VA Loan Requirements for 2021

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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, 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 VA

Affordable home financing is a major military benefit. Here’s what you need to know to take advantage of it.

What Is a VA Loan?

The VA home loan program provides a way for service members, veterans, and surviving spouses to purchase, improve, or refinance a home with competitive mortgage rates, no down payment, and no private mortgage insurance. 

VA home loans are a “cornerstone” of the 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.”

How Do VA Loans Work?

There are two main categories of VA loans: VA direct loans and VA-backed loans.  VA direct loans are serviced directly by VA. The sole VA direct loan is the Native American Direct Loan, which is only available to Native American veterans or service members buying, building, or refinancing a home on federal trust land. All other VA loans are VA-backed loans, meaning they’re serviced by private lenders but backed by VA. All VA loans must be serviced through a VA-loan approved lender who follows VA standards. Since a VA-backed loan is less risky to the lender, they’re more likely to have better terms or less stringent requirements.

One of the biggest draws of a VA loan is that it allows you to secure a loan with 100% financing, no down payment required. You also won’t have to pay private mortgage insurance (PMI), which most conventional lenders require if you put less than 20% down. You will, however, need to pay a one-time VA funding fee.

VA Loan Benefits

Compared to conventional loans, VA loans have many benefits. Some of these include:

  • No down payment required (as long as the sales price isn’t higher than the appraised value)
  • No private mortgage insurance (PMI) required, even if the down payment is less than 20% of the mortgage amount
  • Potentially better rates and terms
  • Potentially fewer closing costs

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 about each.

Purchase loan

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 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.

IRRRL

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. 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 VA, and you’ll have to pay the 0.5% VA funding fee.

Cash-out refinance

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

In general, VA loans are available to veterans, current service members, and eligible surviving spouses. 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:

  • Veteran
  • 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 VA, your lender, or by filling out a mailed request.

Pro Tip

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

Credit requirements

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 

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 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

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

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.

What Is a Certificate of Eligibility (COE)?

A certificate of eligibility shows a lender that you meet the service requirements to qualify for a VA home loan. You can typically get a COE as long as you didn’t receive a dishonorable discharge and you’ve met the minimum active-duty service requirements, which vary depending on when you served. You may also be able to get a COE if you’re the surviving spouse of a veteran. 

Documents You’ll Need

What documents you’ll need to provide to apply for your COE depends on your current status. Here’s the official list provided by VA

StatusDocuments needed
VeteranDischarge or separation papers (DD214)
Service memberStatement of service signed by your commander, adjutant, or personnel officer, with the following information:

Your full name
Your date of birth
Your Social Security number
The date you entered duty
The duration of any lost time
The name of the command providing the information
Current or former activated National Guard or Reserve memberDischarge or separation papers (DD214)
Current or former National Guard or Reserve member who has never been activatedStatement of service signed by your commander, adjutant, or personnel officer, with the following information:

Your full name
Your date of birth
Your Social Security number
The date you entered duty
Your total number of creditable years of service
The duration of any lost time
The name of the command providing the information
Discharged member of the National Guard who was never activatedYour Report of Separation and Record of Service (NGB Form 22) for each period of National Guard service,
and
Your Retirement Points Statement (NGB Form 23) and proof of the character of service
Discharged member of the Reserves who was never activatedA copy of your latest annual retirement points,
and
Proof of your honorable service
Surviving spouseSee here for details for how to apply for a COE as a surviving spouse

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 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 what 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 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 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.

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