VA loans: understanding the steps and your options

VA loans generally offer more favorable terms than conventional mortgage loans as a benefit to those who have served. Because of this, there are additional requirements service members need to meet to qualify for a VA-Guaranteed Home Loan.  

What is a VA loan? 

A VA loan is a type of mortgage loan offered by private lenders that is partially backed by the Department of Veterans Affairs (VA), known as the VA Home Loan “Guaranty.” This agreement replaces the need for a down payment and acts as a reimbursement to private lenders if you foreclose on your mortgage loan. 

VA loans are available to qualifying:

• Active-duty service members
• Veterans
• National Guard members
• Reserve members
• Surviving spouses
• Certain uniformed service personnel

VA loans can be used to:

• Purchase a single-family home or townhouse
• Purchase a VA-approved condo
• Purchase a multi-family home, up to four units 
• Purchase a home to renovate
• Build a new home
• Add or update energy efficient features to your current home

VA loans qualifications and limits 

Private mortgage lenders and the Department of VA have separate minimum eligibility requirements that borrowers must meet to qualify for a mortgage loan. 

Private lender requirements: You may be required to meet a minimum debt-to-income (DTI) ratio or credit requirement to qualify for a loan through a private lender, such as a bank or mortgage company. This helps lenders determine the terms of your loan like your interest rate. 

It’s important to note that the VA does not require you to maintain a minimum credit score to qualify. Let’s say you applied for a VA loan through a private lender, and you were denied based on your credit score. This does not mean you are not able to take out a VA loan, instead try talking to another lender who may be able to work with your financial situation, says Jennifer Beeston, senior vice president of mortgage lending at Guaranteed Rate Mortgage. 

VA requirements: The VA requires service members to live in the home they are purchasing and meet minimum service requirements based on your duty status and when you served. 

The VA does not set a dollar limit on the amount you can borrow to purchase a home, but they do review your financial situation to determine what monthly payment you can comfortably afford to help you avoid defaulting on your loan. This is done by calculating the amount of income left after meeting your financial obligations, including your mortgage and other bill payments. 

Guide to buying a home with a VA loan 

Purchasing a home with a VA home loan requires a few additional steps on top of the already complicated process. 

1. Find a mortgage lender who specializes in VA loans. A mortgage officer with experience working on VA loans will have better insight on which documents you need to complete and what properties you are able to qualify for than someone who is unfamiliar with the process. Some lenders may also waive fees for Veterans and active-duty service members.

“A lot of times people assume that because a company says military in their title, they must be really good [at structuring VA loans],” says Beeston. But it’s actually more important to focus on whether your mortgage officer has experience with VA loans—they are structuring the loan, reviewing your debt-to-income ratio, and may be communicating on your behalf with the real estate agent. 

2. Apply for a Certificate of Eligibility (COE). Obtaining a COE from the VA confirms your eligibility for the VA home loan benefit and is required by your lender for VA-backed home loans. You can request a COE online using the eBenefits service from the Department of VA, through your lender, or by mail. 

3. Obtain a mortgage pre-approval. Your private lender will review your COE, and possibly your income and credit level to pre-approve you up to a specified dollar amount for a mortgage loan. This letter shows buyers that you are serious about purchasing a home and can secure a mortgage loan. If you are an eligible spouse of a service member applying for a COE, you may be required to provide additional documents like your marriage license. 

4. Shop for a home using a real estate agent who specializes in VA loans. Certain properties may require VA-approval prior to purchasing with your home loan benefit, like condos or certain multi-family units. Working with an experienced real estate agent who can guide you to approved properties may speed up the purchasing process so you can move into your dream home sooner. 

5. Finalize the purchase contract. After finding the right home, your real estate agent will help you submit an offer on the home. Since the VA requires you to pay closing costs on the home out-of-pocket, the purchase offer might include a request for the seller to pay a portion of your closing costs. You might consider adding contingencies to the offer, such as a right to a home inspection.

6. Work with a VA-approved home appraiser to determine the home’s value and if it meets the VA’s Minimum Property Requirements. The VA requires buyers to use an approved home appraiser when purchasing a home with a backed home loan to ensure the property meets the Minimum Property Requirements set by the Department of VA. 

In the event the purchase price exceeds the value of the home, the VA may require you to make a down payment equal to the difference. For instance, let’s say you want to purchase a home that is listed for $350,000. The home appraiser determines that the house is reasonably worth $200,000. The VA may require you to make a $150,000 down payment out with your own funds to qualify this home for a VA loan.

7. Close on your home loan and pay any additional fees. At this point, you will sign the final documents which set the terms of your mortgage loan and will be required to pay the closing costs. 

This includes the VA funding fee, which is a one-time payment based on the type of loan, and is stated as a percentage of your total loan amount. There are instances where the VA funding fee may be waived, such as disability or if you received a Purple Heart medal, says Beeston.

8. File your COE with the VA. Once you close on your home, the VA will update your COE to show how much of your benefit you used on your home purchase. If you are considering purchasing a secondary property after using a portion of your VA entitlement, it’s important to speak with a mortgage lender. 

“When you are dealing with second use entitlements, it gets a little bit tricky,” says Beeston. There are additional considerations beyond the dollar amount listed on the COE, such as loan limit increases, home sales that can restore your full entitlement, and potential down payments that impact what you’re entitled to.

VA loans vs. conventional mortgage loans 

VA loans offer more favorable terms than a traditional mortgage loan might, including no down payment or PMI requirements and possibly lower interest rates. But, they also require additional costs like the VA funding fee. 

When determining which mortgage loan suits your individual needs, you should consider the type of property you want to purchase, how much you can afford to pay monthly, and your current financial circumstances.