Overview of the Requirements for VA Loans
The VA itself does not issue loans. As such, to obtain financing under the VA loan program, people who wish to purchase a property need to meet both the requirements set by the lender from which they want to borrow money and those of the Department of Veterans Affairs.
Under the legal provisions pertaining to VA loans, borrowers need to meet the criteria outlined below.
The borrower must:
- Be an entitled veteran who has a VA loan entitlement currently available.
- Be purchasing a home that qualifies under the VA program.
- Live in the home, or plan to do so, for a reasonable amount of time after securing the loan. In some cases, there are exceptions to this requirement. Lenders will be able to offer comprehensive advice on the occupancy rules.
- The borrower must have a suitable credit score.
- Have sufficient income in isolation or in combination with a spouse to repay the loan on a monthly basis while also having enough money to cover all other costs and expenditure associated with everyday living, including any family support obligations.
In addition to the general requirements, each lender will have their own qualification criteria that are specific to that financial institution. The lender will be able to inform interested parties of any additional requirements including those pertaining to credit history, debt-to-income, and other factors.
While the VA itself does not require veterans to achieve a given credit score to borrow money under the VA program, the VA lender will typically expect eligible veterans to have a credit score in the region of 620. However, credit score requirements can vary from lender to lender.
Lenders will also be interested in a borrower’s debt-to-income (DTI) ratio. This figure provides a broad overview of the extent to which the veteran’s gross monthly income can cover any debt obligations. Although the VA stipulates that borrowers should have a DTI ratio of 41% or below, lenders will typically consider DTI ratios in excess of this figure. Again, this will vary from lender to lender.
The VA requirements also stipulate the need for borrowers to have access to residual income; that is, additional money after all expenses and other obligations have been paid. Residual income is of interest because it means that all borrowers and their family members will have access to adequate money to fund the daily cost of living (for example, bill payments, food, and transportation costs). The residual income requirements vary according to where in the United States the applicant lives and the size of his or her family. The low foreclosure rate associated with the VA loan program is often attributed to the underlying residual income requirements.
Once the VA is under contract for a property purchase, a VA appraisal is conducted to evaluate the overall condition and market value of the home. The VA appraisal is a mandatory part of the process. However, it is important to note that it differs from the home inspection process, which is optional but much more in depth. Veterans who are securing VA loans are advised to have the property inspected before purchasing the home because this can help identify any problems that could undermine its value at a later date.
Following the VA appraisal, the veteran will be provided with an estimation of the property value and how it compares to similar properties. The VA appraiser will also ensure that the condition of the home meets the VA’s Minimum Property Requirements (MPRs). The purpose of this process is to ensure that veterans only purchase homes that are worth the price tag and are sound and safe. It is worth familiarizing yourself with the MRP requirements before you start searching for a suitable property as this may prevent you from encountering hurdles at a later date.
If a property is ultimately valued below the amount the borrower has agreed to pay, this can be problematic. In such situations, veterans can request a Reconsideration of Value, agree to fund the difference from their own money, or leave the option to buy behind and try and find a new property.
The VA appraisal may identify some repairs that will need to be made before the loan can be offered. Lenders will be able to guide veterans through this process.