Guide to VA Home Loans
This is a complete guide to VA mortgages.
What Is a VA Mortgage?
The US government created the VA home loan program in 1944 when the Servicemen’s Readjustment Act added a package of benefits to eligible service members. VA mortgage lenders offer a variety of home loans designed to meet many needs, including:
- Build a single-family home.
- Buy a single-family home, a condominium unit in a VA-approved development, or a co-op unit.
- Repair, renovate, or upgrade your primary residence.
- Refinance a mortgage.
- Buy a manufactured home and/or lot.
- Make energy-efficient improvements like solar heating or cooling systems.
The VA does not loan money. Instead, it guarantees VA loans, which makes them safer for lenders and keeps mortgage rates down. Lenders like mortgage companies, banks, and credit unions do the actual lending.
Is a VA Mortgage Right for You?
VA mortgages offer advantages like no other program. Here are ten reasons to finance with a VA home loan.
- There is no down payment requirement.
- The VA allows cash-out refinancing up to 100% of the property value. Many lenders, however, set their own limits at 90 percent.
- Streamline VA to VA Interest Rate Reduction Refinance Loans (IRRRL) require no credit qualifying, income verification or appraisal.
- The VA imposes no minimum credit score. Many lenders do have minimum credit scores (overlays). Gustan Cho Associates does not apply overlays.
- VA mortgages are fully assumable by any qualified person (buyer does not have to be a veteran). The VA or the lender must give prior approval.
- There are NO monthly mortgage insurance premiums or mortgage insurance underwriting requirements.
- Borrowers can add VA funding fees to their loan balances, reducing out-of-pocket costs. Refinancing is easy because VA loans have no prepayment penalty.
- Fixed and adjustable-rate mortgages are available.
- Sellers can assist with standard closing costs of up to four percent.
- Energy-efficient improvements can be added to 100% financing with any VA home loan product.
In addition, VA mortgage rates are often lower than any other program because borrowers tend to default less often and because the government backs the loans.
Who Is Eligible for VA Home Loans?
In general, you must be on active duty or have been honorably discharged from a branch of the military. The VA probably has your records filed electronically and can provide your Certificate of Eligibility (COE) almost instantly. Click here to get your certificate from the VA.
If the VA can’t provide your certificate online, you’ll need your DD-214 form proving that you’ve been honorably discharged. Then, you can have your lender get your certificate or file VA Form 26-1880 yourself.
Here are the service requirements for VA home loan eligibility:
- 181 days service during peacetime (Active Duty)
- 90 days service during war time (Active Duty)
- 6 years service in the Reserves or National Guard
- Your spouse was a service member who was killed in the line of duty
There are other instances in which you may be eligible – the rules depend on when you served. Click here for more details.
Re-using your VA eligibility
You can re-use your eligibility for VA financing. Ordinarily, you’d sell your home, pay off your loan, and restore your eligibility. However, you can’t have more than one VA loan at a time. If you pay off your VA mortgage but still own the property, you can restore your eligibility and get another VA mortgage,. However, you can only do this one time.
To restore your eligibility, you send a completed VA Form 26-1880 to the Atlanta Eligibility Center. Include evidence that you repaid the prior loan in full and, if applicable, that you sold the property. This evidence can be in the form of a paid-in-full statement from the former lender, or a copy of the HUD-1 settlement statement completed in connection with a sale of the property or refinance of the prior loan.
Assumed VA mortgage
If you let someone assume your VA loan, you can restore your eligibility only if the qualified assumer is also an eligible veteran who is willing to substitute his or her available eligibility for yours. Otherwise, you cannot restore eligibility until your buyer pays off the VA loan.
If you used only a portion of your eligibility, any partial remaining eligibility would be available for use. You need to check with a lender to see if the remainder is sufficient for the loan amount sought and whether any down payment is needed.
When property is awarded to the veteran’s spouse as a result of divorce, entitlement cannot be restored unless the spouse refinances the property and/or pays the VA loan in full or the ex-spouse is a veteran who substitutes his or her entitlement.
VA Loans for Manufactured Homes
You may use a VA-guaranteed loan to:
- Buy a manufactured home and/or lot;
- Buy and improve a lot on which to place a manufactured home you already own and occupy;
- Refinance a manufactured home loan in order to buy a lot;
- Refinance your VA manufactured home loan to reduce the interest rate (IRRRL).
However, the rules are a little different.
