So who qualifies for a VA home loan? Odds are you do if you’re a military veteran or spouse with reliable income and decent credit. VA loan requirements have four general areas used to determine applicant eligibility: Credit History, Income Requirements, Service Requirements and Property Requirements.
1. Service History
You are generally eligible for a VA loan if you’ve served in the military for 90 consecutive days during wartime, 181 days during peacetime, or served six or more years in the Reserve or National Guard. Also the surviving spouses of those who died in the line of duty may qualify.
All VA loan applicants must first obtain a Certificate of Eligibility through the Department of Veteran’s Affairs. You can obtain a Certificate of Eligibility (COE) online at www.benefits.va.gov or by mail through Veterans Affairs.
An applicant is considered qualified for a VA COE if they meet one or more of the following requirements:
- You served at least 90 consecutive days during wartime
- You served at least 181 days during peacetime
- You served at least 6 years or more in the National Guard or Reserves
- You are the surviving spouse of a service member that died in the line of duty or due to a service-related disability
If still have questions about your service eligibility, VA provides a very detailed look at VA home loan requirements for service here.
2. Credit History
Early in the application process, the lender checks the applicant’s credit report using a tri-merge credit report. This credit report gets scores from all three of the major credit bureaus. The lender then evaluates the applicant’s scores and credit history to determine if they meet minimum qualifications for VA loan eligibility.
To be approved, the borrower must have a middle credit score of 620 of higher with no late housing payments for the last year. If the veteran has a bankruptcy or foreclosure in their past, they must wait an acceptable amount of time before they can get a VA loan. Lenders are looking for the following VA loan credit requirements when evaluating an applicant:
- Middle FICO credit score must be 620 or higher
- No late mortgage payments for at least one year
- No outstanding federal liens or judgements
- If applicant has had a Chapter 13 bankruptcy, all bankruptcy payments must have been made on time for one year
- If applicant has had a Chapter 7 bankruptcy, at least two years must have passed before application
- If applicant has had a foreclosure, at least two years must have passed before application
3. Minimum Income
VA loan income guidelines are uniquely different than any other mortgage programs because they use two separate methods to qualify an applicants income.
The first method VA home loan requirements employs is a uncommon approach known as the residual income method, which is a fairly simple approach to determine if a borrower will be able to afford his new housing payment. Under the residual income method, VA provides an a chart, based upon their income, that outlines how much money a borrower must have left over each month after his new housing payment and other expenses are paid. It’s that simple!
The second method used is the more common debt-to-income method (DTI). This method uses a debt-to-income ratio that measures the borrowers total monthly debt, including the proposed new housing payment, as a percentage of their monthly income. The debt-to-income ratio used for VA loans is similar to what’s known as the “bottom ratio”, “back ratio” or “total debt ratio” on other mortgage programs.
To meet VA loan guidelines DTI requirements, the applicants proposed total monthly debt amount may not exceed 41% of their total monthly income. If the applicant’s debt-to-income ratio does exceed the 41% limit, however, they may still be able to qualify using the residual income method. Here’s a rundown of the dual income requirements for VA loans:
A. Residual Income Method
The applicant must show they will have the required amount of income after all debt payments are made, including housing. Leftover income requirements (residual income) are as follows:
B. Debt-to-Income Method
- 41% Debt-To-Income Ratio – The applicant’s new housing payment and all other combined monthly expenses may not exceed 41 percent of their total monthly income.
4. Property Requirements
For a property to be eligible VA financing, it must first pass a VA appraisal, which accomplishes two things. The first function of is to determine if the home must meet certain minimum property requirements or “MPR’s”. VA minimum property requirements are exactly as they sound, and serve as evaluation guidelines for VA appraisers.
The second function is to determine the if the value of the property meets the minimum VA loan valuation requirements. Eligible properties must have an appraised value that’s greater than or equal to the maximum loan-to-value requirements for the mortgage program being used.
VA loan property guidelines include the following conditions:
Minimum Property Requirements (MPR’s)
- Property must have an adequate roof that’s in good condition
- Property must have adequate heating
- Electrical and plumbing systems must be in good condition
- Basements and crawl spaces must be dry and free of leaks
- Property must be free of termites and other pests
- Property must be free of lead-based paint
- Property must be free of defects and hazards
Property Value Requirements
- VA appraisers use a “sales comparison” method to determine the home’s value
- Three comparable properties or “comps” will be compared to determine the fair market value of the subject property
- Comparable properties must have been similarly priced, sold within the last 12 months and located fairly close to the subject property
VA Loan Costs and Fees
What are the costs of a VA home loan? Basically one – there is a funding fee charged by the the Department of Veteran Affairs to support the home loan program. The funding fee ranges from 1.25% to 2.4% of the loan amount for first time borrowers, and it’s based upon your military status and the down payment amount, if any. This fee is charged at closing, but may be rolled into your loan amount and paid over time. Potential fees for VA loans are outlined below:
VA Funding Fee
- Upfront VA Funding Fee amounts to anywhere between 1.25% and 2.4% of the loan amount for purchase and refinance loans.
- The funding fee can be rolled into loan amount.
Other Potential Fees Not Directly Charged by VA
- Lender Origination Fees and Discount Points
- Appraisal Fees, Inspection Fees, Survey Fees and Pest Inspection Fees
- Closing Costs such as State and Local Taxes, Recording Fees, Title Fees and Escrows
- Up to 4% Seller Concessions Allowed – Seller can pay buyer closing costs up to 4 percent of mortgage loan amount.
VA Loan Limits
VA mortgage loans have maximum borrowing limits that vary from place to place, depending on local housing costs. Current VA loan limits are set at $417,000 for most areas, but higher ceilings have been established in areas with higher home values. A complete list of limits by area can be searched here or you can consult www.benefits.va.gov/homeloans.
While the VA home loans certainly offer many benefits unique to active and retired military, the decision to purchase and finance a home is a major one than contains many options that are unique just to you. By taking the time to research your options, doing your homework and shopping around, chances are you’ll find your perfect mortgage.