VA Loan Requirements (2019)

Certified Mortgage Advisor
NMLS 1701021
Published 
August 9, 2019

VA loan requirements

So if you're looking to get a VA loan, what are the minimum things that you need to meet to make sure that loan is going to go as smoothly as possible? And just like all of the other loan types and anybody who's looking to buy a house, some of the two biggest questions from people are what's the minimum credit score and what's the minimum down payment.

Take advantage of the VA loan

Let me first start off by saying the loans are incredible. If you are eligible for a VA loan, meaning that you are a veteran you have a fantastic loan program available to you. If you don't use that VA loan program I hope you have a really good strategy set up because if you take advantage of the VA loan, you are going to see incorrect benefits.

And we'll get into a little bit more of some of what's been happening more recently nationally with the VA loans and a little bit of why VA loans might have had a bad reputation in the past. And what's a little bit different is how to make sure that you're working with a lender who can give you the best VA loan possible.

Minimum credit score

First of all, what's the minimum requirement for a credit score most of the time you're going to run into 620 as the minimum credit score on VA loans. Very similar to conventional. Most conventional loans go down to that 620 range and you're going to see that with VA loans as well, 620 really is not a crazy high credit score. Most people in America have about 640 and above. So 620 is not terrible at all. Obviously, the higher your credit score is the better interest rates you're gonna get.

Minimum down is 0%

Then, if we talk about the minimum down for most people on a VA loan is a whopping 0% down. Yes, 0% down on a VA loan. There's no grant. There's no money that you have to pay back. It is true 100%, 0% down.

Interest rate

So what's incredible about VA are you get an awesome interest rate, awesome terms on mortgage insurance, and 0% down. Most other programs are going to require 3% or 5% down where you can go with nothing on the VA loan and still get really great rates.

Mortgage insurance

Now, let's start getting into mortgage insurance. If you put less than 20% down on a conventional loan, you're going to run into monthly mortgage insurance. VA is a little different in that they have no monthly mortgage insurance. So mortgage insurance is something that protects the lender.

If you are putting less money down. And it protects the lender against default because the loan is risky if you don't have a down payment because technically you don't have as much skin in the game.

VA Funding Fee

But what VA does is instead of charging a monthly mortgage insurance cost, they just do an upfront mortgage insurance premium. So they call this a VA Funding Fee. So the funding fee is what you'll pay at closing or in your loan to basically allow the VA to keep giving out these incredible loans.

How to pay funding fee?

And so the funding fee can be paid in two ways. It can either be paid as a cost at club or it can be put into your loan amount. And that's what most people do is they put it into their loan amount. And so normally we see the funding fee being about 2.15%. This can vary depending on it. This is the first time you've used a VA or a second time, or how much you're putting down can change.

But if you're doing 0% down, this is the first time you're using a VA loan, then it's going to be 2.15%. And so on a hundred thousand dollars loan. Instead of taking a hundred thousand dollar loan, you would take a $102,150 loan. So you would take that funding fee and put it into the loan amount. But this saves you again from no mortgage insurance monthly. So your monthly costs are lower.

Service connected disability

Now, something to note with this funding fee too is if you have a service-connected disability. So any disability that was connected to you while you were in the service, you most likely are exempt from the funding fee. So if you're exempt from the funding fee, then that means you will pay no mortgage insurance on your VA loan.

Certificate of Eligibility

And the way to find that out is you can find that out through your VA office, there's a document called a Certificate of Eligibility. You can get this from any mortgage advisor or your VA office. And with a certificate of eligibility is going to tell you is if you're exempt from the funding. It's also going to show you your entitlement amount.

So if you've never used a VA loan, you're going to have full entitlement and it will also show you if you've ever used the past or a VA loan in the past and how much was charged there.

Debt-to-income

Something that's a weird about VA loans is that in every other loan that you're going to run into, you're most likely going to run into what's called a debt-to-income ratio. The debt-to-income ratio is if you took all of your monthly debts, so how much you pay on your car, how much you pay on credit cards per month, if you take that divided by your income, that's going to give you your debt-to-income ratio.

VA is interesting in that they have a debt-to-income ratio, but they don't care as much about the debt-to-income ratio as other loans do. On other loans, the debt-to-income ratio is a huge factor, and whether you qualify for that loan or not.

Residual income

But VA is a lot more lenient because they're not necessarily looking at the debt-to-income ratio as much as they are what's called residual income. So VA is more interested in how much money you actually have left over every month instead of a percentage.

In their mind, the percentage isn't a good factor of if you can afford your mortgage, and they're a good factor for identifying. If you can pay back your mortgage how much actual money is left over after you pay your expenses and your mortgage. And so this is what they call residual income.

