply for a disability grant through the VA’s eBenefits website. You can also apply by mail or in person.