How hard is it to qualify for a VA loan when buying a house? Are VA loans easier or harder to obtain, when compared to regular mortgage loans?
These are some of the frequently asked questions borrowers have about the Department of Veterans Affairs (VA) home loan program. Today, we will explore these questions in detail to help you understand what it takes to qualify for this loan program.
The short answer: VA loans are typically easier to qualify for than conventional mortgage financing. The lenders that offer these loans receive a partial guarantee from the government, which reduces their risk. Additionally, there is no down payment required and no minimum credit score.
How the VA Loan Program Works
Some borrowers who get turned down for conventional mortgage financing end up getting approved for VA loans. To understand the reasons why, we have to examine how this program actually works.
VA loans are available to military members and veterans who meet certain service requirements. Some spouses are eligible for this program, as well.
But the Department of Veterans Affairs does not lend money directly to these borrowers. Instead, they offer a guarantee to the private-sector mortgage lenders that actually provide the funding.
This guarantee promises to reimburse lenders for some of their losses, in the event that the borrower defaults or fails to repay the loan. You might think of it as a kind of insurance that reduces the mortgage lender’s risk.
A conventional mortgage loan, on the other hand, does not have this kind of government backing. As a result, conventional financing can bring more risk for the lender.
Is It Hard or Easy to Qualify?
VA loans are actually one of the easiest types of mortgage financing to qualify for. And we’ve covered the primary reason for this already.
These loans receive a form of federal backing that’s not applied to regular mortgage loans. Because of this, lenders that participate in this program can be a bit more flexible when it comes to things like borrower credit scores, debt ratios, etc.
When they don’t have any kind of insurance against default, mortgage lenders tend to be more stringent when reviewing loan applicants. They might require a higher credit score, a larger down payment, and a lower debt-to-income ratio.
This VA loan program is also more forgiving when it comes to financial or credit-related issues you might have had in the past. As it states on the Department of Veterans Affairs website:
“Unlike many loan programs, a lower credit score, bankruptcy or foreclosure does not disqualify you from a VA home loan.”
This doesn’t mean everyone can qualify for a VA loan. You’ll still need a decent credit score, a manageable level of debt, and sufficient income to repay the loan. But overall, it’s typically easier to qualify for a VA loan than a regular or conventional mortgage product.
No Down Payment, No Mortgage Insurance
The down payment is another reason why it’s not as hard to qualify for a VA loan. (Or should we say, the lack of a down payment.)
Borrowers with VA loans can use their mortgage funding to cover the entire purchase price. This means you could potentially buy a house with no down payment whatsoever.
For a lot of would-be home buyers, saving up for the down payment is one of the hardest parts of the mortgage process. Many borrowers have a hard time coming up with enough money to meet the minimum down payment requirement for a standard mortgage loan.
But that’s not an issue with a VA-guaranteed home loan.
By eliminating the need for a down payment, this program makes it a lot easier for borrowers to qualify for financing. You don’t have to spend years saving up thousands of dollars to cover your down payment expense. This in turn shortens and simplifies the path to homeownership.
The VA loan program also eliminates the need for mortgage insurance. With a traditional home loan, borrowers who make a relatively small down payment usually have to pay for mortgage insurance to offset the added risk. This can add several hundred dollars onto the homeowner’s monthly mortgage payments.
By eliminating the need for a down payment and mortgage insurance, VA loans make it easier—not harder—to qualify for mortgage financing and buy a home.
A Few Extra Steps in the VA Loan Process
While it is relatively easy to qualify for a VA loan, borrowers who use this program do have to take a couple of extra steps.
One of those steps has to do with a document known as the Certificate of Eligibility (COE).
When you apply for a VA loan, you’ll have to provide this document to your mortgage lender. The Department of Veterans Affairs issues this document. It shows the lender that you’re eligible for the program. It also shows whether or not you have used it in the past.
(We’ve covered the COE in a separate article, if you’d like to learn more about it.)
Home buyers who use a VA loan to buy a house must also pay a funding fee. This fee covers the operating costs incurred by the Department of Veterans Affairs, while reducing the burden on taxpayers. So it’s an important part of the program.
The good news is you can pay the funding fee upfront or roll it into the loan. And it’s a much cheaper option when compared to the mortgage insurance associated with conventional home loans.
To summarize: It’s not very hard to qualify for a VA-guaranteed mortgage loan, especially when compared to the stricter requirements for conventional financing. So, if you are a military member or veteran and meet the minimum eligibility requirements, you owe it to yourself to explore this program.