In 2018, the VA guaranteed 610,512 home loans. In 2019, it celebrated its 24-millionth borrower.
It’s easy to see why these mortgages are so popular. Not only are they available with zero down payment, but they also offer lower interest rates than for the average consumer and because the VA has less strict credit requirements than other loan types, it can be easier to qualify.
If you’re eligible for one of these mortgages — and most veterans and active-duty servicemembers are — then you should consider a VA home loan.
What is a VA home loan?
The VA is not a mortgage lender. Instead, it guarantees loans made by private lenders, which means that if you default on your loan, the VA will repay some of the losses your lender may incur.
Because of this guarantee, lenders are willing to offer loans without some of the requirements of other loan types. Some of the things that set VA home loans apart:
- No down payment required. The VA loan offers 100% financing, though you can put money down if you wish.
- No monthly private mortgage insurance. Depending on how much you borrow, that could save you $100+ every month.
- Lower closing costs. The VA caps certain fees lenders can charge unlike other loan types.
- Option for seller-paid closing costs. This isn’t offered for all loan types, and ultimately needs to be negotiated with the seller.
- Lenient credit guidelines. The VA doesn’t set minimum credit score requirements, though most lenders require at least 620.
VA home loan rates for 2020
In general, VA loan interest rates are lower than those for other loan types. According to Ellie Mae’s September 2019 Origination Insight Report, the average mortgage interest rate was 3.69% compared to 3.96% for both conventional and FHA loans.
While that may not seem like much of a difference, it is — even a small decrease in interest rate can save you thousands of dollars over the life of the loan.
VA home loan requirements for 2020
The rules around service eligibility are a bit complicated. To see if you qualify, you’ll need to get a certificate of eligibility (COE) from the VA. A VA-approved lender can request it for you as well.
In general, eligible veterans need to have served:
- 90 days or more in wartime
- 181 days or more in peacetime
- 24 months or the full period for which you were ordered, if now separated from service
- 6 years, if in the National Guard or Reserves
Other eligibility requirements: You can’t have been dishonorably discharged.
Unremarried spouses of veterans killed or missing in action may also be eligible as well as veterans who were discharged due to a service-connected disability. (See a full list of the VA’s service eligibility requirements.)
Qualifying debt-to-income (DTI) ratio
Mortgage lenders want to be certain that you can comfortably afford your loan payments. A big part of determining this is your debt-to-income (DTI) ratio. Most lenders approve a DTI of 41% or lower — it may be harder to qualify with a higher DTI. Ultimately, each lender has its own DTI threshold and some may be more flexible than others.
To calculate your DTI, add up your monthly bills — credit card minimum payments, car and student loan payments, child support, etc. Don’t include expenses like food, gas, and utilities. Then add your new monthly homeowner costs: mortgage payment, property taxes, homeowner’s insurance, and HOA fees (if applicable). Divide this total by your gross monthly income (before taxes). That’s your DTI ratio.
For example, if your gross monthly income is $5,000 and your monthly expenses are $2,050, then your DTI ratio is 41%.
Credit score minimums
The VA doesn’t set minimum credit score requirements for home loans. But, that doesn’t mean you’ll be approved regardless of your credit history. Most lenders require a minimum credit score of 620. Those that’ll approve lower credit scores will be harder to find.
Your credit score doesn’t just affect if you’ll qualify for a loan it’s also a factor in what interest rate you’ll qualify for — the higher your credit score, the lower your interest rate.
VA funding fee
To support the costs of the loan program, the VA charges a funding fee for each loan. The typical funding fee amount is 2.3% of the loan. For example, a 2.3% funding fee for a $250,000 loan is $5,750. This cost doesn’t have to be paid at closing and can be financed into the overall cost of the loan.
VA loan property types
To use a VA loan, you must be purchasing a primary residence — rental homes, investment properties, or second homes aren’t eligible.