For manufactured home financing, the maximum VA guarantee is $20,000. Because most lenders limit VA loans to four times the guarantee amount, many lenders max out their loan amount at $80,000.
You’ll need to make a down payment. The maximum loan amount for a manufactured home purchase is 95% of the purchase price of the property securing the loan, plus the VA funding fee.
And you won’t get 30 years to repay your loan. The maximum terms for manufactured home loans are:
- 20 years and 32 days for a single-wide unit or a combination single-wide unit and lot;
- 23 years and 32 days for a double-wide unit only
- 25 years and 32 days for a double-wide unit and lot.
Manufactured home guidelines
To be eligible for a VA home loan, the manufactured home must be on a permanent foundation and classified as real estate. That means you pay property tax to your county assessor, not a vehicle tax to the DMV.
It must be livable year-round with permanent eating, cooking, sleeping and sanitary facilities. A single-wide manufactured (mobile) home must be at least 10 feet wide, with a minimum floor area of 400 square feet; double-wide units must be at least 20 feet wide with at least 700 square feet of floor space.
Your manufactured home must be sited on a lot that you own. If you lease your land, you can’t use VA home financing.
VA Loans for Condos
Eligible borrowers may use VA home loans to purchase VA-approved condominiums. Before making an offer on a condo, verify through the Veterans Information Portal (VIP) that it’s on the VA-approved list.
If you don’t see the project you want on the VA list, check with HUD to see if on HUD’s list of FHA-approved condominiums.
The VA is generally willing to allow projects on FHA’s approved list.
If you don’t find your project on either the VA or FHA list, ask your VA-approved lender to submit the necessary paperwork to the VA for project approval.
Condos approved by HUD (and/or the VA) must meet these guidelines
- The whole project must be complete, including all common areas and facilities.
- The HOA must have been in control of the common areas for at least one year.
- The project must have appropriate hazard, liability, and flood insurance (if applicable). Projects with 20 or more units require fidelity insurance or a bond.
- Individual ownership must be fee simple with undivided ownership of common areas.
- There must be no legal restrictions on the transferability of title.
- The builder must have sold at least 50% of all units.
- More than half of units must be owner-occupied.
- No single entity may own more than 10% of the units in a project.
- No more than 30% of the units may be FHA-financed.
- For mixed-use projects, the maximum commercial area is 25% of the square footage.
- The budget must adequate.
- The association must have reserves of at least 10% of the budget.
Condominium hotels or “condotels”, timeshares, houseboat projects, and multi-dwelling unit condominiums are ineligible.
If your condo project complies with these guidelines, the VA will probably approve it. However, the process takes time.
Qualifying and applying: VA is different
Qualifying for a VA mortgage is different. Instead of looking at your credit score, income, debts and bank accounts, VA underwriting guidelines mention no minimum credit score, do not require down payments, and calculate “residual income” instead of debt-to-income ratios. Is your head spinning yet? It’s not as hard to understand as it seems.
VA lenders look at several factors when underwriting your loan application.
They look at these things differently than other kinds of lenders do.
The VA tells its lenders in its underwriting guide that VA loans involve a veteran’s benefit and to underwrite accordingly. For most applicants, “residual income” is a more generous standard than debt-to-income ratios.
You need to supply pay stubs covering your last 30 days of employment, W-2 forms covering your last two years of employment, and a written or telephoned verification of employment (VOE).
Child support or alimony
You can use child support alimony, or separate maintenance to qualify for your loan if you can prove that you’re entitled to it and that you receive it regularly.
In community property states, the lender may request your spouse’s income information even if he or she isn’t purchasing the home with you or obligated on the loan.
Second job income
Income from a second job won’t help you qualify unless you have at least 24 months’ experience of working two jobs.
Lenders only count second jobs or seasonal income if you’ve received it for a minimum of two years UNLESS you’ve got at least a 12-month history and your employer indicates a high probability of continued employment on the VOE form.
If you have less than 12 months, underwriters also look at your training and/or education and skills that relate to your current position. Examples include training in nursing or medicine, law, or information technology. The VA says, “If the probability of continued employment is high based on these factors, then the lender may give favorable consideration to including the income in total effective income.”
Overtime, bonus, and part-time earnings
You can use overtime, bonus, and part-time earnings (if you have at least one year of history) to offset intermediate-term debts with less than 24 months remaining. For example, if you have 15 months left on a car loan and your payment is $300, and you’ve been earning $200 a month in overtime for at least a year, lenders only count $100 of your car payment in your debts.
