The government does not lend you money to buy a home when you get a loan through the Department of Veterans Affairs.
Instead, the government guarantees your loan so your lender can give you a lower interest rate and relaxed borrowing terms.
For many vets, a VA mortgage can generate thousands of dollars in savings over the life of the loan. For others, a VA loan’s more relaxed terms make borrowing money for a new home possible.
But you have to qualify first, both with the Department of Veterans Affairs and your lender.
Who is Eligible for a VA Loan?
This sounds like an unnecessary question. Obviously, you have to be a veteran or on active duty to get a VA mortgage.
It’s not quite that simple, though. While most veterans can qualify, you’ll want to make sure you’ve met the requirements for military service and for creditworthiness.
Military Service Requirements
To be eligible for federal mortgage backing through the Department of Veterans Affairs, a service member or a veteran who has been honorably discharged must meet at least one of the following requirements:
- Have served at least 90 consecutive days on active duty during a time of war.
- Have served at least 181 days on active duty during peacetime.
- Have served at least six years in the Reserves or the National Guard.
- Be the spouse of someone who died in the line of duty or because of a service-related disability.
If you meet one of these requirements, you’ll need to prove it when you visit a VA-approved mortgage lender. Rather than carrying around important papers proving military service, many veterans prefer getting a VA Loan Certificate of Eligibility.
The certificate tells lenders you meet the service requirements without requiring you to share personal documents each time you apply for a loan.
You can get a certificate through the eBenefits portal, and you can also apply for a certificate through a VA-approved lender. Or you can apply the old fashioned way: by sending in VA Form 26-1880.
VA Loan Credit Requirements
A VA loan extends your borrowing power. When the federal government backs your mortgage, your bank can afford to help you by:
- Lowering your down payment: You could finance up to 100 percent of your home’s value, meaning you don’t need a down payment. This is a huge benefit compared to other loans requiring anywhere from 3 to 20 percent down.
- Lowering your interest rate: Mortgage interest rates fluctuate with the market, but VA loans typically offer lower rates than you’ll find in the wider market.
- Lowering the required credit score: Lenders assess your risk as a borrower based on your credit history. Since the federal government will back your loan, banks can accept more loans from people with lower credit scores.
Despite these advantages, lenders still have standards you’ll have to meet, and your bank will analyze your credit history just like it would with any other borrower.
Usually, a lender will pull your credit score from Equifax, TransUnion, and Experian, then take your median credit score to use for your application.
Some lenders will make exceptions, but generally, you’ll need a median credit score of 620 to qualify. If you don’t yet meet this requirement, you should start working now to improve your credit score. We’ll get into that below.
However, a score below 620 doesn’t automatically disqualify you. Lenders will consider other factors such as your most recent credit history.
For example, if you’ve been making payments on time for two years and your lower credit score results from decisions you made five years ago, you’ll be in better shape than someone who has a low rating because of recent problems.
What About Debt-to-Income Ratio?
People shopping for cars or homes sometimes have trouble borrowing because of their high debt-to-income ratio. While this issue usually doesn’t matter as much as your credit score, a high ratio can affect your loan terms and eligibility.
The VA’s debt-to-income ratio benchmark is 41 percent, but banks have the final say in whether they’ll lend you money for a new home.
Even if you meet the VA’s debt-to-income ratio benchmark, a bank may decide to deny your loan application if you have a higher ratio and a lower credit score.
Here’s how to calculate your debt-to-income ratio:
- Determine your monthly income, including wages, tips, investment income, commissions, and child support. (Use your gross, or pre-taxed income.)
- Add up your debts including car payments, student loan payments, loans you’ve co-signed on, credit card minimum payments, child support payments, and mortgage payments including your new mortgage.
- Divide your debt by your income and multiply that number by 100.
Let’s try out an example: $2,000 a month in debt (divided by) $4,500 a month in income (equals) .44. Multiply .44 by 100, which shows a debt-to-income ratio of 44 percent.
In this example, the applicant’s ratio would be higher than the VA’s benchmark, but a bank may still lend the money if the applicant also had a higher credit score and a recent history of on-time bill payments.
You can also help your chances in a situation like this by lowering the amount of money you’d like to borrow. This could require shopping for a smaller home or paying a down payment to lower the loan amount.
