What are the requirements for a VA loan?

By Liz Clinger Updated on 7/28/2017

This article does not address the VA Loan Eligibility but describes in detail the standards that Veterans of the United States must meet for getting a loan from the Department of Veteran Affairs. Under certain circumstances, like job relocation, a veteran may borrow two VA loans simultaneously. 

It is best to speak with a lender about qualifying to carry multiple VA loans. Veterans pursuing one VA loan must satisfy the following requirements:

Social Security

Borrowers who apply must be a legal resident of the United States, have a valid Social Security number and be of the legal age to obtain a mortgage in their state.

Income

Borrowers must have had a consistent or rising income for at least two years, whether earning a salary, commission, or self-employed.

Employment History

Borrowers must have a stable employment history (at least two years with the same employer) and confirmation of continued employment to qualify.

Credit Score

While the Department of Veteran Affairs does not provide specific requirements on VA credit scores for qualification, individual lenders may have credit restrictions for borrowers. 

A credit score of 620 is acceptable for some mortgage lenders. However, a score of 640 is the standard qualifying minimum. Keep in mind that borrowers will not qualify for 100% financing with a credit score under 580, removing one of the VA loan’s best advantages.

Debt-to-Income Ratio Requirements

Borrowers must have a debt to income ratio of 41% or less. A borrower’s debt to income ratio is the total cost of the monthly mortgage payment against the borrower’s gross income. For example, if you pay $1,000 total a month on your mortgage and earn a gross income of $4,000 a month, your debt to income ratio would be 25%.

Total Fixed Payment vs. Effective Income Ratio

The amount for total fixed payment to effective income must not exceed 43% and must be a minimum of approximately 30%. The total fixed payment is the sum of monthly payments including mortgage payments as well as all recurring monthly fees (including car loans, student loans, credit cards, etc.). 

Therefore, total fixed payments cannot exceed 43% of gross monthly income and must be greater than 30%. 

Residual Income May allow For Higher Debt-To-Income Ratios

If the debt-to-income ratio is higher than 41%, the VA may allow for an exception if residual income is 120% of the stated guideline - usually, the debt-to-income ratio will be ignored.

Residual income is the income left over after a borrower has made his monthly debt payments, a class of outflows that includes the mortgage payment and its monthly tax and insurance, student loans, car payments and other obligations.

Bankruptcy / Foreclosure / Short Sale - Waiting Period

• If you have filed for Chapter 7 Bankruptcy, you must wait at least two years since your discharge date, not to be confused with the date on which you filed for bankruptcy.
• If you have filed for Chapter 13 Bankruptcy, you must have made and verified bankruptcy payments for at least a year.
• Foreclosure History: 2 years from the date of the foreclosure sale.
• Short Sale History: 2 years from the date of the short sale. If you had no late payments 12 months before the short sale you can apply without waiting. 

Pre-qualification for a VA Loan

Pre-qualifying for a VA loan is an effective way to determine how much you will be able to borrow through the Department of Veteran Affairs. It is important to note that prequalification is only a rough estimate and may be somewhat different than the actual granted loan amount. 

Following the VA loan pre-qualification process, borrowers will have a better understanding of how much income will be necessary to fit the price range of affordable homes. While not mandatory, pre-qualifying is highly recommended so that borrowers do not waste time searching for homes that they cannot necessarily afford.
 

Applicants will need to provide some basic information, including: name, phone number, military status, and current address. Also, lenders will typically require information regarding income and assets to make an accurate assessment.

Once applicants are pre-qualified, the VA-approved lender with whom they pre-qualified will research available VA loan options.

Fees associated with VA Loans

Borrowers must be able to afford the various VA loan fees, including the closing costs, the VA-unique funding fee of 1.25%-3%, and down payments (for borrowers with credit scores below 580). While these fees may not be present in every VA loan transaction and may be strategically avoided in some cases, applicants who cannot afford these fees should consider saving up the necessary funds before researching VA loan lenders and rates.