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If you’re a veteran with steady employment, it’s a great time to enter the housing market.
VA interest rates are low because of federal efforts to stimulate the pandemic economy, and service members are taking advantage of the financing boom. In 2020, mortgages backed by the U.S. Department of Veterans Affairs (VA) reached a record number of originations in the past six years, and Interest Rate Reduction Refinance Loans (IRRRL) increased by six times year over year, leading to a doubling of VA loan originations overall, according to data from the VA.
Affordable home financing is a major military benefit. VA home loans are a “cornerstone” original 1944 GI Bill, according to Chris Birk, vice president of mortgage insight and director of education for Veterans United Home Loans. And more than seventy years later, “it’s incredibly impactful, especially for younger service members and veterans. [They] have been able to plant roots and jump into houses ahead of their civilian counterparts because no down payment is required.”
Types of VA Home Loans
The three most popular VA home loans are purchase loans (mortgages), IRRRLs, and cash-out refinances. Here’s what you need to know.
VA purchase loans are government-backed mortgages that offer a pathway to homeownership for veterans and active-duty military. The qualifications and terms tend to be more lenient than conventional loans, and you’re not required to put up a down payment. You need to go through a mortgage lender to get a VA purchase loan — not through the VA itself — and the home must be a primary residence. You won’t have to pay PMI, but you’ll have to pay the VA funding fee.
Also known as a VA streamline refinance, an IRRRL is a home-refinancing option for homeowners who already have a VA-backed mortgage. An IRRRL is great for people who want to refinance to a lower interest rate or lower monthly payment. In today’s low-rate environment, it may not offer the most competitive rates for people with good or excellent credit, but an IRRRL could benefit someone with low income because of the simplified documentation requirements. Like a purchase loan, you’ll need to go through a mortgage lender and not through the VA, and you’ll have to pay the 0.5% VA funding fee.
The VA cash-out refinance replaces your existing mortgage with a bigger mortgage, allowing you to withdraw the difference in cash. The amount you can take out is reliant on how much home equity you have in your home. Unlike an IRRRL, you can have a conventional mortgage and still qualify for the VA cash-out refinance. But the interest rate may be higher than an IRRRL, as lenders tend to consider this a riskier investment. You’ll also have to pay the VA funding fee (2.3% for the first use, then 3.6% each time after that).
VA Loan Eligibility
The simple answer: you need to be a veteran or active military servicemember to get a VA loan. But there are additional requirements you need to meet.
To qualify for a VA loan (a purchase loan, an IRRRL, or a cash-out refinance), you need to be one of the following:
- Active-duty service member
- Current, former, or discharged member of the National Guard or the Reserves
- Surviving spouse of a veteran who either died in active duty or had a service-related disability
There are additional service requirements you’ll need to meet and documents to supply. The most important document will be your Certificate of Eligibility (COE), which will show you what benefits you’re eligible for. You can get this online from the VA, your lender, or by filling out a mailed request.
VA loans are not a one-time benefit. You can apply more than once — so long as you are purchasing a primary residence and pay off the VA loan each time.
VA Loan Qualifications
The VA doesn’t require a particular credit score to get a purchase loan, IRRRL, or cash-out refinance. That’s one of the advantages of VA loans, according to Birk. “The ability to buy without a down payment and without needing pristine credit are huge differentiators for military families.”
However, you will need to display creditworthiness to lenders, even if your credit score isn’t excellent or good. “Some lenders allow a 580 credit score or lower if, in the past two years, you haven’t had negatives on your report,” says Shanequa Jones, a veteran and realtor with Houston-based NB Elite Realty.
Debt-to-income ratio, or DTI, is a measure of how much you owe in relation to how much you make. Lenders view DTI as a proxy for how likely you are to pay off a mortgage. Jones says lenders of VA-backed loans tend to prefer borrowers with DTIs lower than 45% or 40%, but “some [accept higher DTIs] with compensated factors, like more cash reserves or higher credit scores.”
