A VA loan is a mortgage program offered by the U.S. Department of Veterans Affairs (VA) to eligible Veterans and military service members. VA loans make it easier for current and former military members to buy safe and adequate housing by offering exclusive benefits, including:
- No down payment requirement
- Lower interest rates than conventional loans
- No private mortgage insurance (PMI)
- More flexible credit score and income requirements
- Assistance with loan modification and foreclosure avoidance
Today we’ll review the eligibility terms set by the VA and financing requirements set by lenders and get you one step closer to that dream of home ownership.
Who is Eligible for a VA Loan?
To qualify for a VA loan, you must meet specific service requirements. Generally speaking, VA loans are available to:
- Veterans who have served 90 consecutive days of active duty during wartime or 181 days during peacetime with acceptable discharge conditions.
- Active-duty service members who have served 90 consecutive days with acceptable discharge conditions.
- National Guard and Reserve members who have served at least 6 years or served 90 days (at least 30 consecutive days) under Title 32 orders.
- Surviving spouses of a Veteran who died in the line of duty or due to a service-related disability.
A Certificate of Eligibility, or COE, is a document that proves your eligibility for the VA home loan benefit. The COE shows that you meet the minimum service requirements and have enough entitlement to obtain a VA loan.
The COE also includes your entitlement code, which tells the lender how much loan entitlement you have available. VA entitlement refers to the dollar amount the VA will guarantee on a VA loan, which represents the portion of the loan that the VA will repay the lender if the borrower defaults on their loan.
The requirements to obtain your COE vary depending on your service status. You can get your COE by applying through your lender, applying online through the VA’s eBenefits portal, or applying by mail.
VA Loan Financing Rules
VA loan lenders set financing requirements to ensure you can comfortably meet your mortgage payments. Lender requirements typically vary, but we’ll go over the commonly accepted indicators, including credit score minimums, a minimum debt-to-income ratio, and employment requirements. This information helps lenders determine how much loan you can afford and your monthly payment terms.
Minimum Credit Score
There is no official minimum credit score required to get a VA loan. However, the majority of lenders won’t accept a score below 620. Usually, a lender will pull your credit score from Equifax, TransUnion, and Experian, then take your median credit score to use for your application.
A score below 620 doesn’t automatically disqualify you. Lenders will consider other factors, such as your most recent credit history. For example, if you’ve been making payments on time for two years and your lower credit score results from decisions you made five years ago, you’ll be in better shape than someone with a low rating because of recent problems.
Debt to Income Ratio
The VA does not set a maximum debt-to-income (DTI) ratio for VA loans, but most lenders prefer 41% or less. The DTI ratio measures your monthly debt payments divided by your gross income, indicating your ability to handle new debt. Lenders prefer a lower DTI ratio as it suggests better capacity for financial obligations like a mortgage.
While most lenders like to see a maximum DTI ratio of 41%, they may be willing to make exceptions for borrowers with solid credit scores or other compensating factors, such as a large down payment or significant cash reserves.
Here’s how to calculate your debt-to-income ratio:
- Determine your monthly income, including wages, tips, investments, commissions and child support (use your gross or pre-taxed income).
- Add up your debts, including car payments, student loan payments, loans you’ve co-signed, credit card minimum payments, child support payments and mortgage payments, including your new mortgage.
- Divide your debt by your income and multiply that number by 100.
Let’s try out an example: $2,000 a month in debt (divided by) $4,500 a month in income (equals) .44. Multiply .44 by 100, which shows a debt-to-income ratio of 44%.
VA loan employment requirements refer to the guidelines lenders use to evaluate a borrower’s employment history and stability when considering them for a VA loan.
In general, lenders prefer borrowers with a stable and consistent employment history and a steady income track record. This typically means having at least two years of continuous employment with the same employer or in the same line of work. However, there are some exceptions to this rule. For example, if you are a recent college graduate who has only briefly worked in your field but has a strong employment history before, lenders may still consider you for a VA loan.
Lenders may also consider other employment-related factors, such as the borrower’s occupation, income stability and future earning potential. They may also look at whether the borrower has a history of job hopping or gaps in employment, which could indicate a higher risk of default.
Lenders may require additional documentation, such as tax returns and profit and loss statements, to verify your income and employment stability if you’re self-employed.
General VA Loan Rules
VA Funding Fee
The VA funding fee is a one-time fee charged by the Department of Veterans Affairs (VA) to help offset the costs of the VA loan program. The VA funding fee serves two main purposes: to assist in funding the VA loan program and to function like Private Mortgage Insurance (PMI), which is not mandatory for VA loans.
The funding fee ranges from 0.5% – 3.3% depending on your loan terms. You may be exempt from paying the funding fee if you:
- receive compensation for a service-connected disability
- receive Dependency and Indemnity Compensation (DIC) as the surviving spouse of a Veteran
- are a Purple Heart recipient
VA Occupancy Rules
VA loans are intended for owner-occupied properties, meaning the borrower must intend to live in the property as their primary residence. The borrower is generally required to move into the property within 60 days of closing on the loan.
VA Loan Limits
A VA loan limit is the maximum loan amount available to borrowers with only partial entitlement remaining. VA loan limits vary depending on the borrower’s county, so make sure to check where your property is located.
Equal housing opportunity. The Department of Veterans Affairs affirmatively administers the VA Home Loan Program by assuring that all veterans are given an equal opportunity to buy homes with VA assistance. Federal law requires all VA Home Loan Program participants — builders, brokers and lenders offering housing for sale with VA financing — must comply with fair housing laws and may not discriminate based on the race, color, religion, sex, handicap, familial status or national origin of the veteran.