Seasonal income may be used under special circumstances. It is important to document the past history and the likelihood it will continue.
Lenders consider income from Worker’s Compensation, foster care, public assistance, Social Security, alimony, and child support if consistently paid and likely to continue. Public assistance programs and Social Security must continue for a minimum of three years from the date of closing.
Temporary income such as VA educational allowances and unemployment compensation do not represent stable and reliable income and won’t count.
Generally, income from self-employment may be used when the applicant has been self-employed for at least 2 years. Here’s what you’ll need to provide:
- Copies of last two years’ business and / or individual tax returns.
- The current year-to-date profit & loss statement and balance.
- For partnerships and corporations, furnish a list of the primary owners and their percentage in the business.
- Taxable Income listed on the bottom of a corporate tax return (IRS Form 1120) may be divided by the veteran’s percentage of ownership and then used as additional income (subject to tax).
How is your self-employment income calculated? In general, you’ll take your taxable income and add back non-cash deductions like depreciation as well as extraordinary expenses that won’t recur. You’ll subtract windfall income that won’t recur. The two years income is then averaged, if your income increased from year one to year two. If it decreased, though, you get the lower year’s income – maybe even less if your industry or economy is shaky.
Normal business expenses that can be added-back to the net profit or bottom-line figures include depreciation, business interest, and amortization of organizational fees (corporations).
Commissions and bonuses
When at least “a major portion” of your income is from commissions, you have to have received it for at least two years for it to count. The VA does not define “major portion.” You’ll need your employer to indicate your year-to-date commissions, the basis for computing commissions, and how frequently commissions are paid.
- Provide your last two years’ income tax returns with W-2s and 1099-MISC Forms. If your income is increasing, you get the average of the last two years’ income. If decreasing, you get the lower year’s income – or less, if your industry or local economy is faltering.
Provide your Leave and Earnings Statement (LES). If your release date is within 12 months, you’ll need:
- Evidence that you have already re-enlisted or extended your period of active duty to a date 12 months beyond the date of loan closing
- OR proof of a valid offer of local civilian employment
- OR a statement that you intend to reenlist or extend active duty beyond the 12-month period PLUS a statement from your commanding officer confirming that you’re eligible to reenlist or extend active duty.
Assets, Down Payment, Closing Costs
The VA doesn’t require you to have reserves, which are funds you could use to pay your mortgage and other obligations if you had an interruption or reduction in your income. However, lenders consider your liquid assets for unplanned expenses in the overall credit analysis.
You don’t need a down payment unless your sales price exceeds the property value or the maximum loan amount the lender is willing to make (remember, the VA does not limit the loan amount).
You may not have to pay closing costs, either — your lender can cover your closing costs if you choose a loan with a higher interest rate. The home’s seller can contribute up to four percent of the appraised value for closing costs.
Your lender will verify that you have enough money to pay your closing costs, as well as any assets that affect its underwriting decision. Your lender can send a Verification of Deposit (VOD) form to every depository institution you use, or you can provide copies of statements (certified by the bank). Online verification by your lender is also an option – just provide the url.
Your credit report will probably list all or most of your debts. You’ll need to document unlisted debts like child support or alimony.
Lenders deduct significant debts from your effective income. These have a remaining term of at least ten months, or less than ten months but “very large” payments. In addition (and VA is the only loan program that requires this), child care expenses count as debt payments. After deducting debt payments (including the proposed housing payment) from income, there must be enough money left (called “residual income”) for you to qualify for your loan.
In community property states, your spouse’s debts count against you, even if he or she is not going to purchase the property with you.
If divorced, debts assigned to your spouse won’t count as yours.
If you’ve co-signed for a loan, the debt won’t count as yours as long as you can show that the borrower is making the payments. Once the lender deducts the required amounts from your income, the rest is “residual income.” You’ll need at least the amounts listed below to qualify for a loan.
|Table of Residual Incomes by Region
For loan amounts of $80,000 and above
|over 5||Add $80 for each additional member up to a family of seven|
The VA does not impose minimum credit score requirements on borrowers.
Lenders should carefully review the complete credit history and use their judgment. For example, if you have numerous unpaid collections, the lender will question your ability to manage debt. If you have derogatory credit entries and the lender approves your loan, it must include an explanation in your file. If lenders are unsure about a particular situation, they should contact the appropriate VA Regional Loan Center.
