Overview of the Requirements for VA Loans
VA Home Purchase Loans
Potential VA homebuyers need to meet requirements set by the Department of Veterans Affairs and by the lender they work with to obtain financing. The VA does not make home loans, so lenders can have their own requirements along with the VA’s requirements.
To obtain a VA loan, the law requires that:
- The applicant must be an eligible veteran who has available entitlement.
- The loan must be for an eligible purpose.
- The veteran must occupy or intend to occupy the property as a home within a reasonable period of time after closing the loan. There are exceptions and workarounds in some cases. Talk with a lender about your particular occupancy situation.
- The veteran must be a satisfactory credit risk.
- The income of the veteran and spouse, if any, must be shown to be stable and sufficient to meet the mortgage payments, cover the costs of owning a home, take care of other obligations and expenses, and have enough left over for family support.
An experienced mortgage lender will be able to discuss specific income and other qualifying requirements, such as credit history, debt-to-income ratio and more.
Credit & DTI Ratio
The VA doesn’t require a specific credit score for veterans and military members who want to use this benefit. But VA lender typically will, and it’s often around a 620. Credit score requirements can be different among lenders.
Similarly, lenders will compute debt-to-income (DTI) ratios. This measure is a snapshot of a borrower’s monthly debts and payments compared to his or her gross monthly income. Despite the VA’s preference for borrowers to have a 41 percent DTI ratio or lower, lenders will often allow for higher DTI ratios. That, too, can be different depending on the lender.
VA also has a requirement for residual income, or monthly income remaining after all major debts and obligations are paid. Residual income is measured to ensure borrowers and their families will have enough money to cover basic living costs (e.g. food, transportation), and amounts vary based on family size and part of the country. The VA loan program’s success in terms of low foreclosure rate is due in part to these residual income requirements.
Once the buyer gets under contract on a home, a VA appraisal is conducted to assess the market value and condition of the property. The VA appraisal is a required step in the process and isn’t the same as home inspection, which is more thorough but not required. A home inspection is usually a good investment and can be done before the lender orders the independent appraisal.
The VA appraisal provides an estimate of the value of the property compared to the price of comparable homes. The appraiser will also check the property’s condition against the VA’s Minimum Property Requirements (MPRs). The VA wants to help ensure veterans buy homes that are safe and sound. Being familiar with MPRs will curtail frustrations if any red flags while you’re home shopping.
Properties that are valued below what you agree to pay present an issue. Generally, veterans can seek a Reconsideration of Value, make up the difference themselves or walk away from the purchase and look for another home. Some property condition issues will need to get fixed before the loan can close. Talk with a lender for more information.