VA Home Loan Program Eligibility Requirements and Guidelines Every Veteran Should Know

VA Loan Benefits

A VA mortgage is a great benefit for the men and women who have volunteered to serve our country in one of the armed forces. There are many rules to the loan but having a good understanding of them will make the purchase process easier for qualified applicants.

Listed below are the most important VA guidelines that every veteran should know.

VA Mortgages are Backed by the Federal Government

A certain portion of every approved VA mortgage is guaranteed by the Federal Government.

This means that even if the veteran finds themselves unable to make all the payments and the home is foreclosed, the government will repay the designated portion.

This single feature makes the loan more attractive for a wide range of lenders to offer to their customers.

VA Mortgages Have No Down Payment Option

This single benefit is likely one of the biggest reasons that qualified veterans use the VA home loan to buy a house.

Compared to other types of loans that may require as little as 3% and as much as 20% of the purchase price for a down payment, the no money down option can save homebuyers thousands of dollars in out-of-pocket costs.

This program is one of the few true no down payment loans.

Relaxed Rules for Approving Veterans

Conventional loans are typically designed for people with the absolute best credit scores.

This program will approve top credit scores and less-than-perfect scores.

The Department of Veterans Affairs wishes to make it easier for veterans to get a loan, so their guidelines are a bit more relaxed.

No Private Mortgage Insurance Requirement

With the majority of mortgage loans, the lender will place private mortgage insurance (PMI) fees on the loan if the borrower pays less than 20% of the purchase price as the upfront payment.

So, considering the previous point of a no down payment option, it would seem that the VA charges more for PMI.

However, the opposite is true.

The VA does not add PMI fees to any loan, making the overall cost of the loan lower than similar loans.

Limit on Closing Costs

The VA also institutes certain limits on particular fees that are charged by mortgage lenders for closing the loan.

Any approved VA mortgage lender can provide you with a closing cost estimate for a conventional mortgage and the VA mortgage and you can see the differences in the costs associated with the two mortgages.

Competitive Interest Rates

Since the VA authorizes banks, mortgage lenders, and other financial institutions to provide the VA program, this makes the loan very competitive with conventional and FHA loans.

For this reason, the mortgage rates are very comparable to those loans. In certain areas rates may even be lower than some conventional loans.

Multiple Ways to Use a VA Mortgage

Veterans may buy a home with a fixed rate over a fixed term, such as a 30-year fixed loan.

Or, it can be offered with an adjustable rate to offer a bit of saving in the first few years of the mortgage.

The loan can also be used to refinance an existing mortgage.

Even better, the VA loan can be used to make minor repairs and modest improvements to an existing home.

VA Mortgages Do Not Charge a Penalty for Early Payoff

Some loans charge a penalty if the loan is paid off within a certain period, usually within the first 5 years of the loan.

VA guidelines prohibit such a penalty for Veterans. If you decide to sell the home just a couple of years after buying, you will simply owe the outstanding balance on the home. Similarly, if you should come into a large sum of money like an inheritance or lottery winnings, you could also pay off the balance with no penalty.

An Existing VA Mortgage Can Be Assumed by Another Qualified Buyer

If you find that you would like to sell your home, another qualified veteran can assume your existing loan.

This can be a great selling point if the rates have risen and the buyer would like to keep the low rate that you currently have on your mortgage.

Must Meet the Minimum Service Requirements: Loan Eligibility Rules

The Department of Veterans Affairs has a list of people who may be allowed to apply for a VA mortgage based on service. In summary, the following people can apply for the loan:

• Individuals that served in either the National Guard or Army Reserve
• Enrolled cadets of the Air Force Academy, Coast Guard Academy, or U.S. Military Academy
• Students of the U.S. Naval Academy also referred to as Midshipmen
• The surviving spouse of a veteran who has passed away
• Any person who is currently serving full-time in the Army, Marines, Navy, Air Force, or Coast Guard
• A person that was honorably discharged from the Army or Marines or Navy or Air Force or Coast Guard

There are length of service restrictions for each category of people. Active duty people usually have the shortest service time restrictions while members of the National Guard or Army Reserve typically have the longest service time requirements.

Certificate of Eligibility

Before applying for this mortgage, you will first need to obtain a copy of your Certificate of Eligibility, also called the COE. This is a document from the Veterans Affairs office that determines the amount of guarantee that will be offered to you for the VA mortgage. An approved VA Mortgage lender can get the COE for you online.

If you prefer, you may obtain the COE on your own through the Veterans portal online via the Department of Veterans Affairs.

The COE is NOT a Guarantee For the Loan

The COE does not mean that you are approved for the mortgage.

Instead, the COE shows that you have met the service requirements to apply for the loan.

The loan application is then submitted by your lender to get approval from the mortgage underwriter.

Debt-to-Income Rules

The rule of thumb used by a mortgage underwriter is that an applicant’s debt-to-income ratio should not be higher than 41%. There are instances where the 41% ratio can be exceeded with automated underwriter approval. Talk to your mortgage lender to see if that’s an option for you if you’re above the 41% threshold.

This is a simple calculation. The underwriter will take the applicant’s current monthly debt payments, plus the new housing payment, and divide that by the applicant’s gross monthly income.

For example, suppose a borrower makes $60,000 on their current job. This means that before taxes and other items are cut from their pay, their monthly gross income is $5,000. 41% of $5,000 is $2,050. This means that the borrower’s new house payment, plus their debt payments like a car payment, credit card payments, student loans, and other debt cannot be over $2,050.