However, many lenders, if not the majority, prefer adding their own minimum credit score requirements to making judgment calls. Minimum scores of 620 – 660 are not uncommon. The average FICO score for those approved for VA mortgages is 708. If your credit score is an issue, ask the lenders that you contact if they have minimum credit scores, and avoid those with requirements you can’t meet.
The VA is fairly flexible in its treatment of other credit issues, but individual lenders may differ. Here are some of those issues:
Some lenders treat credit counseling the same way they would a Chapter 13 bankruptcy; others view it as a pro-active problem solution and a positive thing. The VA is in the latter camp, saying, “If a veteran, or veteran and spouse, have prior adverse credit and are participating in a Consumer Credit Counseling plan, they may be determined to be a satisfactory credit risk if they demonstrate 12 months’ satisfactory payments and the counseling agency approves the new credit.”
If a veteran, or veteran and spouse, have good prior credit and are participating in a Consumer Credit Counseling plan, such participation is to be considered a neutral factor, or even a positive factor, in determining creditworthiness. Do not treat this as a negative credit item if the veteran entered the Consumer Credit Counseling plan before reaching the point of having bad credit.
The VA is pretty generous in its interpretation of a bankruptcy filing on an applicant’s default risk. “The fact that a bankruptcy exists in an applicant’s (or spouse’s) credit history does not in itself disqualify the loan.”
Underwriters are instructed to disregard Chapter 7 bankruptcies over two years old. Those with bankruptcies discharged at least a year ago may also qualify for financing, if they have taken out new credit and made their payments on time, and, “the bankruptcy was caused by circumstances beyond the control of the applicant or spouse such as unemployment, prolonged strikes, medical bills not covered by insurance, and so on, and the circumstances are verified.”
Chapter 13 bankruptcies are treated more leniently still. Once discharged, they are disregarded. In fact, if you have “satisfactorily made at least 12 months of the payments and the Trustee or the Bankruptcy Judge approves of the new credit, the lender may give favorable consideration.”
The VA says that foreclosure does not necessarily make you ineligible for financing. Lenders are directed to apply the same guidelines they would for bankruptcy – reestablished credit, cause of foreclosure, etc. – when determining if your credit qualifies for a mortgage approval.
You may have to contact a number of VA-approved lenders before you find one that adheres to VA guidelines without imposing stricter overlays.
The one non-negotiable credit issue for VA and other government mortgages is the CAIVRS check. The Credit Alert Interactive Verification Reporting System is a database that lists people who have defaulted on federally guaranteed debts like student loans, have outstanding tax liens, or other obligations to the federal government. Your lender has to check this database when you apply for a mortgage. If you’re on it, you won’t be allowed to close on a government-backed mortgage until you’ve either cleared up whatever reporting errors or resolved the debt – in many cases, you need to set up a payment plan.
UNDERWRITING VA LOANS
(Lender’s Handbook, Chapter 4)
- Verify a minimum of two years of employment (including previous jobs, if needed).
- Only verified income can be considered in qualifying for a VA loan.
- The income of a spouse who will be obligated on the loan must also be verified if needed.
Acceptable verification of employment consists of the following:
- VA Form 26-8497, Request for Verification Of Employment (VOE), or any format that obtains the same information.
- All Verifications of Employment must be originals.
Note: It is acceptable for Department of Defense civilian employees to provide computer-generated pay stubs accessed through E/MSS (Employee Member Self Service).
- An original or certified copy of the applicant’s pay stub, when furnished by the employer, must be provided.
- The employment verification should be compared with the pay stub for consistency.
Note: The VOE and pay stub must not be more than 120 days old (180 days for new construction) for loans closed on the automatic basis.
(Lender’s Handbook, Chapter 4)
- Telephone verifications should be obtained and be similar in content to the employment verification form. Phone verification should show the person contacted, their position, phone number, and date contacted.
- Furnish the original pay stub(s) covering the most recent 30-day period together with W-2 forms for the previous 2 years.
- Two verification companies, VIE and TALX Corporation, have been approved for use on VA loans.
ADDITIONAL SOURCES OF INCOME
(Lender’s Handbook, Chapter 4, Topics 2p,q,r)
- Receipt of child support, alimony, or separate maintenance must be disclosed and verified to be considered when qualifying for the loan.
