Our veterans deserve special considerations when it comes to their home funding needs. This is why the Dept. of Veteran Affairs guarantees loans for active service members, reservists, the National Guard, veterans, and qualified surviving spouses. This enables lenders to offer our proud military members special incentives and advantages when it comes to purchasing, remodeling, building, or refinancing a home. Should a borrower with a VA insured loan default or foreclose on the property, the VA will compensate the lender for a portion of their losses on the loan. All veterans shopping for a home should know the VA loan criteria.
VA Loan Acceptable Forms of Income
Military members are often receiving forms of income that are atypical compared to that of other citizens. For this reason, there are certain rules about which forms of income are acceptable and how they will be calculated or treated during the loan income verification process.
If you are currently on active duty, your LES (Leave and Earnings Statement) will list the types of allowances and income you receive beyond your normal base rate. Note that if you will be released from active duty or discharged within 1 year of the expected closing date of your loan, you will be asked to provide proof of further income. This could be in the form of a statement showing you intend (and are eligible) to extend your active duty term or reenlist, verification of civilian employment, or proof that your spouse’s income is sufficiently high enough that you would only need minimal income to support your mortgage payments, etc.
Income sources that will be counted:
- Military Quarters Allowance
- This is a general allowance for housing. DD Form 1747, Status of Housing Availability, must be submitted in order to show that the military will not be making housing arrangements for you and that you are authorized to make your own housing arrangements. This form is not necessary in some cases, such as when you are stationed overseas and need permanent housing for your family stateside, or are a recruiter operating in an area with no on-base military housing.
- Subsistence and Clothing Allowance: This income will be counted and is not taxable. Your lender will usually convert it from an annual amount to a monthly amount for the purposes of calculating your monthly debt to income ratio.
- Other Allowances (Flight, Combat Pay, Etc.) These sources will be only be include if they are expected to continue due to to the nature of your service. As such, they will be periodically reviewed to see if you are still receiving them. These are taxable sources of income.
- Note About Reserve or National Guard Income: Income that comes from the Reserves or National Guard will only be counted if the length of your service indicates strongly that the income will continue.
VA Debt to Income Ratio
Your debt to income ratio is the amount of money you spend paying your debts each month (including what would be paid toward your new property) compared to how much income you receive. The allowable debt-to-income ratio for a VA loan is 41%. Unlike with other loans, the VA does not outline how much of this debt percentage may go toward housing. The 41% is simply the total amount of debt you are expecting to pay monthly if your loan is approved.
However, the VA does require that a certain amount of money be left over after all monthly payments and expenses have been paid. This is referred to as residual income. Borrowers may be exempt from this clause if they can show they have another source of verified income that has not been included in the formal loan analysis.
VA Credit Considerations
VA loans generally have much more lenient underwriting standards. They are less credit-score driven, though your specific lender may have certain minimum score requirements. The following are forms of credit and credit history your lender will look at.
VA Bad Credit
As with FHA loans, collection accounts reflect poorly on your credit worthiness but do not necessarily have to be paid off for loan approval. However, judgments from a court must either be paid in full or there must be a standing agreement between you and the original creditor that states you are making payments towards this debt. It goes without saying that any repayment plan between you and the original creditor must be in good standing and a history of timely payments shown.
VA Debt and Credit Counseling
Veterans that are participating in a debt or credit counseling plan must show that they have been making timely monthly payments for at least 1 year, and the credit counseling agency must consent to the new loan transaction.
Veterans who are approved for a loan but find themselves struggling to make payments are eligible for financial counseling and planning aid through the VA.
VA Lack of Credit History
If you do not have an adequate credit history your lender can use to gage your credit worthiness, non-traditional forms of verification will be used. This includes utility payments, insurance payments, rental payments, etc. The same rules for late payments will apply, though they may be judged less harshly depending on the circumstances.
VA Rent and Mortgage History
You must have rented or paid the mortgage on a house for at least 12 months. As a general rule, you may not have more than one 30-day late payment in that time, and no payments that were made over 60 days late. You will be asked for an adequate explanation of any late payments.
VA Who is Eligible?
All applicants for a VA loan must first be qualified as an eligible veteran (or spouse). This means you fall into one of the following categories and meet the minimum requirements for that category.
You served on active duty in the Coast Guard, Navy, Army, Air Force, or Marine Corps after Sept. 15, 1940, but before Sept. 7, 1980:
Received an Honorable Discharge.
Served 90 days or more during wartime OR 181 continuous days or more during peacetime.
You served on active duty in the Coast Guard, Navy, Army, Air Force, or Marine Corps after Sept. 7, 1980 OR entered service as an originator after Oct. 16, 1981:
Completion of either 24 continuous months of active duty, or the full period for which called or ordered to active duty; not to be less than 90 days during wartime or 181 continuous days during peacetime.
