The Requirements of VA Loans

Credit score requirements for VA loans are some of the lowest among all mortgage programs, and borrowers with FICO scores as low as 500 might qualify. The same is true for debt-to-income ratio (DTI); while a 41% or under DTI is preferable, borrowers with higher DTIs could qualify for VA loans.

Factors like past short sales, foreclosures, and credit issues will impact qualification, but the VA loan program is lenient toward the borrower’s credit history.

Service requirements for VA loans stipulate the borrower must have served at least 90 days during wartime or at least 181 during peacetime in one of the uniformed branches. These branches include the Army, Navy, Air Force, Marines, and Coast Guard.

For members of the National Guard and the Reserves, the service time requirement is at least six years.

To apply for a VA loan, you need a certificate of eligibility (COE). You can request a COE online or by mail with a VA Form 26-1880.

No Money Down

That’s the big selling point of VA loans, and most VA mortgages are 100% financed. Recent Realtor.com research finds that almost 75% of all VA loans had no money down. That translates to real savings; first-time homebuyers who put 0% down on a VA loan save an average of $824 per year compared to borrowers who put down 8% on comparable conventional home loans.

The no-money-down option comes with the condition that the home’s sale price doesn’t exceed its appraised value.

The borrowers who put money down on VA loans, to reduce the principal balance and lower monthly payments, make down payments of 4.6% on average. With comparable conventional loans, the down payment average is 19.7%.

No Mortgage Insurance

With most conventional mortgages, if you put down less than 20%, you must get private mortgage insurance (PMI), which protects the mortgage professional in case of default. PMI usually costs between 0.5% and 1.5% of the original loan amount each year. On a $300,000 mortgage, for example, that would be a cost of $1,500 to $4,500 per year.

With a VA loan, the backing of the U.S. government is all the PMI you need. However, it is common for VA loans to require homeowners insurance, which protects the borrower’s property.

Refinancing With a VA Loan

Borrowers with existing VA loans might be able to take advantage of today’s attractive interest rates and refinance their mortgages with a lower rate.

Would you like to use your home’s equity to make home improvements? Pay off debts? Fund education? You can do these things and more with cash-out refinancing. With most conventional loans, the amount you can take out in cash maxes at 80% of the home’s equity. With a VA loan, that amount is 90%.

Closing Costs for VA Loans

What you’ll pay at closing differs from the closing costs for a conventional loan and includes:

A funding fee. For most first-time VA homebuyers who put 0% to 5% down, this one-time payment is usually 2.15% of the loan amount. First-time buyers who put down 5% to 9.9% pay a funding fee of 1.5%, and those who put down 10% or more pay a funding fee of 1.25%. Some borrowers, such as Purple Heart recipients, may be exempt from the funding fee.

Other closing costs. These are like the closing costs for conventional loans and can include fees for the loan origination, credit report, appraisal, title insurance, and more.

Overall, the buyer’s closing costs for VA loans are usually between 3% and 5% of the loan amount, which is comparable to the range for traditional mortgage loans. With a VA loan, the seller can pay up to 4% of these costs.

The Pros & Cons of VA Loans

The Pros

• • Lower interest rates. While loan type is one of several factors determining the interest rate, VA loan rates are commonly up to 0.5% lower than rates for conventional mortgages.
  • Fee protections. The Department of Veterans Affairs has non-allowable fees that VA loan borrowers can’t be charged.
  • Fewer penalties. VA loan borrowers can prepay mortgage payments without getting hit with prepayment penalties, which can be thousands of dollars.
  • Versatile terms. VA loans can be 5- or 7-year adjustable-rate, 30-year fixed-rate, or interest-only loans.
  • More lenience. While credit issues, bankruptcies, and foreclosures factor into mortgage approval, they are often less consequential with a VA loan than with other loan types.
  • Default protections. If a VA loan borrower has trouble making payments, the Department of Veterans Affairs may help with a special forbearance, a repayment plan, or other remedies.

The Cons

• Stricter appraisals. Uncle Sam wants to make sure he’s backing a solid investment. The VA loan appraisal process is comprehensive and done by a VA-approved appraiser who submits a notice of value (NOV) report. The VA’s property standards can be higher than those for non-VA loans.
• Property restrictions. VA loans come with Minimum Property Requirements (MPRs). The home must be the borrower’s primary residence, not a vacation home or an investment property. Usually, the buyer must move in within 60 days, though allowances for repairs or renovations are common.