Income and employment
There’s no minimum income required by the VA. But Jones says employment is definitely a factor in your application: “[Lenders] want two years of consistent work history.” You may need to provide pay stubs or an offer letter as proof of employment to your lender, and some lenders may even count your education as part of your work history.
VA Loan Down Payment Requirements
The VA does not require a minimum down payment, so you can get a home loan with 0% down — a rarity in the mortgage industry that veterans can take full advantage of. Birk says eight in 10 veterans who get a VA-backed home buy without putting up a down payment.
VA Loan Property Requirements
The VA requires whatever home you purchase with a VA-backed loan to be a primary residence. This means you can’t use the loan to buy a vacation home or an investment property. However, “home” doesn’t just mean single-family homes. It can also mean condo units, multi-unit houses (up to four units), and manufactured housing.
The home will need to undergo an appraisal and inspection by a VA-approved contractor before closing. Jones says VA appraisals tend to be strict and similar to FHA appraisals. These are intended to review the building’s safety and stability.
How to Apply for a VA Loan
Getting a VA-backed loan is similar to getting a conventional loan, with just a couple added steps.
1. Get your Certificate of Eligibility
Your COE lets you know what VA benefits you’re eligible for, based on your status in the military and years of service. You can get it online from the VA website, request the VA to send it to you in the mail, or ask your lender to procure it.
2. Shop around
Not every offer will be the same. We recommend reviewing terms and rates from at least three lenders, either directly through the lender or through a mortgage broker. This will give you a sense of what the market offers based on your financial profile. Getting pre-approved — rather than undergoing the full application process — is even better because it allows you to see you’re potentially qualified for, without dinging your credit score from too many submitted applications. With inventory low across the country, having a pre-approval letter in hand can make the homebuying process go much quicker.
3. Apply for the loan
Once you find the right home, you’ll undergo the application and underwriting process for the VA loan. The lender will evaluate your income, assets, debts, credit, and other aspects of your financial health to determine if you’re a trustworthy borrower. In this process, you’ll have to provide documentation, and the home will undergo a VA-approved appraisal to ensure property requirements are met.
4. Pay closing costs and VA funding fee
If passing the lender’s qualifications, you’ll enter the closing process. This will require lots of signatures on paperwork and lots of fees to pay. One of those fees will be the VA funding fee, which is charged by the VA to subsidize the affordable terms of the loans. You can either pay the VA funding fee upfront or roll it into your monthly mortgage payments.
Eligibility for Other VA Loans and Grants
Native American Direct Loan
A Native American Direct Loan (NADL) offers home loans to Native American veterans looking to buy or build on federal trust land (reservations). Unlike other VA loans, this 30-year loan is procured directly from the VA and not through a VA-approved lender. This loan doesn’t require PMI or a down payment. To apply, you’ll need to get your COE and contact your local VA office for more details.
Specially Adapted Housing grant
Specially Adapted Housing (SAH) grants help veterans and active military with service-connected disabilities get permanent housing that accommodates their disability. These funds can either help buy or improve a home you plan on living in long-term. Qualifying people can get up to $100,896 in SAH grants for FY 2021, but keep in mind that only certain disabilities count for this grant.
You may qualify for an SAH grant if you have one of the following disabilities:
- You’ve lost (or lost the function of) more than one limb
- You’ve lost (or lost the function of) a lower leg due to a “natural” disease or injury
- You’re blind in both eyes
- You have “certain” severe burns
- You’ve lost (or lost the function of) a foot or leg after 9/11, so you aren’t able to balance or walk without a mobility device (such as braces, crutches, canes, or a wheelchair)
Special Home Adaptation grant
Special Home Adaptation (SHA) grants are similar to SAH grants, because they help veterans with disabilities with permanent housing. The differences are the maximum amount given ($20,215 in FY 2021) and the disabilities covered. You can qualify for an SHA grant if you have lost or lost the function of both hands, have “certain” severe burns, or have “certain” respiratory or breathing issues.