Mortgage Options For Veterans: How VA Loans Work

Mortgage Options For Veterans: How VA Loans Work

by Kim Pinnelli
Senior Contributing Writer

September 16, 2020
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The VA loan is a great program for veterans. It offers 100% financing and flexible underwriting requirements that are easy to meet.

VA loans are a way to thank those that serve our country. The 100% financing program has the most flexible guidelines out of any program, enabling veterans and current military members to buy a home easily.

The VA loan is easy to understand and just this year got even easier to borrow as much as you need (and qualify for). Veterans should look at their VA loan options first before other loan options as it’s often the least expensive and most flexible program available.

What is a VA Loan?

A VA loan is a loan backed by the Veteran’s Administration. This doesn’t mean they fund it or even underwrite it, though. VA-approved lenders do the work. They just follow the VA guidelines (which are super flexible) and write loans accordingly.

The VA’s role is one of a guarantor. They give lenders the guarantee that they’ll pay them back a portion of the funds they lose if a borrower defaults. VA loans, however, have the lowest default rate out of any program.

Who is Eligible?

Before determining if you qualify for a VA loan, you must determine eligibility. Basically, you must prove you served enough time in the military and had an honorable discharge. The eligibility requirements are as follows:

  • Serve at least 90 days during wartime
  • Serve at least 181 days during peacetime
  • Serve at least 6 years in the Reserves or National Guard

If you served enough time, you must also have enough entitlement. Ideally, the VA allows veterans to have one VA loan at a time. Since it’s meant to buy a primary residence, you shouldn’t have more than one loan out at a time anyway. If you used your benefits already, you must sell the house and pay the balance off in full to reuse your benefits.

You can lose your entitlement if you default on your mortgage and lose the home in foreclosure.

How to Qualify

Once you know you are eligible, it’s time to qualify. Like we said above, the VA guidelines are incredibly flexible:

  • Minimum 620 credit score – This is an average. The VA doesn’t have a minimum credit score requirement, but most lenders want at least a 620 or higher to prove you’re financially capable of handling the loan.
  • Maximum 43% debt-to-income ratio – The VA also doesn’t have specific DTI guidelines. They focus more on your disposable income (more on that below), but most lenders prefer you to have 43% or less of your monthly income committed to existing debts, including the new mortgage.
  • Enough disposable income – The VA credits their low default rate to its focus on disposable income. They’re the only loan that looks at this. Your disposable income is the money left after you pay your monthly obligations. The VA feels if you meet the disposable income requirements for your area and family size that you can comfortably afford a mortgage.
  • Stable income and employment – Like most loan programs, the VA prefers you to have a 2-year stable employment history. If you just got out of the military and just starting a job, you may get approved with a job offer letter if you didn’t start working yet, as long as the start date is within 30 days of loan closing.
  • No recent public records – If you lost a home in foreclosure, filed bankruptcy, or have any recent collections, you may have to wait 2 – 3 years before you can use your benefit, but it varies by situation.

The VA Loan Benefits

  • No down payment – You can secure 100% financing with a VA loan. This means you don’t have to put any money down. You are more than welcome to if you have the money (it’s a good idea if you can), but if you don’t, you’ll get the same rate and terms as if you made a down payment.
  • Flexible underwriting guidelines – All other loan programs have tighter restrictions that make it harder to secure a mortgage. The VA loan helps veterans that served our country get the financing they need (and can afford) to become homeowners faster.
  • No mortgage insurance – Most loan programs have mortgage insurance, especially with no down payment, but VA loans don’t require annual mortgage insurance. The only fee charged is the funding fee at the loan closing. You can pay it at the closing or wrap it into your loan amount. Today, the VA funding fee is 2.3% of the loan amount.
  • No loan limits – As of 2020, veterans aren’t subjected to loan limits like previous years. Before, if you needed to borrow more than the national conforming limit, you had to make a down payment equal to 25% of the difference between the purchase price and loan limits. This year, there are no loan limits. As long as you qualify for the loan (prove you can afford it), you can borrow as much as you need.
  • Minimal closing costs – The VA controls what closing costs lenders and 3rd parties may charge veterans. The closing costs are often much less than the cost of any other loan program.

VA Loans are a Great Option for Veterans

VA loans are one of the most flexible and easy to understand loan programs available today. Veterans only need to prove that they have the money available to cover their commitments and the cost of living to qualify.

Without the need for a down payment or even perfect credit, veterans of all ages and in all stages of life can enjoy home ownership without the worry of tough mortgage requirements or the inability to qualify.

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