Summary: Good news for military service members. We expect few, if any, changes to the VA loan program in 2014. The qualification requirements that are currently in place will likely carry over into next year. The Qualified Mortgage (QM) rule that takes effect in January 2014 should have little effect on the VA program. Basic eligibility requirements will also remain unchanged. We do, however, expect some adjustments to the loan limits associated with the program.
VA home loans offer several benefits to military service members and their families. The biggest advantage is the option for 100% financing. Eligible borrowers who meet all of the VA loan requirements can get a mortgage with no money down whatsoever. This accounts for the program’s popularity among those serving in the military.
Generally speaking, it is easier for borrowers to qualify for a VA loan compared to a conventional mortgage (one that is not backed or ensured by the government). According to the Department of Veterans Affairs, the “VA guarantees a portion of the loan, enabling the lender to provide you with more favorable terms.”
But not everyone can qualify for this type of financing. Like any other mortgage product, this program has certain qualification requirements and standards associated with it. This article takes a current, updated look at VA loan requirements for 2014.
Basic Eligibility Requirements: Department of Veterans Affairs
You can think of VA home-loan qualification as a two-tiered process. You must meet two sets of requirements, in order to qualify for such a loan. First, we have the basic eligibility requirements set forth by the U.S. Department of Veterans Affairs (VA). This department of the federal government manages the program and establishes the minimum requirements for VA loans in 2014.
Generally speaking, you are eligible for the program if you meet any one of the following criteria:
- You are a veteran who served 181 days during peacetime (active duty).
- You are a veteran who served 90 days during war time (active duty).
- You served at least 6 years in the National Guard or Reserves.
- You are currently on active duty and have served at least 90 continuous days.
- You were discharged from the military due to hardship.
- You are the un-remarried spouse of a veteran who died while in service or from a “service connected disability.”
Service members who have received a dishonorable discharge are generally not eligible for the program.
As you can see, the eligibility requirements for VA loans in 2014 are fairly broad in scope. This is intentional. They are meant to include most service members who have served in the military for a certain length of time.
Just remember the two-tiered system mentioned earlier. These are the minimum requirements established by the government. But the government does not actually originate VA loans. They are originated in the private sector, like most other types of mortgages. The government simply guarantees a portion of the amount being borrowed. So, in addition to meeting the basic eligibility guidelines above, you must also meet whatever VA loan requirements are imposed by the lender. So let’s talk about those next.
Other (Lender) Requirements for VA Loans in 2014
The Department of Veterans Affairs establishes clear and specific guidelines when it comes to length and type of service. But the information they offer about other VA loan requirements is somewhat vague.
For instance, the Department says “you must have suitable credit, sufficient income, and a valid Certificate of Eligibility (COE) to be eligible for a VA-guaranteed home loan.” But they offer no specific definition of suitable credit or sufficient income. This leaves borrowers scratching their heads and asking a lot of questions: What credit score is needed to qualify for a VA loan? How much can I borrow based on my income? What about my other debts, do they play a role?
This is where the two-tiered system comes into play. Here’s what you need to know.
It’s possible to be turned down for a VA loan, even though you meet the government’s minimum guidelines for program eligibility. Meeting the Department’s requirements is not enough. You must also meet the lender’s requirements — specifically when it comes to credit scores and debt-to-income ratios. These are two of the most important factors when it comes to qualifying for a VA loan in 2014.
Credit scores: As mentioned earlier, the Department of Veterans Affairs does not have any specific requirements for credit scores. But you can bet the mortgage lender does, and this can vary from one lender to the next. According to the VA Mortgage Center, a company that specializes in this program, most lenders are looking for a credit score of 620 or higher these days. But this is not a hard-and-fast rule. We expect some lenders to offer more flexible requirements for VA loans in 2014, due to the drop-off in loan volume resulting from rising interest rates. So don’t fixate on that 620 number. If you’re slightly below that, but you are well-qualified in other areas, you could still be approved.
Debt ratios: The debt-to-income ratio, or DTI, is another important VA loan requirement. This is a comparison between the amount of money you earn (gross monthly income) and the amount that goes toward your fixed monthly expenses (recurring debts). Generally speaking, your total DTI ratio — including the house payment — should not exceed 41%. This requirement is imposed by the lender, not by the VA. So it varies from one mortgage company to the next. Exceptions are often made for borrowers with excellent credit, significant savings in the bank, etc. Income may come from a variety of sources including but not limited to: base military pay, non-military employment, commissions, self-employed income, retirement income, spouse’s income, and alimony.
Read: Debt-to-income ratio standards for 2014
Documents: When it comes to VA home loan requirements in 2014, documentation is the name of the game. The lender will request a wide variety of documents to verify your income and assets, as well as your current debt situation. They also need to verify and document your ability to repay the loan, in keeping with new lending requirements. Documents needed for VA financing typically include the Certificate of Eligibility (COE), the Uniform Residential Loan Application (URLA), bank statements, tax returns and W-2 forms, the DD Form 214 for veterans who have left the military, and a variety of standard VA documents.
Occupancy: The VA also has specific requirements for occupancy status. Simply put, you must use the home as your primary residence. You cannot use this program to finance the purchase of an investment or vacation property.
Appraisal: The Department of Veterans Affairs requires all homes being purchased with a VA loan to undergo a property appraisal. This is when a licensed appraiser evaluates the home to determine how much it is worth in the current market. Generally speaking, the house must be worth the amount you have agreed to pay for it, and it cannot exceed the VA loan limit for the county in which it is located. The house “must be adequate collateral for the requested loan,” according to the Department. We are still awaiting the revised loan limits for 2014. You can find the current limits for 2013 on the Department of Veterans Affairs website.
Read: Overview of new mortgage rules coming in 2014
Obtaining Your Certificate of Eligibility or COE
Borrowers who wish to use a VA loan to buy a house must first obtain a Certificate of Eligibility (COE). This document is issued by the Department of Veterans Affairs. The borrower must then present the COE to the lender when applying for the loan. The COE essentially says that the individual meets the Department’s minimum eligibility requirements.
To obtain a COE, applicants must provide evidence of their eligibility. This can be done in several ways:
- Veterans who have separated from the military can provide a DD Form 214. It must show the character of service and the reason for separation.
- Active-duty military personnel, National Guard members, and reservists can provide a statement of service signed by the personnel office (typically) or the unit commander.
- Discharged members of the National Guard who have never been on active service can provide NGB Form 22 or 23.
- Discharged members of the Selected Reserve who have never been on active service can provide a copy of the latest annual retirement points statement and evidence of honorable service.
This is a basic overview of COE documentation requirements. For more detailed information, visit the home loans section of the Department of Veterans Affairs website (www.benefits.va.gov/homeloans/).
About the author: Brandon Cornett is a veteran of the U.S. Navy, having performed eight years of honorable service. Brandon enlisted in 1995 and left the Navy as a Lieutenant (O-3) in 2003. He is also the creator of the Home Buying Institute.
Disclaimer: This article provides an overview of VA loan requirements in 2014. There are exceptions to many of the rules mentioned above. Borrowers should not assume they are unqualified for the program based solely on the information presented above. The only way to find out if you are eligible for the program is to obtain a Certificate of Eligibility (COE). Likewise, the only way to find out if you meet a particular lender’s standards is to speak to them directly.
Brandon Cornett is a veteran real estate market analyst, reporter, and creator of the Home Buying Institute. He has been covering the U.S. real estate market for more than 15 years. About the author