What is a VA Loan and Who Qualifies?
The Department of Veterans Affairs (VA) is a Government Agency located in the United States of America, and helps to serve Military Veterans, those on active duty, as well as National Guards and Reserves. As a part of their services, they also offer guaranteed home loans to those who qualify.
Since the Servicemen’s Readjustment Act of 1944, there have been over 20 million VA home loans that have been insured by the Department of Veterans Affairs. That includes over 540,000 in 2012 alone!
Since that time (1944) there have been many, many changes to the VA home loans, big and small.
The purpose of this type of loan was to provide Veterans, and/or their spouses, the ability to finance a home or make improvements, as many financial institutions may not be practical or available to most service people.
Most eligible areas are not located in bigger cities or Metropolitan areas, but are usually areas with credit shortages, small cities/towns, or even rural areas. However, this doesn’t necessarily mean that you can’t find a great home in the area of your choice.
Why VA Loans are Good
If eligible, VA Home Loans can be used to build a home, purchase and/or improve a home, condo (must be VA-approved), make improvements to a home (energy-efficiency, etc) or even purchase a mobile/manufactured home and/or lot. They have lower fees and are guaranteed loans, backed by the U.S. Department of Affairs (VA).
VA Loans offer those eligible with 103.15% financing, without the need for mortgage insurance (guaranteed through VA), and/or a 20% second mortgage with up to $6,000 for energy related improvements to the home.
No Down Payment: if you are qualified for a VA loan, one great advantage is that you can purchase a home that’s worth up to $415,000 and not pay a penny down. While most loans require a significant down payment (3-5 percent, minimum), you’ll be off the hook.
Bankruptcy or Foreclosures aren’t automatic disqualifications: most conventional loans are backed by lenders that will most likely disqualify anyone with a foreclosure or bankruptcy on their credit history over the past 2 years. However, this isn’t the always the case with VA Loans. You may be still be eligible for the loan after 2 years.
No PMI (Private Mortgage Insurance): while most conventional loans require a down payment, many can’t afford to pay down 20% of the loan. PMI (private mortgage insurance) will usually be required for those who can’t afford the down payment. While these fees vary, they’re irrelevant to this type of loan. Good for you.
Higher DTI: you can qualify for a VA loan with a debt-to-income ratio of 41 percent or less, which is much higher than FHA or other conventional loans.
No pre-payment penalties: if you decide to pay off your loan early — you will not be hit with pre-payment penalties, which will occur with most other types of home loans.
Why a VA Loan May Not Be Good For You
Not everyone is eligible for a VA Loan, nor will all eligible applicants find that a VA Loan is the right loan for them. There are a lot of negatives that can go with the positive.
Not always accepted: due to misconceptions, some home sellers do not want to deal with VA loans, unfortunately. While this is rare, it does occur. Educating them may help alleviate any concerns.
Primary Residence only: if you’re thinking of using your VA eligibility to purchase a second home, rental or some other form of investment property — think again. You are required to use that home as your primary residence and you must verify that you live there. You won’t be able to purchase a home with a VA Loan so that you can rent it out, or purchase it for a family member.
Borrowing Limitations: while you can use anyone to co-sign on a conventional loan, this is not the case with VA loans. You will need a spouse or another veteran to co-sign on the loan.
Funding Fee: every VA loan has a mandatory funding fee that the VA charges, which goes back into the “system” that helps keep the VA program running. This fee is unique to VA home loans and you won’t find it in other conventional loans. Not everyone is subject to this fee, though. If you have service-connected disabilities, you are exempt from having to pay this fee. The VA funding fee can range anywhere from 0 to 3.15% of the loan amount, which is paid to the Department of Veterans Affairs (VA). * This fee can also be financed as well.
Can You Get a VA Loan with Poor Credit
In short, yes and no. Credit checks will be used to determine your creditworthiness. This is certain.
However, there is no minimum credit score needed to qualify for for a VA loan, but don’t think that gives you an easy track to qualification. If you have had a Bankruptcy or very poor credit, you can be turned down by the lender, and they may even check your FICO score to come to this conclusion. Sounds contradicting, I know. Debt-to-Income ratios, Negative Accounts, Payment History and FICO scores can be used to determine whether or not you pose a risk (creditworthiness).