- In accordance with the Equal Credit Opportunity Act (ECOA), do not ask questions about the income of a spouse unless the spouse will be contractually liable or the applicant is relying on the spouse’s income to qualify.
- In community property states, information concerning a non-purchasing spouse may be requested and considered in the same manner as for the applicant, even if the spouse will not be contractually obligated on the loan.
- Income from Worker’s Compensation, Foster Care, Public Assistance, Social Security, Alimony, and Child Support may be considered if they have been verified as consistently paid and are likely to continue. Public assistance programs and Social Security must continue for a minimum of 3 years from the date of closing to be counted.
- Generally, income from a 2nd job should only be used after the applicant has 24 months’ experience of working two jobs.
- Generally, income from overtime or part-time work is not reliable unless the applicant has a two-year history of earnings
- Overtime and part-time earnings that have been received for at least 1 year can be used to offset intermediate-term debts with less than 24 months remaining.
- Seasonal income may be used under special circumstances. It is important to document the past history and the likelihood it will continue.
Generally, income from self-employment may be used when the applicant has been self-employed for at least 2 years.
- Copies of the past two years’ business or individual tax returns must be provided.
- The current year-to-date profit & loss statement and balance sheets are required. These exhibits can be prepared by the business or the veteran if adequate information is provided.
- Normal business expenses that can be “added back” to the net profit or bottom-line figures include depreciation, business interest, and amortization of organizational fees (corporations).
- Business debts listing the name of a Sole Proprietor on a Schedule C must be counted against the veteran on the loan analysis. The same applies to partnerships filed on IRS Form 1065. Only corporate debts are exempt from the veteran’s loan analysis.
- For partnerships and corporations, furnish a list of the primary owners and their percentage in the business. This can usually be found on the K-1 Forms for partnership and subchapter S corporations, or on the 1120 Form, Schedule E for standard corporations.
- Taxable Income listed on the bottom of a corporate tax return (IRS Form 1120) may be divided by the veteran’s percentage of ownership and then used as additional income (subject to tax).
INCOME FROM COMMISSIONS
(Lender’s Handbook, Chapter 4, Topic 2i)
When all or a major portion of an applicant’s income comes from commissions, a verification exhibit is needed. It must show the year-to-date commissions, the basis for computing commissions, and how frequently commissions are paid to the applicant.
- Commission income can be considered stable after the applicant has received it for two years.
- The prior two years’ income tax returns must be provided with W-2s and 1099-MISC Forms. These individual returns must be complete with all schedules, signatures, and dates included.
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(Lender’s Handbook, Chapter 4, Topic 2o)
Rental of an existing present residence can offset the mortgage payment if there is a positive cash flow. Obtain a copy of the lease and list the debt on the loan analysis, but show it as a “rental offset.”
Rental Income from the subject property
- If the veteran is purchasing multi-family housing, the lender should obtain (1) documentation (education, prior experience, professional management contract, etc) supporting the likelihood of the veteran’s success as a landlord, (2) copies of leases (if available), and (3) evidence of cash reserves equaling 6 months of mortgage payments.
- Use 75 percent of the anticipated rental income to qualify for the mortgage.
All of the conditions must be met to include rental income as qualifying income.
ACTIVE MILITARY INCOME VERIFICATION
(Lender’s Handbook, Chapter 4, Topic 2k)
- Applicants must provide an original or certified copy of the applicant’s Leave and Earnings Statement (LES). Note: The Department of Defense provides service members access to a computer-generated LES through the E/MSS (Employee Member Self Service). This type of LES is acceptable.
- Service members who are within 12 months of release from active duty or the end of their contract term require additional information.
Note: The ETS (Expiration of Term of Service)or EAOS(Expiration of Active Obligated Service) date is on the LES for enlisted personnel or on an officer’s orders.
- If release will be within 12 months of the anticipated closing date, the applicant must supply one of the following:
- Evidence that the applicant has already re-enlisted or extended his or her period of active duty to a date 12 months beyond the date of loan closing, OR
- Verification of a valid offer of local civilian employment, OR
- A statement from the service member that he/she intends to reenlist or extend his or her active duty to a date beyond the 12-month period.
- A statement from the applicant’s commanding officer confirming that the applicant is eligible to reenlist or extend his or her active duty and has no reason to believe that such reenlistment or extension of active duty will not be granted.
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Active Military Income Verification, Continued