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How do VA Loans Work and Who is Eligible?


Sep 04, 2018

Veterans Administration (VA) loans provide substantial assistance to veterans in purchasing a home. The VA loan program began in 1944, when it was signed into law by President Franklin Roosevelt.

It was created as part of the GI Bill of Rights, otherwise known as the GI Bill. The GI Bill provides many rights and benefits to veterans, including college tuition assistance.

VA loans work through a system where the federal government guarantees loans given to veterans. Because the government guarantees the loans, lenders are willing to extend loans to veterans under special terms that the government requires. These terms include no down payment requirements and no mortgage insurance requirements. In addition, veterans can include closing costs in the loan amount.

The government guarantees lenders up to 25 percent of the home's value. Because lenders know they will receive this compensation if the loan defaults, they are able to waive down payment requirements without incurring unacceptable risk. VA loans are issued by numerous private lenders across the country. The program has resulted in a substantial boost to the overall U.S. economy as well as the rate of veteran home ownership.

Who is eligible for a VA loan?

Most but not all veterans are eligible. To qualify for the VA home loan program, veterans must have served at least 181 days of consecutive active duty during peacetime or more than 90 days of consecutive active duty during a time of war. Note that in many cases, the consecutive requirement may eliminate some reservists because their service days may not be continuous. Additionally, veterans must have received a discharge other than dishonorable. For example, honorable, general, and medical discharges all qualify under VA loan standards. National guard and reserve veterans are eligible with 6 years of service but may qualify with less if discharged due to a service-connected disability. Spouses of veterans killed during service are also eligible for VA loans.

What are the income requirements?

Income requirements for VA loans depend on the size of the mortgage. The lender will compute the applicant's debt-to-income (DTI) ratio in order to determine if the veteran makes enough money to afford the mortgage payments. DTI ratios calculate all of the applicant's debt payments, including the proposed mortgage, in order to determine if the income is sufficient to pay all bills and living expenses. VA loans use the residual income calculation to determine DTI ratios.

What is the minimum credit score and is there a maximum loan amount?

The VA imposes no minimum credit score, however, individual VA lenders often do. A 640 credit score is a typical minimum, though some lenders will go as low as 600. Though the VA imposes no loan maximum, it limits the amount of its guarantee. As a result, lenders cap VA loans at $417,000. There are many VA loan lenders. Some are limited to local areas, while others are nationwide. A VA loan specialist can determine the exact criteria. In addition, bankruptcy cases must be concluded before applying for a VA loan. Also, 2 years must elapse after a Chapter 7 bankruptcy is discharged. For Chapter 13 bankruptcies, you must have at least 12 months of clean credit history post discharge.

What is a certificate of eligibility?

The VA must issue a certificate of eligibility in order for a VA loan to close. When you apply for a VA loan, the VA loan specialist obtains this on your behalf. The VA checks its records and determines if the applicant meets VA loan requirements before issuing the certificate of eligibility. Issuance of the certificate confirms that the applicant served in the military for the necessary period of time and recieved a qualifying discharge. The VA also ensures that the applicant has not already used up his or her eligibility.

What repayment plans are available?

VA loans are 30-year loans that offer several repayment options. Borrowers can elect a traditional fixed payment loan, which has a level principal and interest payment for the life of the loan. Veterans may also choose a graduated repayment plan, which starts with low payments that gradually accelerate over the first six years of the loan. Those wishing to pay their loans off faster can take advantage of the Growing Equity Mortgages (GEM) plans. Under a GEM plan, payments gradually increase, with the additional amounts being applied to principal, resulting in a quicker payoff period.

Are VA loans only for home purchases?

VA loans can be used for many purposes related to the veterans' primary residence, including the following:

  • Refinance
  • Home building
  • Home renovations
  • Home repairs
  • Manufactured homes (with or without a lot)
  • Installing solar climate control systems
  • Weatherization improvements
  • Income properties up to 4 units (provided the veteran lives in one of the units)

VA loans have helped millions of veterans realize the dream of home ownership. By eliminating down payment requirements and offering a choice of repayment options, VA loans make home financing affordable.