Lenders can offer better terms with VA backing, and these loans give borrowers several advantages compared to other loans. One of the biggest is freedom to refrain from making a down payment<\/a> \u2014 at all. VA borrowers can also avoid mortgage insurance<\/a>. And they benefit from lower-than-average mortgage interest rates<\/a>.<\/p>\n Zero down, no mortgage insurance, and attractive rates mean that a VA borrower can often qualify to borrow more money through the program than through another program, such as a conventional loan or an FHA loan<\/a>. So how do you get a VA loan?<\/p>\n The VA loan program dates to 1944, when the GI Bill of Rights \u2014 officially known as the Servicemen\u2019s Readjustment Act \u2014 was signed into law. In fiscal year 2019, according to the VA, 624,546 loans were made under the program<\/a>. The average loan amount was $281,226, and the total loan amount reached $175.6 billion.<\/p>\n VA loans can be made for several purposes, including:<\/p>\n VA loans are only available to veterans, active-duty military service men and women, or their surviving spouses. Veterans also will have to meet requirements for length of service.<\/p>\n Borrowers need to prove eligibility by filling out a Certificate of Eligibility<\/a>. The VA or a VA-affiliated lender can provide a copy, or you can fill one out online<\/a>.<\/p>\n The down payment is the biggest obstacle to homeownership<\/a>. But VA borrowers are lucky enough to skip this hurdle entirely, however, since they can put as little as 0% down. According to the VA, 90% of VA borrowers do just that<\/a>.<\/p>\n The VA itself has no official minimum credit score<\/a> for extending a mortgage loan, the private lenders who make the loans can and usually do impose minimum credit scores. Lenders may require VA borrowers to have credit scores of 620 or above.<\/p>\n The VA can also limit the size of the loan it will guarantee<\/a>. If the requested loan amount would require a guarantee above the VA\u2019s maximum amount, the borrower may have to make a larger down payment in order to bring the loan size down.<\/p>\n VA loans also typically offer lower costs and fees than other programs. This includes freedom from mortgage insurance and a cap on closing costs.<\/p>\n Combined, these can significantly expand affordability for VA borrowers.<\/p>\n Under most loan programs, borrowers who put down less than 20% have to pay for mortgage insurance. This insurance protects lenders if the borrower defaults on the loan.<\/p>\n Mortgage insurance costs may range from 0.5% to 1% of the loan amount annually.<\/p>\n For a loan amount of $281,226 \u2014 the average for VA in 2019 \u2014 the mortgage insurance on another type of loan could be $2,812 a year. That would add $234 to the monthly payment, which could easily put the monthly payment outside the buyer\u2019s range. But VA loan borrowers will have that much more to work with when they get ready to buy.<\/p>\n Although VA loans don\u2019t require mortgage insurance, they do require borrowers who are buying or refinancing a home to pay a different, smaller fee. This VA funding fee<\/a> can range from 1.25% to 3.5% of the loan amount.<\/p>\n The size of the fee depends in part on whether the borrower is using the VA loan benefit for the first time. Another factor is whether the borrower is making a down payment.<\/p>\n Like mortgage insurance, the VA funding fee is used to reduce the risk of a borrower failing to pay back the loan. However, unlike mortgage insurance, the VA funding fee is a one-time fee. It doesn\u2019t include an annual premium, and it doesn\u2019t have to be paid monthly.<\/p>\n The funding fee can be rolled into the loan. Because it increases the loan amount, this will have an effect on the monthly payment. But this effect is much smaller than mortgage insurance.<\/p>\n The VA will waive the funding fee for veterans who are getting disability pay. It will also waive the fee for surviving spouses.<\/p>\n The VA has some limits on closing costs. It caps the lender\u2019s origination fee at 1% of the loan, and it prohibits some fees altogether. Prohibited fees include real estate broker commissions, charges for follow-up appraisals, and attorney fees charged by the lender.<\/p>\n VA borrowers may still have to pay reasonable and customary fees for their initial appraisal, title insurance, credit report, and other allowable services. Altogether, VA closing costs are likely to be approximately 4% of the purchase price, with a range of 0.5% on either side. The actual percentage depends on various factors including the amount of pre-paid property taxes.<\/p>\n For example, assuming the 2019 average VA loan amount of $281,226 is the home purchase price, closing costs could range from between $9,843 and $12,655. The average would be about $11,249.<\/p>\n The 28\/36 rule<\/a> is a shorthand approach to figuring affordability. It says a buyer should not spend more than 28% of their gross monthly income on all costs related to owning the home. Payments on debts including mortgage, auto loans, student loans, and credit cards also should not total more than 36% percent of gross monthly income.<\/p>\n Note that this isn\u2019t how your lender will think about how much home you can afford, but we\u2019ll get to that soon!<\/p>\n Another way to figure home affordability is to use a home affordability calculator<\/a>. This free online tool uses six inputs:<\/p>\n Using this information, the home affordability calculator will tell the user how much they can likely spend on a home.