Understanding VA Loan Requirements

What is a VA loan?

A VA loan is a mortgage loan guaranteed by the U.S. Department of Veteran Affairs (VA) and created by eligible lenders. The VA does not make loans directly, but they do approve lenders and set qualifying and underwriting criteria.

The original Servicemen’s Readjustment Act of 1944 created the VA loan guarantee program, granting guarantees (a form of insurance) on home, farm, and business loans made to veterans. The Veterans Housing Act of 1970 removed termination dates and expanded guarantees to include financing mobile and manufactured homes and the Veterans Housing Benefits Improvement Act of 1978 expanded and increased benefits further. By 1992 the Veterans Home Loan Program Amendments of 1992 extended eligibility to Reservists and National Guard veterans with at least six years of qualifying service — regardless of prior active duty requirements.

What makes VA loans unique is who is eligible to use them, and the terms available on them. VA loans are only available to US military members and veterans, and in some cases their surviving spouses. VA loans allow for 100% financing, whether purchasing or refinancing, and do not charge a mortgage insurance premium (MIP) or private mortgage insurance (PMI).

Who is eligible to use a VA loan?

According to the U.S. Department of Veterans Affairs, “You must have satisfactory credit, sufficient income, and a valid Certificate of Eligibility (COE) to be eligible for a VA-guaranteed home loan.” 1 In order to obtain a COE you can either apply online with the VA or through your lender, providing proof of service documentation such as a DD-214 form, statement of service, or NGB-22 and -23 for National Guard service. To apply as a surviving spouse you’ll need the VA form 26-1817 in addition to the DD-214.

An eligible veteran is a person who served in the military (Active Duty, Reserves, or National Guard), with an acceptable character of service, or is the unmarried spouse of a deceased veteran who died while in service or of service related causes. It is important to keep in mind that veterans who have served less than the minimum required period of service, or who were discharged due to a service-related disability may still be eligible.

Minimum service periods are generally 90 days of Active Duty, 6 years of Reserves or National Guard service, or 90 days of wartime service. For a more in-depth look at specific dates of service, please visit benefits.va.gov for a comprehensive list.

What types of home loans are eligible for VA guarantee?

VA home loans can be used to:

• Purchase a home or a condominium unit (provided that it is located in a VA-approved project).
• Build a home as new construction.
• Simultaneously purchase and repair or renovate a home.
• Improve an existing home by installing energy-related features or making energy efficient improvements.
• Purchase a mobile, manufactured, or modular home and/or the accompanying lot.
• Refinance an existing VA-guaranteed or direct loan for the purpose of a lower interest rate or other tangible net benefit (such as converting an adjustable rate loan into a fixed rate loan).
• Refinance an existing mortgage loan for the purpose of taking cash out of the equity in the property (not to exceed 100% of the home’s value).

What are VA loan underwriting requirements?

Entitlement

Entitlement is the maximum dollar amount that the VA will guarantee on a mortgage loan – meaning the amount that the VA will insure. The VA will provide entitlement up to 25% of the Agency loan limit or 25% of the VA county loan limit in high-cost counties. All qualified veterans start out with $36,000 in basic entitlement, and bonus entitlement makes up the difference between this and the purchase price of the home (up to the national conforming loan limit – which is $453,100 as of 2018).

Here is how entitlement is calculated currently:

• Basic entitlement $36,000 x 4 = $144,000
• Bonus entitlement $77,275 x 4 = $309,100 (or higher in high-cost counties)
  $144,000 + $309,100 = $453,100 (or higher in high-cost counties)

You have full entitlement available if you have never had a VA loan, or if you plan to pay off an outstanding VA loan at or prior to closing on your new VA loan. Your entitlement is reduced if you have another VA loan that will not be paid off at or prior to closing, or if you have foreclosed on a VA loan in the past and haven’t reimbursed the VA for the amount of entitlement that was paid to the lender.

Funding Fees

Veterans obtaining a VA loan are required to pay a Funding Fee in order to help defray the costs of the program. The funding fee is required by federal law and may be financed into the loan on all transaction types. It is expressed as a percentage of the loan amount and varies based on the transaction type, down payment percentage, and whether the loan is considered first time use or subsequent use.

