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VA Loan Requirements for 2018

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The VA loan is often touted as the best mortgage option for military veterans. Best known for being a no-money-down loan, the VA loan also stands out for being a low-fee option that allows military members to skip annual mortgage insurance payments. However, not everyone qualifies for the VA loan.

Are you eligible for the VA home loan benefit in 2018? If you are, should you use it to buy your next home? We explore the ins and outs of the VA loan, so you can decide whether to use it in your next home purchase.

This article covers:

Understanding the VA loan

The VA home loan is designed as a benefit for active-duty military, veterans and long-standing members of the Reserves or National Guard. To qualify for the loan, you must meet certain service requirements (which we explain below). VA loan borrowers don’t need to come up with any money to put down on their mortgage. That makes it a compelling option for younger buyers who haven’t had time to save. It’s also compelling because VA borrowers never pay the pricey mortgage insurance premiums that can accompany other mortgages.

VA home loans, don’t technically have a loan ceiling, but most lenders set a maximum amount that corresponds to loan limits set by secondary mortgage buyers Fannie Mae and Freddie Mac. That means in 2018, most borrowers can borrow up to $453,100 for a single-family home, but the limit is higher in certain parts of the country. You can look up the expected loan limit by county.

Frequently, avoiding fees means paying a higher interest rate, but that isn’t necessarily the case. Today, VA loan interest rates are competitive with conventional mortgages.

The main drawback to the VA loan is the upfront funding fee. While borrowers can finance this fee, it adds to the total cost of the mortgage. However, wounded veterans* and surviving spouses** can waive the funding fee which makes this loan even more compelling.

If you’re purchasing a house using a VA loan, you can also reduce your upfront financing fee by putting down 5% or more.

VA Funding Fee by Down Payment
First-time use (%) Repeat use (%)
Wounded veteran* or surviving spouse** 0% 0%
Home purchase- Veteran or active duty military
0% down- 2.15% 0% down- 3.3%
5% down- 1.50% 5% down- 1.50%
10% down- 1.25% 10% down- 1.25%
Home purchase- Reserves/National Guard
0% down- 2.40% 0% down- 3.3%
5% down- 1.75% 5% down- 1.75%
10% down- 1.50% 10% down- 1.50%
IRRRLs (Interest Rate Reduction Refinancing Loans) .50% .50%
Cash-out refinances (Veteran or active duty) 2.15% 3.30%
Cash out refinances (reserves) 2.40% 3.30%
Loan Assumptions .50% .50%
Manufactured Home Loan (not classified as real property) 1.0% 1.0%

*Wounded veterans are veterans receiving VA compensation for a service-connect disability or who would be entitled to compensation for a service-connected disability but are receiving retirement or active-duty pay.

**Surviving spouses include spouses of veterans who died in service or from a service-connected disability.

VA loan requirements in 2018

What does it take to qualify for one of these loans? Like all loans, the VA loan requires borrowers to have satisfactory credit and sufficient income. In addition to the more traditional loan requirements, the VA loan requires borrowers to plan on living in their home for at least one year and to meet certain service requirements.

Before you take out a loan, check to see that you meet each of these lending criteria:

Service requirement:

All borrowers must obtain a certificate of eligibility based on their service record. The general rules for obtaining a certificate are below, but some exceptions apply, so review eligibility requirements on the VA website.

  • Current Active Duty – At least 90 days of active duty
  • Veterans – Generally 181 days active duty service and discharge other than dishonorable, or 90 days active duty during war.
  • National Guard or National Reserves – 6 years of service

Residency requirements:

VA loan borrowers must use the VA loan for owner-occupied purchases. Borrowers (or their spouses for active-duty military) must occupy the house after closing or within 60 days (if it’s a loan for a new build). If you purchase a multi-unit house, you must occupy at least one unit.

Active-duty military who plan to retire within 12 months may buy a retirement home in their intended location.

Once you’ve purchased and lived in the home for a reasonable amount of time (often consider 12 months, though there aren’t strict limits), you may convert the home to a rental property with no penalty.

You do not have to occupy your home to qualify for VA loan refinances (called IRRRLs), but you must have previously occupied it.

Credit score requirements:

Unlike many other mortgages, the VA loan doesn’t have specific credit scoring requirements. Instead, lenders generally set the standards based on their risk tolerance. However, VA loans do require borrowers to have at least 12 months of “paid as agreed” credit history. This means that you can’t have any accounts that fell delinquent in the last 12 months, and at least two years since a bankruptcy is preferred.  In general, borrowers should expect to have at least a fair credit score to qualify for a VA loan. An Urban Institute study showed that just 3.8% of VA loan borrowers had FICO credit scores less than 620 in the year 2012 (most recent year available).

Debt to income requirements:

In general, VA borrowers must have a debt-to-income (DTI) ratio of less than 41% (although, this isn’t a hard cutoff). This means that borrowers can have monthly debt obligations (including the cost of the mortgage) of up to 41% of their stable monthly income. By comparison, conventional mortgages allow a DTI ratio of 36% in most cases, but up to 45% for some borrowers.

Free cash flow requirements:

One unique requirement for VA borrowers is the free cash flow requirement. After accounting for a family’s debts and monthly obligations (home ownership costs, taxes utilities, insurance, childcare), the borrowers must have money left over. The exact cash flow required depends on the area of the country where a borrower lives and the size of their family.

