What is a VA loan?
A VA loan is a mortgage loan issued under a program designed for Active and Veteran Service Members and their Surviving Spouses. VA home loans are offered through private mortgage lenders, but they’re ultimately backed by the U.S. Department of Veterans Affairs, which was previously known as the “Veterans Administration.”
Several types of VA loans exist. Including:
The program allows you to use a VA loan to buy a home or tap into your home’s equity to make home improvements. When using a VA loan to purchase a home, the loan can fund up to 100% of the home’s value, which is how you eliminate the need for a down payment.
Who qualifies for a VA loan?
VA loans are designed for Veterans, Active-Duty Service Members, or their Surviving Spouses. To qualify for a VA loan, you’ll need to provide proof of your Military service and meet the other eligibility requirements set forth by both the VA and your VA-approved lender.
The following items detail the requirements to secure a VA loan:
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Certificate of Eligibility (COE)
First, you’ll need to provide your lender with documentation proving your Military service. This document is known as a certificate of eligibility (COE) and can be obtained from the VA website.
The department may request that you provide additional service-related documentation which confirms your status as Active Duty or a Military Veteran.
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Credit score
On the one hand, the VA does not have a minimum requirement for your personal credit score. But VA lenders can have different eligibility requirements, so it’s important to check with each lender before applying for any type of loan.
Generally speaking, it’s easier to qualify for a VA loan than a conventional loan, though some mortgage lenders may charge a fee to applicants with less-than-stellar credit.
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Debt-to-income ratio (DTI)
All lenders will look at your debt-to-income ratio (DTI) before approving you for a loan. Your DTI is calculated by dividing your monthly debts by your monthly income. Most VA lenders will approve loans if your DTI is 45% or lower, though, as with your credit score, this threshold can vary considerably between lenders.
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The VA funding fee
Approved applicants will have to pay a modest VA funding fee. This fee helps support the VA program so that other Veterans and their families can receive the benefits of a VA loan. This fee is a percentage of your total loan amount, which can vary depending on how much you’re borrowing.
The funding fee doesn’t have to be paid upfront, nor does it have to be paid at closing. You can roll this funding fee into your regular monthly payments to make it easier to cover.
However, you may be eligible for a refund or a waiver of this funding fee if you have service-connected disabilities. Contact the Department of Veterans Affairs to see if you qualify.
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Property requirements
To qualify for a VA loan, the property you are buying must meet the minimum property requirements. The property itself must be:
- A conventional family home
- The borrower’s primary residence
- Free of any structural defects (e.g. rot, termite infestations, etc.)
- Free of any mechanical or electrical issues affecting safety
- Able to supply adequate heating
These restrictions mean you can’t use a VA loan for commercial property or real estate investing. But homebuyers will find no restriction on the home’s geographic location, which allows you to use this loan program for any home in the U.S.
However, if you want to buy a condo with a VA loan, you’ll need to search the approved condo database on the Department of Veterans Affairs website.
Benefits of a VA loan
VA loans make particularly great options for first-time homebuyers. If you or your spouse are a current or former member of the U.S. Military, you have access to the following benefits of a VA loan:
Alternatives to VA loans
Despite the benefits of a VA loan, there may be times when you wish to use a different type of loan entirely. For instance, if you have strong credit and enough savings for a 20% down payment, you may qualify for better rates and terms with a conventional mortgage.
You might consider other first-time home loan options if you’re not eligible for a VA loan. If you’re buying a home in a rural or suburban area, you may qualify for a USDA loan, which will also allow you to purchase a home with no down payment.
Otherwise, you might look into an FHA loan backed by the Federal Housing Administration, which offers rates as low as 3.5% for qualified buyers.
Thank you for your service
VA loans are just one way of thanking the dedicated personnel of the U.S. Military for their sacrificial service. This mortgage vehicle can put homeownership well within reach and provide you and your family with some much-needed comfort and stability.