VA Mortgages Also Calculate Residual Income to Protect the Borrower

To prevent the borrower from collecting too much debt and causing financial hardship, the underwriters also do a residual income calculation.

The residual income is the amount of money left over after paying monthly debt and paying utilities and income taxes. The necessary residual income amount is based on the size of the family and the region of the country where the borrower plans to live.

The residual income test is one of the main reasons why the this mortgage has the lowest percentage of foreclosures among most types of mortgage loans.

VA Requires the Borrower to Reside Within the Home

The VA mortgage is intended for applicants who plan to reside within the home as their primary property. This mortgage is not allowed for vacation homes or rental properties.

Although the guidelines state that it is possible to use the loan to purchase a multi-family home such as a duplex or triplex, it is very difficult to find a lender that will approve that type of purchase.

Funding Fee Charges

To have a reserve of money needed to pay the infrequent guarantee to a lender if a home is foreclosed, the VA charges a funding fee on each loan.

The percentage of the funding fee will depend on the loan amount and the purpose of the loan. Thankfully, this fee is not required to be paid up-front. Instead, the fee is added to the loan amount and financed over time.

The following chart shows the percentage applied to each type of loan.

Fees when purchasing a home

The funding fee for a cash-out refinance loan is 2.15% for the first use and then 3.3% for each use after.

No Set Maximum for Loan Amounts

There was a time when the VA restricted the amount of money that could be loaned out on each loan. However, that restriction was removed in the year 2019 with the Blue Water Navy Vietnam Veterans Act.

The only loan limit will be the previously mentioned debt-to-income ratios and the residual income test.

VA Will Allow the Purchase of a Condo Unit

The VA Home loan can be used to purchase an existing single-family home or a new construction home. If you want to purchase a new construction home, the builder MUST have a VA Builder ID.

Also, the VA will allow the purchase of a condo unit.

The VA has a listing of condo projects that are currently approved. You can use their website to see if a condo you are considering is on their list.

If the condo project you are considering is not on the approved list, it will be extremely difficult to qualify for financing.

The Property Must Meet the Minimum Property Requirements

The VA wants each qualifying veteran to have an adequate home to live in when using this program.  For this reason, each home must pass must pass certain qualifications.

These guidelines deal with the overall safety of the home to ensure that the veteran will have a comfortable and adequate home.

The majority of the VA property requirements deal with items such as the electrical, plumbing, and heating systems as well as the condition of the roof, foundation, and access to clean water.

Necessary Income For the Mortgage Needs to Be Consistent and Dependable

Some people are under the false idea that they will need a high-ranking career with several years on the job to be approved for the mortgage. This is not true.

Refer back to the earlier point about debt-to-income ratios and the residual income guideline. The underwriter will look to make sure these rules are met.

Then, the underwriter will look at the source of the income. Whether it is one full-time job, or 2 part-time jobs, or service disability plus a part-time job, it does not matter. So long as you can document your income for a minimum of 24 months and that the income has either stayed the same or increased over that time, then you should be fine.

In Certain Situations, It is Possible to Have TWO VA Mortgages at the Same Time

Earlier we described that the veteran must plan to live in the home as their main residence to qualify for the mortgage. However, there are a few, well-defined situations in which a veteran may have two separate VA mortgages on two separate homes at the same time.

This is called VA Second-Tier entitlement. The most common situation is when a full-time service member receives a new PCS and must relocate. 

The VA-Backed Home Loan Offers a Streamlined Refinance Option If Rates Go Down

The VA has a popular option known as the interest rate reduction refinance loan, or IRRRL for short. This makes it easy to refinance with reduced paperwork under certain circumstances.

Before applying for the IRRRL, the person must currently have a VA mortgage on a home that is their primary residence. They also must have a clean payment record on the mortgage for at least the past 12 months.

The IRRRL is intended to help people lower the interest rate on their mortgage so that they have a lower overall payment. Or, it can help someone move from an adjustable-rate mortgage to a fixed-rate mortgage.

For people who have been paying on their home loan for 10 years or more, may be able to keep their payments the same but drop down to a 15-year fixed mortgage and save a lot on interest over the remainder of the loan.

Summing Up VA Lender Guidelines Every Veteran Should Know

The above list represents the most important guidelines that every veteran should understand. Being familiar with these rules will help you prepare for the loan application and also give you a better overall knowledge of the loan process so that you feel comfortable during the journey to buying your home.

Additional Helpful Mortgage Resources:
The VA mortgage has a lot of moving parts. Knowing each step of the process and what to expect, can make the home buying process so much better. Jeff Nelson has a great article explaining what you need to know about loans for Veterans and the steps to expect while you go through your home buying journey.

There are many benefits of a VA mortgage as Bill Gassett details in his blog post on the topic. From no down payment options to no private mortgage insurance, Bill’s article articulates the many benefits of VA mortgages.

There are a ton of reasons to apply for this loan. The pros outweigh the cons but there are certain circumstances where a VA mortgage is not for you. Take a look at this post to learn the pros and cons of a Veteran mortgages.

The VA mortgage is one of only a few mortgage programs that have a no down payment option. Kyle Hiscock has an informative article about the pros and cons of low down payment programs that will help you make an informed decision on whether or not it is a good idea for you.

Requirements for a VA Loan Every Veteran Should Know

About the author: This article on “VA Home Loan Benefits Every Veteran Should Know” was written by Luke Skar of MadisonMortgageGuys.com. As the Social Media Strategist, his role is to provide original content for all of their social media profiles and generate new leads from his website.

We provide award-winning customer service to clients who need to purchase a home or refinance an existing mortgage.