Eligible property types:
- Single-family homes
- Two- to four-unit homes, as long as you live in one of the units
- Condominiums or townhomes (properties must be VA approved)
- Mobile/manufactured homes (most lenders don’t offer loans for these)
Minimum property requirements (MPRs)
The VA has minimum property requirements (MPRs) for its VA home loans. These guidelines are intended to ensure that purchased properties are “safe, structurally sound, and sanitary.” Some basic MPRs:
- The home must have adequate living, sleeping, cooking, dining areas, as well as sanitary facilities.
- The home must be safely accessible year-round.
- The heating, water, and electricity systems must be in working order with good life expectancy.
- The roof and crawl space must be in good condition.
- The home must be free of lead-based paint.
- The home must not be too close to gas pipelines or high-voltage electric lines.
A VA appraisal is required before your loan will be approved. It’s intended to determine that the home meets the VA’s MPRs as well as determine the market value of the home. If the property doesn’t pass the VA appraisal, you’ll receive a list of repairs that must be fixed before your loan will be approved.
It’s important to note that the VA appraiser is not obligated to report on all issues that could be wrong with the home. In fact, they’re not necessarily trained to do so. For a full top-to-bottom examination of the home, you’ll need a home inspection. It’s not required and will be an additional cost, but is definitely recommended.
Other benefits of a VA home loan
No mortgage insurance
VA loans don’t require private mortgage insurance (PMI) or mortgage insurance premiums (MIPs) like conventional and FHA loans respectively. Depending on your credit score and the size of your down payment, you can expect to pay 1.86% of the loan amount every year. For example, if you have a credit score of 630 and a $200,000 mortgage, you’d pay an extra $310 per month.
While conventional loans allow you to remove PMI once your mortgage balance is below 80% of your home’s market value, FHA loans require it for the entire life of the loan (if you put zero money down). That would mean paying $310 per month for 30 years and that adds up.
VA loan limits
Previously, the VA loan program required borrowers to make a down payment on any loan that exceeded conventional loan limits.
But not anymore.
As of January 1, 2020, VA-eligible borrowers can get any size loan with no down payment. There are no official limits.
But remember, you’ll still have to qualify for the mortgage.
If you’re looking for an extra-large VA loan with no down payment, make sure you have a solid income and excellent credit score.
Necessary documents for a VA home loan
The VA home loan is much like any other mortgage. You’ll need to supply income, assets, credit, and property information to the lender — along with supporting documentation.
But there are a few extra items that VA loans require. And you’ll likely need one or more of the following:
- Certificate of eligibility (COE). You’ll need this from the VA to prove that you’re eligible for benefits. Your lender can often get this from the VA quickly, sometimes within minutes.
- Form 26-1880. This is the request form for your COE and you’ll likely complete this form as part of the loan application. Get a sample of this form here.
- DD-214. This form is often required to get your COE. It details your separation from the military and your service. You can request a copy from the National Personnel Records Center (NPRC).
- Commanding Officer Statement of Service. If you’re still a servicemember, you will not yet have a DD-214. Instead, you’ll need a statement from your commanding officer detailing your service and expected time remaining on active duty.
- Verification of child care expenses. VA home loans require proof of monthly child care expenses if you declare dependents on the loan application. You’ll need a signed statement from your child care provider detailing the cost. Alternatively, you may provide a signed statement from a stay-at-home spouse or family member if the childcare is free.
Should you choose a VA home loan?
If you’re eligible for a VA home loan, then you should consider it. Compared to other loan types, it offers some significant advantages to veterans and servicemembers than other loan types. Some highlights: lower down payment requirements, no private mortgage insurance, and lower interest rates.
|Loan Type||Down Payment*||Mortgage Insurance**||Interest Rate***|
*Assumes a $250,000 loan and 700 credit score **Source: MGIC Ratefinder (6/11/13) ***Source: Ellie Mae Origination Insight Report, August 2019
If you still have questions, then it’s best to speak to a VA-licensed mortgage lender.