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Looking to buy or revamp a home on considerably better financial terms than you'd get from a standard mortgage loan? If you're a current or former U.S. service member, or the spouse of one, a U.S. Department of Veterans Affairs (VA) loan could be just what you need.
To qualify for a VA loan, borrowers need a stable income and adequate credit. Qualified borrowers can use a VA loan to buy a house or a condo (in a VA-approved complex), to finance construction of a new home, or to renovate or add on to an existing property where they live. Lower down payment requirements (including some loans offered with no down payment at all), lower interest rates and no private mortgage insurance requirement make them very attractive loans.
Who Is Eligible for a VA Loan?
VA loan eligibility extends to a broad range of current and former military service members, including combat veterans and troops who served in peacetime, active-duty personnel and reservists. In some cases, spouses of service members—including those disabled, missing or killed in action—are also eligible for VA loans.
The list of service personnel and dependents eligible for VA loans is long, and specific qualifications vary somewhat according to the years served, the nature of the service and the length of time served. A detailed breakdown can be found on the VA's home loan eligibility page, but you're probably eligible if you (or your eligible spouse) received anything but a dishonorable discharge after serving any one of the following:
- At least 90 days' active wartime duty in World War II, the Korean War or the Vietnam War.
- At least 181 days' active peacetime duty from 1947 to 1964 or from 1975 to September 7, 1980 (October 16, 1981, for officers).
- At least 24 months' continuous active duty if you left the service after Sept. 7, 1980 (October 16, 1981 for officers), or served during the Gulf War (which began August 2, 1990).
- Six years in the Selected Reserve or National Guard (as a member of an active unit who attended required weekend drills and training), followed by honorable discharge, retirement, or continued service as a reserve member.
Service members discharged due to service-related injury or disability typically qualify even if they don't meet those minimum length of service requirements.
Borrowing Requirements for a VA Loan
The VA has established three general requirements VA loan applicants must meet:
- You must have a stable source of income.
- You must have adequate credit.
- You must obtain a Certificate of Eligibility (COE) from the VA.
Only one of these criteria, the COE, is determined by the VA itself. The others are set by the financial institutions (banks and credit unions) that issue VA loans in the community where you want to buy, build or improve your home.
These lenders must follow VA lending guidelines, but they have leeway within those rules to set their own lending criteria and terms. Different banks and credit unions may have different credit score and income requirements for their VA loans, and some may charge higher or lower interest rates than others.
How Much Income Is Required?
The VA does not set a minimum income level required to get a VA loan, but the bank or credit union issuing the loan will probably want to see evidence of sufficient income to cover the monthly loan payments. That amount, in turn, will depend in large part on how much you want to borrow.
What Credit Score Do I Need?
As with income levels, lenders set their own minimum credit requirements for VA loan borrowers. Lenders are likely to check credit scores as part of their screening process, and most will set a minimum score, or cutoff, that loan applicants must exceed to be considered.
What that minimum is will vary from lender to lender, but VA loan issuers generally prefer borrowers with credit scores that qualify as good or better. On the FICO® Score* scale range of 300 to 850, credit of 670 or greater is considered good; scores above 740 are very good; and those above 800 are exceptional.
If you are turned down on a VA loan application (or any loan or credit application) on the basis of an insufficient credit score, the lender must provide you with a written explanation and tell you how to get a free copy of your credit report. You can use that information to begin working toward improving your credit scores. If you succeed in bringing your scores up, you may qualify when you re-apply for a VA loan in the future.
What About the Certificate of Eligibility?
Once a lender qualifies you for a loan based on your finances and credit, you must provide a COE to prove that you (or your spouse) meet the military service requirements for the loan.
To get a COE, you must submit an application accompanied by documentation of your service (or relationship to a qualified service member). Specific documentation requirements vary according to the nature of your service, but they may consist of discharge papers (for former service members) or a statement of service (for currently serving service members and reservists).
You can apply for a COE online, and many lenders that issue VA loans can apply on your behalf as part of their loan-processing services.
What Benefits Do VA Loans Offer?
The benefits of VA loans boil down to saving you money and helping you become a homeowner sooner than you'd be able to with a standard mortgage loan:
- Lower interest rates. The annual percentage rate (APR) charged on a VA loan may be a percentage point or more lower the APR on a traditional mortgage loan. Over the life of a typical 30-year mortgage, that difference can mean savings of tens of thousands of dollars or even more, depending on the size of the loan.
- No or low down payment. Depending on the amount you want to borrow, it's possible to get a VA loan without putting any money down on the sale. The VA grants all eligible borrowers a "basic entitlement" of $36,000, a sum you can think of as going toward a down payment. Most lenders will issue loans up to four times the basic entitlement ($144,000) without requiring a down payment.
If you'd like to borrow a greater amount, you'll likely have to put down 20% of the portion of the loan that exceeds $144,000—but your down payment will still be considerably lower than what you'd need on a traditional mortgage.
- No private mortgage insurance (PMI) requirement. With a traditional mortgage, if your down payment is less than 20% of the purchase price, lenders typically require you to purchase private mortgage insurance to protect them in case you fail to repay the loan. Since the VA guarantees its loans, borrowers don't have to buy PMI on VA loans.
- You can get multiple VA loans in succession. If you've paid off one VA loan and sold the property, you can apply for and receive additional VA loans, as long as you still meet necessary income and borrowing requirements. A special one-time dispensation may enable you to get a second VA loan even if you still own a home you bought (and paid off) with your initial VA loan.
- You can transfer VA loans. In lieu of selling property you've financed with a VA loan, you can transfer the remainder of your loan to another qualifying veteran, service member or spouse. The transferee must meet the borrowing requirements set out by the VA and your lender, and they must accept all of the original lending terms (interest rate, repayment schedule and so on). Once you've transferred a loan in this fashion, you're free to seek another VA loan.
How to Apply for a VA Loan
As with traditional mortgage loans, it pays to shop around by applying for loans with several VA lenders. If your bank or credit union offers VA loans, you can start by applying there. Ask around at other local lenders and consider checking online to compare offers from national lenders.
(Submitting a loan application triggers a hard credit inquiry on your credit report, resulting in a temporary dip in your credit scores. When you submit multiple applications within the span of a few weeks, however, the major credit scoring systems from FICO and VantageScore treat that as a single event, so there won't be any additional reduction in your scores as a result.)
Applying to multiple VA loan lenders has several advantages: If your credit is on the low end of the good range, you may find you qualify for loans at some institutions, but not others. And even if you're approved everywhere you apply, some institutions may offer better lending terms than others. In addition to differences in interest rates, lenders set a variety of fees that you may need to pay upfront when you close on the loan, or that you may be able to roll into your monthly payments.
Study the loan agreements carefully, and take the best deal you can get. If you have questions, home loan staff at your VA regional office are available to help.
Once your application is approved, work with your lender to get a COE to finalize the loan process.
VA Loan Alternatives
If it turns out you are ineligible for a COE, you may need to seek an alternative to a VA loan. While not as affordable as getting a VA loan, qualifying first-time homebuyers can get a break on down payments and interest rates through a Federal Housing Administration (FHA) Loan.
If you are turned down for a VA loan on the basis of your credit score, you're unlikely to qualify for FHA loans or any conventional mortgage. You can consider a subprime mortgage, but a better bet might be to work on improving your credit score and then applying again for a VA loan.
VA loans are an important way the U.S. thanks service members for their sacrifice and commitment. If you're eligible for one, you've earned a great opportunity to become a homeowner.