MINIMUM CREDIT
SCORE
500
KEY
ADVANTAGES
NO DOWNPAYMENT REQUIRED NO MONTHLY PMI
How does a VA loan work?
The VA loan process works similarly to any other conventional mortgage loan. Before lenders can approve applicants, they will need to verify the following:
- Current and past employment history
- Credit score
- Desired loan amount
- Gross monthly income
- Assets (bank accounts, retirement savings, etc.)
- Debts (credit cards, delinquencies, etc.)
- Previous homeownership
Since lenders will review your credit report, which includes your payment history and debts, they will be able to calculate your debt-to-income ratio (DTI). DTI ratios give lenders a clearer picture of a potential borrower’s monthly income relative to their recurring debts. Typically, lenders prefer to see a DTI ratio of 41 percent or lower. However, many lenders have different standards for VA loan eligibility, and they will determine your eligibility based on your financial status and history.
Since the VA loan is guaranteed by the federal government, it provides eligible applicants with the following benefits:
- Requires no down payment (unless your lender deems otherwise, or the purchase price of the home exceeds the allowed VA limit).
- Lenders offer competitive interest rates.
- Allows borrowers to pay off all or part of their loan in advance without penalty.
- The VA orders an appraisal on your behalf to ensure the home’s value is reasonable and aligns with current market conditions.
- If defects are found, the VA may assist you in hiring a contractor to resolve those issues.
The loan must be for an eligible purpose.
- For most applicants, no down payment is required. In comparison, an FHA loan requires a down payment of as little as 3.5%. However, FHA borrowers are required to purchase mortgage insurance, whereas VA loan borrowers do not have to pay this premium.
- Borrowers with a VA loan are not required to pay for monthly mortgage insurance. This premium is usually required by lenders when borrowers put down less than 20 percent with a conventional loan.
- Lenders can offer competitive interest rates compared to other loans. VA loans consistently have the lowest interest rates among various loan options.
- No prepayment penalties. Borrowers will not be penalized if they pay off part or all of the loan early.
- VA loans are classified as assumable mortgages (subject to lender approval). If you move, someone else can take over your mortgage payments. This can be a significant benefit if interest rates rise.
- The VA loan program avoids placing veterans in foreclosed homes, seeking alternative housing options first and using foreclosure as a last resort.
- There is a limitation on the buyer’s closing costs. With a VA loan, sellers can pay all the buyer’s closing costs and up to 4 percent in concessions.
What are the requirements to obtain a VA loan? How do I qualify?
- The applicant must be an eligible veteran who can prove their service.
- The loan must be for an eligible purpose.
- The veteran and their family must occupy the home as their primary residence.
- The applicant’s credit risk must be satisfactory.
- The veteran’s and spouse’s income must be verified as stable and sufficient to handle mortgage payments and other home-related costs.
Lenders will calculate your debt-to-income (DTI) ratio by reviewing your gross monthly income and monthly debts. Most lenders prefer a DTI ratio of 41 percent or lower to ensure that your income exceeds your existing debt obligations. This ratio can vary from lender to lender, so it’s important to do your due diligence and ask each lender about their specific requirements.
Like any other mortgage, the VA requires applicants to prove they have a consistent and stable income. This verification helps measure a borrower’s ability to handle mortgage payments and other necessities (e.g., food, transportation). The residual income required will vary based on family size and the home’s location. You can ask your lender what income level is considered acceptable to obtain a VA loan.
An appraisal is also required during a VA loan transaction. A VA appraisal is ordered to provide an accurate estimate of the home’s value compared to other homes in the area. This process ensures the home is in good condition, providing comfort and safety for veterans. A licensed appraiser will visit the property to evaluate its overall condition and write a detailed report of their findings. This unbiased perspective allows veterans to make informed decisions and adjustments as needed.
Lastly, there are specific service requirements that must be met to become eligible for a VA loan. Most military members, veterans, reservists, and National Guard members are eligible to apply for a VA loan. Even spouses of service members who died while on active duty may be eligible to apply.