Below, we show the required residual income for borrowers with loan amounts of $80,000 and above:

Residual Income Requirements
Family Size Northeast1 Midwest2 South3 West4
1 $450 $441 $441 $491
2 $755 $738 $738 $823
3 $909 $889 $889 $990
4 $1,025 $1,003 $1,003 $1,117
5 $1,062 $1,039 $1,039 $1,158
6+ Add $80 for each additional member up to a family of 7.
  1. States in the Northeast include: Connecticut, Maine, Massachusetts, New Hampshire, New Jersey, New York, Pennsylvania, Rhode Island, Vermont
  2. States in the Midwest include: Illinois, Indiana, Iowa, Kansas, Michigan, Minnesota, Missouri, Nebraska, North Dakota, Ohio, South Dakota, Wisconsin
  3. States in the South include: Alabama, Arkansas, Delaware, District of Columbia, Florida, Georgia, Kentucky, Louisiana, Maryland, Mississippi, North Carolina, Oklahoma, Puerto Rico, South Carolina, Tennessee, Texas, Virginia, West Virginia
  4. States in the West include: Alaska, Arizona, California, Colorado, Hawaii, Idaho, Montana, Nevada, New Mexico, Oregon, Utah, Washington, Wyoming

How to use a VA loan

A VA loan is an incredibly versatile mortgage benefit. It can be used to purchase an existing single-family home or condominium unit, a multi-family home with up to four units, fund a new-build, or make home improvements to an existing home. Homeowners who currently have a VA loan can also use the IRRRL program to refinance their home to a lower interest rate without necessarily having to meet credit underwriting or home value standards again. All of these loans qualify for the zero-money-down and no mortgage insurance benefits.

It’s important to note that VA borrowers cannot use the VA loan to purchase a rental property. Even if they buy a multi-family home, they must occupy at least one of the units because of the residency requirement. Multi-family borrowers must also have enough cash on hand to cover at least six months of mortgage payments to qualify for a VA loan. However, borrowers can choose to convert their home into a rental property after they move out.

Military members who want to buy a manufactured home or lot can use the VA loan, but they must put at least 5% down on the home. Manufactured home loans are only eligible for loan terms between 15 to 25 years, as opposed to the standard 30-year term.

With all the options for using a VA loan, it can be tough to decide when to use it and when to go with another mortgage option.

Because repeat VA borrowers face higher upfront funding fees, it may make sense to reserve your first-time borrower advantage for a larger “dream house” purchase rather than a starter house purchase where other loans may make more sense.

This is one of the regrets that Elizabeth Colegrove, real estate investor and author of “The Everything Lease Addendum: How-to For Landlords” says she has. Colegrove used a VA loan to purchase three different homes including the Hanford, Calif. home where she and her husband live now.

“I have some regrets about using the VA loan for our first time,” she told LendingTree. “I didn’t know our options. If you’re a first-time homebuyer, an FHA loan or a USDA loan might actually be a better deal. You might surprisingly want to hold on to the VA loan. Most people should use their VA loan for the more expensive house that they want to buy somewhere down the line.”

VA-eligible borrowers can work directly with their lender to see if the lender offers any lower cost loans, such as the USDA loan that also offers 0% down payments, or the FHA loan that allows for down payments as low as 3.5% may make more sense.

Working with lenders is even more important for borrowers who can put at least 5% down on their home. VA borrowers who put at least 5% down have lower funding fee payments, but they may also qualify for a conventional mortgage which has no upfront funding fee. However, conventional mortgages require private mortgage insurance (PMI) depending on how much you put down, and you may have to pay points to get a better interest rate. When all these variables start adding up, it’s tough to say which loan is best for you unless you can use real numbers.

Colegrove advised, “It’s easy to get overwhelmed and just want to buy the house, but you have to know your options. Working with your lender is the easiest way to know the real numbers.”

How to find a great VA lender

If you’re ready to buy a house, you’ll want to start by applying for your certificate of eligibility. This will show lenders that you qualify for a VA loan. After that, you want to look for a VA-eligible lender who can help you gain pre-approval.

According to Colegrove, some lenders struggle to finalize VA loans in a timely manner, so some see home purchases fall through at the last minute. To avoid deals falling through, people seeking to buy undervalued houses should use their real estate agent to find the best banks for VA loan approvals.

“You can usually find a slightly better rate by shopping online,” Colegrove said. “But you don’t want to be so cheap that your deal falls through. I prefer knowing that my loan will be approved.”

When you apply for a VA loan, you’ll need personal identification documents (like a passport or driver’s license), the certificate of eligibility and income verification documents. Self-employed borrowers may need to bring the last two years of income tax returns. If you plan to put money down on the house, you will need to verify your liquid assets.

In addition to these documents, you’ll need to have a clear idea of your expenses. In particular, you’ll need to know about your fixed monthly expenses, such as childcare, insurance, and taxes. The lender will use this information to calculate your residual income. You can also expect your lender to pull a recent credit report so they can evaluate your credit history.

Does a VA loan make sense for you?

If you’re eligible for a VA loan, it can be one of the best options for purchasing your dream home. Not only can you purchase a home with no money down, you can avoid mortgage insurance payments, too. However, you shouldn’t be afraid to ask your lender about other loan options. You may find that another loan fits better for your circumstances.

 

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