<\/p>\n The VA uses an additional guideline called residual income to estimate affordability. Residual income guidelines<\/a> vary depending on the size of the borrower\u2019s family and the geographic location.<\/p>\n Loan term is also a factor in determining affordability. That\u2019s because the size of the monthly payments will be much smaller on, say, a 30-year loan than they will be on a 15-year loan.<\/p>\n The interest rate on the loan also matters. A higher interest rate increases the monthly payment, and that can reduce affordability.<\/p>\n Property taxes also affect affordability. Some areas have higher property taxes. Because these taxes are usually paid monthly with the mortgage payment, they can increase the payment.<\/p>\n Premiums on homeowner\u2019s insurance required by lenders are also usually part of the payment. These premiums vary, but they average about $100 per month nationwide<\/a>, according to PolicyGenius.<\/p>\n Homeowner\u2019s association (HOA) fees<\/a> are also included in housing costs, and they can vary wildly depending on the services your HOA provides.<\/p>\n Employment may also affect affordability. Lenders are looking for stable, long-term, full-time employment. Self-employed borrowers may need to provide two years of tax returns to verify employment.<\/p>\n The letters DTI stand for debt-to-income ratio, which is a percentage showing the ratio of a borrower\u2019s total monthly debt payments to total monthly income. Lenders look at DTI to determine how much to lend.<\/p>\n Many lenders want to see a DTI ratio of 43% or less. However, depending on individual circumstances, an acceptable DTI figure may be higher or lower.<\/p>\n To calculate DTI, first add up all sources of income, such as wages, child support, and alimony. Then add up all monthly debt payments, including the anticipated mortgage payment, car loans, student loans, credit card minimum payments, and any payments of child support and alimony.<\/p>\n Divide your total debt payments by your total income to get DTI.<\/p>\n For example, consider a borrower earning $65,712, which the Census Bureau reports is the 2019 national median income<\/a>. This means their gross monthly income is $5,476.<\/p>\n The borrower\u2019s debts include a $400 car loan, $300 student loan, and $100 in credit card minimum payments.<\/p>\n We can assume that the monthly cost of the average VA loan of $281,226 is about $1,500, including principal, interest, taxes, insurance, and HOA fees.<\/p>\n Combining all debt payments produces a total of $2,300. Dividing this by $5,476 in income produces a DTI ratio of 42%.<\/p>\n This ratio is on the border of what is likely to be approved for a typical VA loan.<\/p>\n It\u2019s possible to calculate the monthly housing budget needed to produce a certain DTI figure.<\/p>\n For example, to get a DTI of 30%, the above borrower would need a housing payment of just $800.<\/p>\n To get a DTI of 35%, the borrower could afford a mortgage payment of approximately $1,100.<\/p>\n The VA will consider wages and salaries, tips, commissions, rental income, and other income sources. However, not all types of military pay will be considered; disability pay from the military is not always considered income<\/a> for a VA loan.<\/p>\n Military income that can be considered includes the Basic Allowance for Housing, flight pay, and hazard pay. Borrowers can also include pay from service in the National Guard and Reserves.<\/p>\n One way to reduce VA loan payments and make a house more affordable is to use a longer loan. The payment on a 30-year note will be significantly less than on a 15-year note.<\/p>\n Shopping around for a better mortgage interest rate is another way. Borrowers should check with three or more lenders to see who has the best deal.<\/p>\n Another way to boost affordability is to make a larger down payment. This will reduce the loan amount and the monthly payment.<\/p>\n Buying a more affordable home is another solution. If a buyer can\u2019t qualify to borrow enough for one home, he or she can look for lower priced homes.<\/p>\n VA loans have some major benefits, including:<\/p>\n A VA loan has no prepayment penalty if the borrower pays the loan off early, which is another benefit compared to some other loans. And borrowers who have previously declared bankruptcy can qualify for a VA loan sooner than they could with other loan programs.<\/p>\n There are also some limitations to VA loans, including:<\/p>\n![\"An](\"https:\/\/www.homelight.com\/blog\/wp-content\/uploads\/2021\/01\/how-to-get-a-va-loan-flag-666x381.png\")
<\/a>The history of VA loans<\/h2>\n
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Requirements to get a VA loan<\/h2>\n
VA loan requirement comparisons<\/h3>\n
VA loan costs and fees<\/h2>\n
Does a VA loan require mortgage insurance?<\/h3>\n
What\u2019s the VA funding fee, and how much does it cost?<\/h3>\n
VA closing costs<\/h3>\n
![\"An](\"https:\/\/www.homelight.com\/blog\/wp-content\/uploads\/2021\/01\/how-to-get-a-va-loan-aerial-666x381.png\")
<\/a>Home affordability and VA loans<\/h2>\n
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Factors that affect how much home you can afford with a VA loan<\/h3>\n
What\u2019s DTI, and why is it important to a VA loan?<\/h3>\n
How to calculate your DTI<\/h4>\n
How to calculate your monthly housing budget using DTI<\/h3>\n
Does military income count toward DTI on a VA loan?<\/h4>\n
![\"A](\"https:\/\/www.homelight.com\/blog\/wp-content\/uploads\/2021\/01\/how-to-get-a-va-loan-notes-666x381.png\")
<\/a>How can you lower your VA loan payments?<\/h2>\n
Are VA loans affordable? The pros and cons<\/h3>\n
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Drawbacks of a VA loan for home affordability<\/h4>\n