And so in residual income, instead of calculating a percentage, what they want to do is they want to take your net income. They want to subtract the costs for your house or your mortgage payment. They also want to subtract like a utility expense. So they'll use normally about 14 cents per square foot to calculate a utility expense in there. And then they subtract any debt obligations. And that's going to give you your residual income. So they'll take that number and compare it to a chart that tells them how much you need to have leftover every single month.

Computing residual income

So track with me here. It can be a little confusing but basically, if you Google VA residual income chart, you'll be able to look through and see what region of the country are you in and what's your family size. So let's say I'm going to use a round number here. Let's say that your residual income requirement is $700. That means, if you take your net income, you subtract the mortgage payment, you subtract the utility expense and you subtract your monthly debt obligations, not your expenses, your debt obligations. You need to have $700 or more leftover every single month to be able to meet that residual requirement.

So for most people is not too big of an issue. If you have a lower income, it might be a little bit tighter. And so this is where a mortgage advisor is going to be able to walk you through Residual Income. So VA loans are awesome, but they can have little details that you need to watch out for. And it's always good if you do your research, but it's also great to ask questions of your mortgage advisor and real estate agent and talk with them, make sure that they're doing their homework upfront and making sure that everything is put in the file correctly. That way you don't run into issues when you're under contract for a house.

VA wants your home to be your primary residence

Another thing that you're going to run into with VA is VA does not want you to have an investment property. It needs to be a primary residence. So that means you need to live on the property. If you're going to have a VA loan. Now can you use a VA loan for an investment property? You can, but it has to be you have to follow the rules, right? No government is keen on occupancy fraud. So we have to make sure that we follow the rules when we're looking at any type of mortgage.

But as far as occupancy rules for VA loans, whenever you're purchasing, you have to purchase a primary residence, meaning that when you close, you have to guarantee that you're going to move into that property and live there.

You can rent your home

So what you can do, this is very common, especially for people who are on active duty and maybe they have a permanent change of station. They're traveling for work on contracting or they're doing some sort of moving and you can actually rent out your home while you're traveling.

So what this would look like is at a buyer a couple of months, And he was moving from New Mexico. So he had a VA loan in New Mexico. He got transferred to Wright-Patterson Air Force Base, which is around where I'm at, and what he did is he rented out that VA loan and then got a new VA loan for this property. That's perfectly acceptable.

Just make sure you stayed in the property for a year

He was in that property for over a year, which is one of the requirements that the VA has. He was able to rent that out, get some extra income and then move into a new property here in Ohio where he was stationed. So that's perfectly fine.

Get a multifamily home

Another option that you have is you can purchase multifamily. So you can instead of just going to a single-family residence, you could purchase a duplex or triplex, or fourplex to be able to get some extra income to offset your payment. So all in all VA loans are incredible. They can be a little finicky. So make sure that you do some homework on it. Make sure you talk with a mortgage advisor. Who's going to give you full approval upfront. You don't want somebody, who's just going to take general information and say, here's a letter, right? You don't want to do a VA loan over an app because it can't calculate some of the complexities that go on with the VA.

VA loans are useful loans

They're great loans. You're going to save a lot of money on mortgage insurance and a lot on your interest rate. And you're probably going to have some extra cash leftover because you won't have to put a down payment. So you could use that for furniture or repairs or investments or whatever you want to but make sure.

VA loan reputation

That you're doing the homework and setting everything up on that VA loan, because this is sometimes where VA gets a bad rap is there's a lot of people who don't have any experience with VA loans giving out VA loans or attempting to give out VA loans, which gives VA loans, bad reputation.

Then also there's been a trend nationally in the past few months, and this has been systemic over the years where veterans are being taken advantage of since VA loans are insured by the government, which means that mortgage companies don't lose as much money on VA loans, meaning that when they give out VA loans, they're actually more profitable.

Veterans getting taken advantage

The problem is instead of mortgage companies passing on the cost savings to veterans. They're just charging the same amount that they would for any other loan. And in some cases, they're actually increasing that rate. Don't ask me why. This is a systemic problem that we're seen with veterans for years.

Veterans are continuously getting taken advantage of because there are so many great programs and because a lot of people just don't understand the programs that the VA gives out. We're seeing a lot of companies take advantage of veterans. So when you're looking for a VA loan, shop it around, you don't have to go with the big companies that seem like they're connected with the VA or with the government because they're not affiliated with the government. They just have the badges that make it look like it.

Get a mortgage broker you can trust

So your best bet for a VA loan at least in this market is going with a mortgage broker who legally cannot upcharge you on a VA loan. Another lender could build in costs. So something to watch out for. I don't want to call out any companies and do your research to get multiple quotes of VA loans, but just make sure you don't go with one.

Find extra quotes

Make sure that you're getting really great rates on a VA because you should, if you qualify for a VA loan, they're incredible. Make sure you get a great rate with them, shop it around, and find the best deal for you.

Talk with a loan officer
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