You are a Member of the National Guard or a Reservist:
Six years of service in the Selected Reserve or National Guard and received an Honorable Discharge
OR were placed on the retired list
OR were transferred to the Standby Reserve or an element of the Ready Reserve other than the Selected Reserve
OR currently serve in the Selected Reserve
You are currently on Active Duty:
90 continuous days of service.
You are the spouse of a service member or veteran:
You must be the un-remarried surviving spouse of a veteran who died while serving on active duty or who passed away due to a disability related to their service
OR be the spouse of an active service member who is missing in action or a prisoner of war
OR have only remarried since December 16, 2003 at or above the age of 57.
If you are veteran who does not meet the minimum service requirements due to a discharge related to hardship, the convenience of the government, a reduction-in-force, certain medical conditions, or a service-connected disability, you may also still be eligible for a VA loan.
VA Certificate of Eligibility
As further evidence of VA loan eligibility, applicants will be required to submit a Certificate of Eligibility to the lender. This certificate will authenticate the veteran’s claim and show the loan entitlement amount the VA is willing to guarantee. Typically, the VA will guarantee up to 25% of a loan that is $417,000 or less, if the veteran is eligible for full entitlement. All veterans receive $36,000 as basic entitlement.
A Certificate of Eligibility can be obtained by filling out VA Form 26-1880 and submitting it to the nearest VA Home Loan Eligibility Center.
VA Proof of Service
Veterans who qualify for a VA loan must prove their service by providing a DD Form 214, a Certificate of Release, or a Discharge from Active Duty.
Veterans who are currently serving on active duty will need a current statement of service signed by the adjutant, personnel office, unit commander, or headquarters of their operation.
Reservists and National Guard Members do not have a DD Form 214 and so may submit a NGB Form 22, a Report of Separation and Record of Service, or show a points statement for their service. The points statement should be the most recent available and there should be evidence of honorable service.
Active members of the Reserves or National Guard will need a signed statement of service notarized by the adjutant, personnel office, unit commander, or higher headquarters of their operation.
The guaranty is the amount of a loan the VA will compensate the lender for should the borrower default on their loan. The VA does not limit the amount a veteran may borrow. However the VA maintains a Maximum Guaranty per county. The Maximum Guaranty is the highest amount the VA will insure if the loan exceeds the loan ‘limit’ for that area. For instance, in 2013, a veteran in Orange county in Florida can borrow up to $417,000 and the VA will guarantee 25% of the loan amount or 125% of the median price for a single family home in that area; whichever is greater. If the loan amount exceeds $417,000 the VA will guarantee less than 25% of the loan. In these cases, the borrower may be required to make a down payment in order to satisfy the lenders requirements. The loan amount may not go over 175% of the Freddie Mac loan limit for a similar property in that area.
VA Funding Fee
VA loans do not carry the same mortgage insurance requirements and upfront premium that come with other types of loans (such as FHA loans). However, there is an additional fee for the borrower, called the VA Funding Fee. It is a one-time upfront fee that is based on the loan amount, whether or not the borrower has taken out a VA loan in the past, and the amount of the down payment (if there is one).
The VA funding fee may be paid upfront or financed along with the loan.
Some veterans may be exempt from paying the VA Funding Fee. This is often the case for veterans who are currently receiving a disability payment from the VA.
Veterans who believe they may be exempt should fill out form 26-8937, the Verification of VA Benefit – Related Indebtedness Form, and submit it to their local VA office where it can be evaluated and signed, if approved.
VA Closing Costs
Because the VA loan program was established to help veterans and their families obtain affordable housing, there are limits to the kinds of fees the veteran applying for a loan may pay.
Veterans may pay some closing costs, such as a 1% origination fee, appraisal fees, credit report fees, insurance costs, survey fees, inspection fees, and more. What’s really important for the borrower to know is what they should not be charged for.
Non-Chargeable Closing Costs:
- The lender’s appraisals (not done by TAS)
- The lender’s Inspections
- Loan Closing Fees (also called Settlement fees)
- Document preparation/Cost of preparing loan papers
- Attorney’s Services (beyond title work)
- Interest rate lock-in charges
- Postage and mailing charges or telephone calls (except when refinancing)
- Amortization schedules
- Escrow Charges
- Cost of a notary
- Commitment charge
- Administrator or Trustee fees
- The loan application fee
- A processing fee
- A tax service fee
VA Seller Concessions
The seller may contribute no more than 4% of the sale price to the loan transaction.
VA Appraisal System
When a property requires an appraiser, lenders or mortgage brokers traditionally have the right to assign their own. However, VA properties that need to be appraised must be serviced by an approved VA appraiser. To ensure this happens, every VA loan must be entered into The Appraisal System (TAS). TAS will then assign the loan application a case number in order to keep track of the loan. If the property in question needs to be appraised, TAS will also assign the specific VA appraiser to it.