VA loans are one of the most flexible and competitive loans available today. It’s only available to veterans and some current military members, but it’s a great program to consider if you’re eligible.
Here’s what you must know about how they work and what’s required to qualify.
What is VA Loan?
A VA loan is a government-backed loan for veterans, current military members, and surviving spouses. It’s a flexible loan program to help those who serve our country afford a home.
VA loans have the most flexible guidelines compared to other loan programs, making it easy for veterans and military members to secure financing.
How Do VA Loans Work?
The VA backs VA loans. This means they guarantee the loan for lenders. If a borrower defaults, the VA pays the lender back 25% of the amount lost.
Most VA borrowers don’t need a down payment if they have full entitlement from the VA. For example, you have full entitlement when you haven’t used your VA loan benefits yet, or if you did, but you sold the home and repaid the debt.
If you don’t have full entitlement, you may still qualify for VA financing but with a down payment. For example, full entitlement is $144,000. If you used some and didn’t reinstate it, you can use what’s left.
If you used your entitlement already, you’re subject to the VA county loan limits and will likely need a down payment to total 25% of the loan amount between the guarantee and your down payment.
What are the Types of VA Loans?
There are three types of VA loans:
- Purchase
A purchase VA loan is used to buy a home. Most veterans get 100% of the sales price if they have full entitlement. Otherwise, you may need a down payment as determined by the lender. Purchase loans are strictly for owner-occupied properties.
- VA IRRL
VA Interest Rate Reduction Refinance Loans are for veterans who already have a VA loan and want to refinance it. The IRRRL program doesn’t require a credit, income, or loan-to-value ratio check. If you make your payments on time and you’ve had the loan for at least 210 days, you may be eligible to refinance for a lower rate or better term.
- VA Cash-Out Refinance
The VA cash-out refinance allows veterans to cash into their home’s equity. You earn equity in the home as you pay the balance down. Equity is the difference between the home’s value and your mortgage balance. If you have enough income and few liabilities, you may qualify to borrow the equity, receiving the cash in hand.
VA Loan Eligibility Requirements
To get a VA loan, the following VA service requirements are required:
- Served at least 24 months or 90 consecutive days for which you were called to service
- Served at least 90 consecutive days in active duty in the National Guard or Reserves
- Are a surviving spouse that lost their husband or wife in the line of duty or because of their time in the service
If you’re eligible, you’ll have a Certificate of Eligibility. You may already have it, or you can request it from your local VA office if you don’t. Your lender may also be able to help you get it.
VA Loan Qualification Requirements
Proving you’re eligible for a VA loan is the first step. Next, you must prove you qualify for the loan. In other words, you must prove you can afford it.
Here’s how.
- Minimum 620 credit score – The VA doesn’t have a set credit score requirement, but most lenders require at least a 620. This is much lower than conventional loan requirements and allows veterans more flexibility.
- Maximum 43% – 50% debt-to-income ratio – Like credit scores, the VA doesn’t require a maximum debt-to-income ratio. However, most lenders allow up to a 43% – 50% DTI depending on your other qualifying factors.
- Meet the disposable income guidelines – The VA requires specific amounts of disposable income depending on where you live and your family size. They require this to ensure you can comfortably afford the new mortgage, your debts, and the daily cost of living.
- Proof you’ll live in the property – VA loans are for owner-occupied uses only. So you must prove you intend to live in the property.
- Stable employment – You must have two years of stable employment or employment in the same industry with consistent pay. If you changed jobs within the last two years, you might need to prove you have the training, education, or experience to succeed.
VA Loan Benefits
Like most loan programs, there are specific benefits of VA loans, including the following:
- No down payment required
- Flexible underwriting guidelines
- No loan limits if you have full entitlement
- No Private Mortgage Insurance
Competitive interest rates and closing costs
VA Loan Restrictions
The VA loan program has some restrictions you must know before applying:
- You must have available VA entitlement to be eligible
- You must live in the property you’re buying as your full-time residence
If you don’t have full entitlement, you must abide by the VA loan limits by county
Also Read : How to Refinance a Second Mortgage
How to Apply for a VA Loan
It’s simple to apply for a VA loan. Even though the VA backs it, you get the loan from any approved VA lender. Of course, you can shop around to find the best rates and terms to get the most attractive loan terms.
To apply, you must complete a loan application and provide qualifying documentation for your income, assets, and liabilities.
Final Thoughts
VA loans are a great option for veterans and current military members. With no down payment requirements and flexible underwriting standards, it’s easy to see why it’s a great program. If you have any questions about the program, please feel free to reach out!
