The VA home loan program is a popular way for military members, veterans and their families to buy a home. These FAQs will help you understand the basics of eligibility, documents you’ll need and other details that you might not have thought about as you begin your house hunting experience.
Who is eligible for a VA loan?
Anyone who has served in the military (including Guard and Reserves) and who has not been dishonorably discharged is eligible for a VA home loan.
You do NOT have to be a first time homebuyer, and though you should have decent credit, the credit requirements are usually a bit more relaxed than for conventional loans. Still, aim for a 620 if possible. You should have a regular source of income as well, residual income in lender speak.
The first step for a veteran who wants to secure a VA loan is to obtain a Certificate of Eligibility (COE). Lenders who are working with veterans can obtain an automatic certificate of eligibility (ACE) by using an online system that provides the certificate immediately. The certificate of eligibility contains information on the amount of entitlement that is available to the veteran. What is entitlement?
How Much Money Can I Borrow? (Entitlement)
The U.S. Department of Veterans Affairs (the VA) does not make loans to veterans; it establishes eligibility requirements for VA loans and guarantees them. This basically helps offset the risk to a lender should a borrower every default on the loan.
The government says, hey, this is one of ours and we guarantee that if they ever default on the loan, we will cover a certain portion of the loan amount. The amount that the VA guaranteed to the lender is crucial for determining how much money you, the veteran, can borrow.
The amount that the government will guarantee to a lender is known as a veteran’s “entitlement.” If you served during wartime, the amount of your entitlement is bigger than for a veteran who served during peacetime or was in the reserves.
Lenders will generally loan up to four times a veteran’s available entitlement without requiring a down payment.
- For veterans who have their full entitlement available, the maximum amount of guaranty is 25% of the loan amount, regardless of the conforming loan limit. For the most part, these will be first time homebuyers who are veterans.
- For veterans who have previously used a portion of their entitlement…the maximum guaranty entitlement possible is 25% of the conforming loan limit, less the amount of entitlement previously used and not restored. Here’s an example provided by the VA circular 26-19-23:
A veteran has previously used $70,000 of their entitlement. The Freddie Mac conforming loan limit in the area where they live is $724,000. They’re seeking a $765,000 loan amount.
- $724,000 x .25 = $181,000 (25% of conforming loan limit)
- $181,000 – $70,000 = $111,000 (guaranty entitlement available)
- $111,000/$765,000 = 14.51% (maximum guaranty percentage)
Because in this case the maximum amount of guaranty entitlement ($111,000) was less than 25% of the loan amount ($191,250), the maximum amount of the guaranty available is 14.51%, or $111,000.
What Are the Loan Limits for How Much I Can Borrow?
Pay attention to the conforming loan limits in your county. Regardless whether you use an FHA conventional, or VA loan, they amount that you can borrow is tied closely to these loan limits.
You can easily Google “confirming loan limits in my county” These loan limits are based on the average cost of a home in the county where you plan to buy. If you’re in high cost areas such as parts of CA, NY, Hawaii etc…these loan limits tend to be high for a single family home, around $970,000.
Tip: The loan limits increase for multifamily homes. The loan limit for a 2 family may be 1.2MM, a 3 family, 1.5MM and 1.86MM for a 4 family. In other words, you may be able to get a bigger loan, and the lender will count 75% of your potential rental income to help you qualify for this bigger loan. Boom!
I’m Not a First Time Buyer, can I still use the VA Loan?
The certificate of eligibility that a lender will pull when you apply contains information on the amount of entitlement that is available to a veteran. A veteran who has used all or part of their entitlement can “restore” it (basically fill it back up and use it to purchase another home if:
- They sold the home and paid off the mortgage.
- They’re selling their home to another veteran who is assuming their mortgage.
- The original home loan has been paid off in full.
Is there a pre-payment penalty with a VA loan?
As with any loan, you must pay it back. The VA does not charge a pre-payment fee, though, so you can make payments at any time without penalty. If you want to pay off your loan early, knock yourself out. That said, it may not make sense to pay off your mortgage early. Generally speaking, home loans are the cheapest form of debt so you may be better off paying off higher interest debt or even investing the money.
Can I use my VA loan benefit to fix up a home I already own?
Yes, as long as you haven’t been delinquent on your mortgage payments, you may be able to use your VA loan benefit to make repairs or improvements to a home you already own. Your lender may require that you get a contractor’s estimate and an appraisal of your home before approving the loan.
How much does a VA home loan cost?
There’s no fee to apply for a VA loan. Still, you need some money to cover your closing costs, called the funding fee, which ranges from 0.5% to 3.3% of the loan amount, plan for around 2.3%. If you’re a disabled veteran or their spouse, you’re usually exempt from paying these fees. The funding fee can also be financed.
You may also need to pay for home appraisal, credit report, title fees and other costs related to the purchase of a home. Overall, VA loan expenses are comparable to borrowing from other loan sources with lower interest rates but the biggest benefit? No down payment.
What are the Debt-to-Income Ratio Requirements?
Lenders look for a back end ratio of 41%. In other words, add up all of your the current debts reported on your credit, then divide that total sum by your gross monthly income. That percentage should be below 41%.
The VA loan is a great program for our veterans and they deserve nothing less, particularly for those who have been prepared to make the ultimate sacrifice. Many lenders offer VA loans so we won’t recommend a particular one, but you can visit our directory of black mortgage lenders and loan officers in your state and contact them with any further questions you may have.