If you do have bad credit, please see our guide to removing negative items from your credit report here. For more information, please speak to a qualified loan officer with experience in VA Loans.
Who is Eligible for a VA Home Loan
Servicemen/women and/or their spouses can be eligible for these loans, provided that they did not remarry.
You can find the exact details of eligibility in this link. However, the basics will be listed and outlined below.
- World War II Veterans (9/16/1940 – 7/25/1947) that served at least 90 days.
- Post-WWII (7/26/1947 – 6/26/1950) and served at least 181 continuous days.
- Korean War (6/27/1950 – 1/31/1955) and served at least 90 days.
- Post-Korean War (2/1/1955 – 8/4/1964) and served at least 181 continuous days.
- Vietnam War (8/5/1964 – 5/7/1975) and served at least 90 days. *For Vets who served in the Republic of Vietnam, the beginning date is 2/28/1961
- Post-Vietnam War (5/8/1975 – 9/7/1980) and served at least 181 continuous days. *The ending date for officers is 10/16/1981
- 24-Month Rule (9/8/1980 – 8/1/1990) served at least 24 continuous months OR the full period (at least 181 days) for which you were called or ordered to active duty.
- Gulf War (8/2/1990-Present) served at least 24 continuous months OR the full period (at least 90 days) for which you were called or ordered to active duty.
- Currently on Active Duty for at least 90 continuous days.
National Guards and Reserves are also eligible if they meet the following:
- Gulf War (8/2/1990-Present) and 90 days of active service.
- Six years of service in the Selected Reserve or National Guard, AND
- Were discharged honorably, OR
- Were placed on the retired list, OR
- Were transferred to the Standby Reserve or an element of the Ready Reserve other than the Selected Reserve after service characterized as honorable, OR
- Continue to serve in the Selected Reserve
Spouses can also be eligible to apply for a VA Loan if they:
- Have not remarried
- Are a spouse of a POW (Prisoner of War) or MIA (Missing in Action)
- There may be other spousal eligibilities, so be sure to speak with a qualified professional
- Single-Family Homes
- Approved VA condos
- Multi-Family Homes
- Manufactured Homes and/or Lots
You may also be an eligible applicant if you are a U.S. Citizen that served in an Allied Force of the U.S. during World War II.
The law states that if you receive a VA loan, you must occupy that home. The law also requires verification that you will occupy that home within a reasonable time, which could be within 60 days from closing on the loan. If the borrower is deployed, then they may be able to qualify for a 12-month extension. The borrower or the spouse are the only 2 (if applicable) that can satisfy the occupancy requirement in a VA eligible stead.
While credit does play a role in obtaining a VA loan, income can also play an important part of the process. The borrower needs to have steady income that is sufficient enough to cover the monthly payments, as well as any other costs associated with the loan in question.
After you have determined that you’re eligible, you’ll need to purchase a Certificate of Eligibilty with this link.
There are limits to VA Home loans, so you should definitely be prepared for that.
Loan limits are generally listed at $417,000 at the time of this writing (2013). However, this is subject to the state and county of the home that is being purchased. For instance, if you were in Nantucket, MA, the loan limit would be $1,094,625, whereas Bristol, MA, would be $418,750. If you were in Contra Costa, California, the limit would be $1,000,000, whereas the limit would be $436,250 in Monterey, California.
VA Home Loans are easier to obtain for those who are eligible, but they’re not always practical for the borrower. While there are great advantages to getting this type of loan, there are also some down sides as well. You will be required to use the home as your primary residence, so you can’t use it as an investment home or second home/vacation home.
You cannot apply for this loan with a co-borrower who is not either: a) your spouse or b) another veteran. This makes it a bit difficult for some borrowers, as they may need someone to co-sign for them.
A great advantage is the lack of a down payment on the loan that is being borrowed. Many Veterans cannot come up with the down payment for conventional and FHA loans, so this can be very beneficial.
While we’ve done our best to lay out the basics for you, you should consult with a VA Lender on pre-qualifications for that particular lender and the loan you’re attempting to apply for.