Table 1.1 Funding Fee Requirements 2

It is estimated that between 40% and 50% of eligible veterans are exempt from paying the funding fee however. A veteran may be considered exempt from paying the funding fee if they are currently receiving or have previously received VA disability, if they are receiving a VA pension in lieu of disability, if they are eligible to receive VA disability but are not currently receiving, and finally if they are a surviving spouse with entitlement from a service related death.

Income Requirements

In addition to meeting traditional lending guidelines for affordability (a debt-to-income ratio not exceeding 41%), VA loans require that your residual income meet or exceed the minimum amount established for the applicable region, income level, and family size. Residual income, also referred to as disposable income, is the amount of funds left over after all personal debts, including the mortgage, have been paid each month. It is calculated by subtracting all monthly debts and obligations from your net income. The net income is calculated by subtracting federal, state, and social security tax withholding from your gross income. Monthly shelter expenses include the mortgage, taxes, insurance, maintenance and utilities (maintenance and utilities are calculated by multiplying the square footage of the property by $0.14). Child care expenses for dependent children under the age of 13 are also included in the monthly expenses.

Down Payment Requirements on Purchase

VA loans are eligible for 100% financing, and the Funding Fee is not included in the loan-to-value calculation. That being said, if you put down 5% to 10% or more, the funding fee is reduced (see Table 1.1). If your entitlement is reduced by having an existing VA loan that will not be paid off, you need to make sure that you have enough entitlement to cover at least 25% of the purchase price, or you will need to contribute down payment funds to make up the difference.

Loan to Value Requirements on Refinances

Whether you are completing a rate and term refinance or a cash out refinance, a 100% loan-to-value ratio is the maximum allowed on a VA loan. Even at 100% financing, there are no monthly mortgage insurance premiums to pay, and no prepayment penalties on the loan. VA loans are also assumable at any loan-to-value ratio as well, which can be a great selling point if you’re not relying on the restoration of your entitlement to purchase your next property.

Interest Rate Reduction Refinance Loans – “IRRRL”

VA rate reduction loans are geared towards veterans with VA loans currently, who are looking to refinance into a new VA loan with a lower interest rate. Veterans refinancing an old VA loan into a new VA loan using the IRRRL option are eligible for a reduced funding fee — whether this is subsequent use or not. This program was put into place in order to enable veterans with VA loans to more easily take advantage of lower interest rates. There are several key difference between IRRRL refinances and other VA refinances:

• Entitlement does not factor in. The VA provides a full guaranty on IRRRLs regardless of prior entitlement use.
• A Certificate of Eligibility is not required again.
• Proof of service documentation is not required again.
• There is no maximum debt-to-income guideline, or residual income guideline.
• IRRRLs are not eligible to be used on cash out transactions.

VA Loan Requirements

• What is a VA loan
  • Brief history
  • Definition and details
  • Special and unique features
• Eligibility criteria for a VA loan
  • Who can get one
    • Service requirements, including time of service, branches of service, wartime vs. peacetime service, national guard service, surviving spouse eligibility.
    • DD-214 and certificate of eligibility
      • What they are, where to get them, and what info they provide
  • What types of homes are eligible
    • VA appraisal criteria and disqualifying criteria
    • Approved condo complexes
    • Fee simple vs. leasehold
• VA loan underwriting requirements
  • Entitlement – calculating entitlement, prior use, and restored entitlement
  • DTI requirements – also discuss their way of calculating residual income
    • Income left over after household expenses, and use of household income in qualifying
  • Down payment requirements on purchase
    • 100% financing available
    • varying degrees of funding fee based on % down
  • Funding fees – who pays them and how much
    • Mention who is exempt from funding fee: 10% VA disability designation
    • First time use vs. subsequent use
  • Loan to value requirements on refinances – cash out vs. rate and term
  • IRRRL refinances – highlight how they’re different from regular VA Refi 

1 https://www.benefits.va.gov/homeloans/purchaseco_eligibility.asp

2 https://www.benefits.va.gov/homeloans/documents/docs/funding_fee_table.pdf