Backed by the U.S. Department of Veterans Affairs, VA Home loans are available to active-duty and veteran service members and certain surviving spouses. There are many advantages to a VA Home loan, including lower closing costs and easier qualification requirements. Applicants must fulfill service requirements for the VA and financial conditions for the lenders.
To qualify, you must be honorably discharged*and one of the following:
On active duty for a minimum of 90(continuous) days.
A veteran who served a minimum of 90 days in wartime or 181 days in peacetime.
Completed a minimum of 90 days on active duty or six creditable years in either the National Guard or Selected Reserve.
A surviving spouse (not remarried) of a veteran who died while serving or from a service-related disability. The not remarried requirement does not apply if the remarriage occurs after age 57 or December 16, 2003.
Spouse of service members who are listed as missing in action or prisoner of war.
*If you were discharged with a less than honorable designation, you can apply to the VA to upgrade your discharge status.
Credit and Income Requirements
VA Home Loans are a benefit for those who have served, but anyone applying must also fulfill the financial requirements. While the Veteran’s administration doesn’t set financial requirements, VA mortgage lenders do. They tend to be slightly less stringent than other home loan requirements.
Credit Score: Lenders require a good credit score. Your FICO score should be at least in the low to mid 600s. Lenders also look at your report to see that you generally make your payments on time. Make sure your credit report is accurate before applying. Challenge anything you think is incorrect.
Debt-to-Income Ratio: Most lenders require a DTI ratio of no more than 41%. That means that your monthly debt payments can't represent more than 41% of your gross income. That ratio is higher than the usual 38% required for other loan types. The debt-to-income ratio or DTI is figured by dividing your monthly debt payments by your gross (pre-tax) income. Your monthly debt will include credit card payments, car payments, student debt, and the mortgage payment amount for the house you are considering.
Example: Car Payment $275.
Credit Card Payments $ 250
Mortgage Payment $ 975.
Gross Monthly Income: $3800
$1500 divided by $3800 = 39%
39% is less than 41%, so that this hypothetical person would qualify.
Residual Income: If your ratio is above 41%, a lender may still consider you if you have "residual income." Residual income is any money left after you pay all your monthly bills and expenses. If your regular expenses are lower than average because you work from home, for example, or work for a restaurant and get your meals for free, you may still qualify. Suppose you can show that after making your debt payments, paying for food, medical, utilities, gas or mass transit expenses, clothing, and household expenses, you still have some money left. In that case, you may be able to get a VA loan despite a DTI higher than 41%. You will be required to provide bank statements to prove that you have money left at the end of every month.
Owning your own home can be both satisfying and financially wise. If you can buy a home rather than rent one, you build your personal wealth rather than your landlord’s. You or your spouse served this country, and a VA home loan can make it a little easier for you to achieve your goal of home ownership.