Home Buyer’s Guide
The process of buying a house can be both exciting and overwhelming. There are a lot of elements at play when it comes to securing a loan that’s right for you. So what do you need to know to qualify for a VA loan? Take a look at our Home Buyer’s Guide for some of the more important answers.
Why Should I Apply for a VA Loan?
There are quite a few benefits of VA loans that aren’t allowed with traditional home loans. One of the most attractive aspects is that the home buyer does not have to make a down payment. There’s also no mortgage insurance required. Since down payments are typically 20% of the home’s cost, that represents a huge savings.
Another great benefit is that once you’re eligible for a VA loan, that eligibility never expires. Surviving spouses are also eligible. If your spouse has been killed in action, and you have not remarried, you still qualify.
First, to be eligible for a VA loan you must meet the following criteria:
- You’ve been an active-duty veteran with at least 90 days of service during a war.
- You’ve been offered active service for 181 days straight during peacetime.
- You’re a veteran with at least a 41% debt-to-income ratio (DTI).
Next, you’ll need to apply for your VA Certificate of Eligibility (COE). It lets potential lenders know that you are indeed eligible for a VA loan. The necessary documents vary based on your status; you can find those requirements here.
DTI and Credit Explained
Most of the eligibility requirements are pretty self-explanatory. But what is DTI? It’s the percentage of your income that goes to your monthly debts, and it shows the VA (and other lenders) how much you can borrow to buy a home. Here’s the kicker: your DTI is more important than your credit score when it comes to a VA loan.
Your DTI is calculated by dividing your monthly debt obligations by your monthly income before taxes. While most lenders look for a DTI of 36% or less, the VA’s threshold is a bit higher, which can be incredibly helpful to you.
But don’t panic. If your DTI is over the limit, you can still qualify for a VA loan if your tax-free income or your residual income surpasses the limit by roughly 20%. The mortgage underwriter can also go to bat for you, but they would have to explain the reasons behind approving the loan. That policy varies from lender to lender.
So what about your credit score? That’s one of the major benefits of a VA loan: You can actually get a loan with bad credit. However, it’s entirely up to the lender.
Improving Your Scores
There are a few things you can do to help your DTI and credit score to increase your chances of getting approved for a home loan with favorable terms.
You can improve your credit score by consolidating your current credit and loans. For example, if you have multiple credit cards, try to consolidate them into one account. Before you fully start the home buying process, you can improve your DTI by paying off or down debt.
Necessary Documents for the Loan Applications
Home loans require a lot of paperwork, and VA loans are no exception. However, there are some different requirements. When applying you’ll need the following documents:
- A government-issued ID such as a driver’s license
- W-2 statements from the past two years
- Tax returns from the past two years
- Your most recent checking, savings, and retirement account statements
- Your most recent pay stubs
- Social Security awards letter (if applicable)
- VA disability awards letter (if applicable)
- Divorce decree (if applicable)
- Bankruptcy discharge letter (if applicable)
- DD-214 Statement or Service Points Statement
VA Loan Closing Costs
The final step of your home buying experience is the closing. And much like everything else in the VA loan process, the necessary closing costs differ from those for other loans. They include:
- Origination charge. If a lender charges an origination fee, they’re not allowed to go beyond a standard 1% fee, nor are they allowed to add further overhead charges. They can, however, bundle a variety of fees into that 1%. The choice is entirely up to them, but it will not go beyond that 1%.
- Appraisal fee. While a home appraisal is a normal step in any home buying process, the VA appraisal is slightly different. The VA sets the cost of the appraisal, and it must be paid up front. It varies from loan to loan. However, Hero Loan pays the appraisal on all VA loans, bringing closing costs down even further.
- Discount points or permanent buydown. A VA loan allows you to pay down your insurance rate using a points system. It must be done at the time of purchase and is completely optional. A point is 1% of the loan amount. If you’ve saved money up front (maybe for that down payment you didn’t realize was unnecessary) it’s a good time to use that.
- Credit report fees. While you’re allowed to pull your credit reports for free once a year, the three major credit bureaus can charge you for further reviews. Thanks to the VA, your fees are capped at $50 when you access it beyond that free review.
- Inspection fees. Recipients of a VA loan cannot be charged for termite inspection in 41 states. You may, however, be required to pay for repairs associated with wells, septic systems, or found termite issues.
- Seller concessions. Speaking of negotiations, you can ask the seller to pay up to 4% of the purchase price in order to cover concessions. So if you need doors replaced in the house, for example, this is a good way to have that taken care of rather than holding up the sale over those doors.
- Closing costs. Here’s a big one: If you have a VA loan, the seller can pay for your loan-related closing costs. Note that it’s not required, but it is something you can keep in mind during those final negotiations.
- VA funding fee. This mandatory fee goes back to the VA as a way to keep this program running. If you’re a first-time buyer, you’ll pay 2.30%. However, this amount can go into that 4% concession fee listed above.
Bear in mind, this home buying guide represents just the broad strokes. The VA also has a variety of other lesser-known benefits that you may be able to take advantage of.
Apply for a VA Loan with the Team at Hero Loan
Directly endorsed by the VA, the team at Hero loan is here to help you buy the home you’ve always wanted. We’re here for you during every part of the home buying process. We can even handle paperwork for your COE! There are no up-front or out-of-pocket costs, and in some cases, we can close on your loan in just 14 days.
Ready to get the process rolling? Contact us today!