Other VA Borrowing Requirements
Before applying for a loan through the VA, be sure you also meet the department’s property use and condition requirements.
- Will you live in the home? The VA requires borrowers to use their new home as a primary residence and not rental property, a second home, or a place of business. You’ll have to certify your plans during the application process. One exception: You could buy a multi-unit apartment or condo building as long as you live in one of the units.
- Does the home meet Minimum Property Requirements? An independent appraiser will assess the home during the application process to make sure it meets Minimum Property Requirements. The appraiser will inspect the home’s plumbing, HVAC, and electrical systems along with its roof and kitchen. The appraiser will also want to make sure the home has enough space for the family planning to occupy it.
Ways to Improve Your Ability to Obtain a VA Loan
A VA mortgage loan offers important advantages compared to conventional mortgages. As we said above, most veterans who have been honorably discharged from active duty service will meet the requirements for a Certificate of Eligibility.
If you don’t qualify because of creditworthiness, you can — with a little patience — improve your credit score.
- Make payments on time: Little things can go a long way. Set up a calendar online to remind you about bills rather than waiting for your creditor to send a past-due reminder.
- Pay down credit cards: If possible, stop using your credit cards and focus on paying down their balances. Pay more than the minimum payment if possible.
- Keep those accounts open: When you pay off a credit card, don’t automatically close the account. Keeping an account or two open will show creditors you have available credit you don’t even need.
- Avoid opening new accounts: Each time you open a new account that requires a credit check, your credit score may decrease by a few points.
- Keep an eye on your score: It’s easier than ever to monitor your credit score for free thanks to web sites and apps such as Credit Karma. When you monitor your score, you’ll notice sudden changes which could result from fraud or credit reporting mistakes.
These kinds of measures can, over time, improve your credit score which can get you into range for a VA mortgage. In the process, you’ll likely lower your debt-to-income ratio, too.
Someone who’s struggling to keep the bills up to date can often get help from a credit counselor, but you should make sure the counselor isn’t associated with a lender who can benefit from consolidating your debt.
Which Provider Do You Choose?
When you’re ready to tap into the benefits of a VA mortgage, either for a new home or to refinance your existing mortgage, you’ll need to work with a VA-approved lender.
Hundreds of banks, including most big national banks, have authorization to issue VA mortgage loans. You could walk into just about any bank with your Certificate of Eligibility and start the borrowing process.
Despite this ease of access, not all VA-approved lenders work the same way. We recommend working with one of the best VA loan companies:
- Veterans United Home Loans: Veterans United exists specifically to lend money through VA loans. Naturally it excels at helping veterans through the borrowing process with customer service representatives available around the clock. Get fixed or variable rate loans for new homes or for refinancing your existing mortgage.
- USAA: If you’re not a member of the United Services Automobile Association, better known as USAA, you could save some money by joining. Started more than a hundred years ago for a by veterans, USAA can help you save on insurance and banking, including VA lending of course.
- Navy Federal Credit Union: Another veteran-specific organization, Navy Federal can streamline your access to a refinance. The credit union also issues VA loans for new homes, and it makes customer service reps available 24/7.
- Quicken Loans: The first truly commercial lender on our list, Quicken excels at all home loans, including VA-backed mortgages. You can apply online easily and have a decision on your loan quickly. Quicken Loans will typically stay firm on its credit score requirement of 620.
- JG Wentworth: If customer service tops your list of requirements in a lender, JG Wentworth should make your shortlist. The bank offers cash-out refinances which can help your overall financial stability.
These lenders didn’t make our top 5, but they stand out and may work well for you:
- loanDepot, especially for home equity lines of credit.
- Wells Fargo, if you’re already a customer and want to keep things simple.
- PrimeLending, for another seamless online alternative to Quicken Loans. PrimeLending also has brick-and-mortar locations.
- Lending Tree, for an outside-the-box approach that can show you offers from a variety of lenders.
Extending the Dream of Home Ownership
The VA operates one of the most straightforward federal home loan programs. Veterans and active duty service members whose dreams of home ownership align with the program’s goals can usually get funding without much hassle.
VA loans exist to give current and former military members more opportunities to buy safe and adequate housing for themselves and their families.
Good homes make good investments, too, which can keep your financial life on track as you begin a new life after your discharge.