Veterans Affairs Loan Eligibility:
Qualifying Details

By: , Veteran Realty Services - Everett, Inc.
& , Hallmark Realty Corporation

The Northwest Eddy article "Applying for a Veterans Affairs Loan" outlined the basics of the VA loan process. Refer to this article for additional information on VA loans and lending processes.

VA loans are attractive to borrowers because the underwriting standards are far less stringent than conventional underwriting standards. Nowadays, interest rates and discount points (which can be paid by the borrower or a third party) are negotiable between the VA Lender and the borrower. These loans are also partially guaranteed by the U.S. government. This reduces the VA Lender's exposure to risk if a borrower defaults on the loan payments, much like private mortgage insurance (PMI) in conventional lending practices.

VA Guaranty

VA guarantees a portion of the loan amount. The VA guaranty is funded by a fee which ranges from a low 1.5% (for a transaction with a down payment of less than 10%) to a high 3% (for secondary financing with little or no down payment) of the loan amount. Specific rates are: 2.4% for Reserve or Guard Duty with zero down; 1.5% for Reserve with 1.25% to 10% or more down; 1.75% for Reserve with 1.50% to 5% or more down (up to 10%); 3.3% when VA loan program is used more than once (subsequent use).

This funding fee may be rolled into the loan and paid from the loan proceeds at the transaction's closing. For disabled veterans and/or surviving spouses, the funding fee is waived. Generally, veterans will be charged 2.15% of the loan amount and for reservists, the funding fee is 2.4%.

Eligible borrowers can use VA loans to purchase single-family residences, multi-family complexes up to 4 units, or for the construction of a new home. However, the home—or in the case of multi-family complexes, one of the units—must be "owner occupied." If a Buyer assumes a Seller's VA loan to purchase a home, and the buyer is an eligible veteran, the buyer can substitute or transfer his or her entitlement to the Seller. Therefore, entitlement for this type of loan may be reinstated by full payment of the loan amount. Consequently, the Seller may be eligible for another VA loan.

Although VA loan amounts are not limited, staying at or below $359,650 allows the lender to sell a loan on the secondary market. The basic entitlement is $36,000 (or in some cases as high as $89,912 for loans over $144,000). This entitlement amount may change each year, so you should contact your local VA Lender for confirmation of the current amount. VA Lenders will loan up to four times a veteran's available entitlement with "zero" down, provided the borrower meets the income and credit qualifications, and the property appraises for the sales price. By itself, having served in the U.S. Armed Forces is not enough to qualify for a VA loan.

Eligibility for VA loans is usually based on the length of continuous active service in the U.S. Armed Forces, or long-term service in the National Guard or Reserves. The minimum service requirement varies from 90 days to 24 months depending on when the veteran served. If a person served during "peacetime," the length of service requirement is longer. A veteran not in active service must have an honorable discharge from duty. Another person who may be eligible for a VA loan is a surviving spouse (if he or she is not remarried) of a veteran who was killed in action or died of service-related injuries, is missing in action, or is a prisoner of war.

As is required in conventional lending practices, income analysis is essential to the VA lending process. The difference, however, is that the income analysis for VA loans focuses on the "total-obligations-to-income" ratio (known as and calculated in the same manner as the "total-debt-to-income" ratio used in conventional lending practices) and the veteran's residual income.

Total-Obligations-to-Income Ratio

In this ratio, the VA Lender will add all the veteran's monthly debt service payments such as housing expense, credit card payments, student loans, car payments, revolving loans (defined as a debt that has more than 10 payments outstanding before the balance is paid off) and any other real estate loans, and compare the result to the veteran's monthly income. For VA loans, the total-obligations-to-income ratio is considerably higher (41%) than the conventional (total-debt-to-income ratio) lending practices standard (36%). The example below shows how to calculate this ratio at a rudimentary level.

Let us assume the veteran is purchasing a home for $350,000 with no down payment. The home appraises at the sales price. The property taxes for a given year are $4,200, the annual insurance premium is $800, and the loan interest rate is 6.0%. The veteran also has credit payments of $65/month and car payments of $500/month.

To determine the housing expense—loan principal, loan interest, property taxes, and hazard insurance (PITI)—for a 30-year fixed, fully amortized loan:

1. Subtract 0 (down payment) from 350,000 (purchase price) to arrive at 350,000 (loan principal).
2. Dividing 350,000 (loan principal) by 1,000 equals 350.
3. Look at the Amortization Table's grid under Row "6.0%" (interest) and Column "30 year" (loan term).
4. Multiply 350 by 6 (number which appears in the intersection of the row and column mentioned in Step 3) to get 2,100 (PI).
5. Dividing 4,200 (annual property taxes) by 12 (months) equals 350.
6. Dividing 800 (annual insurance premium) by 12 (months) equals 66.67.
7. Add 2,100 (PI) plus 350 (property taxes) plus 66.67 (insurance premium) to get 2,517.67 (PITI).

The housing expense (PITI) is $2,517.67/month. To calculate the total debt service, continue with the following steps:

8. Add 2,517 (estimated PITI) plus 65 (monthly credit card payments) plus 500 (monthly car payments) to arrive at 3,082.
9. Dividing 3,082 (monthly debt service) by 41% (conventional standard "total-debt- to-income" ratio) equals 7,517.07 (monthly income).

This example, based on the VA's "total-obligations-to-income ratio" standard of 41%, shows a required total income of at least $7,517/month.

Residual Income

Residual income analysis concerns cash flow. The proposed housing expense (PITI), all recurring debts, and certain taxes (federal, state or local income tax, social security, Medicare and any other taxes deducted from the veteran's paycheck) are subtracted from the veteran's gross monthly income to determine the residual income. The veteran's residual income must meet the VA's minimum requirements, which vary according to region, family size, and the proposed loan amount. Your local VA Lender can find out what the most current income requirements are.

Although the VA underwriting standards are important, they are only guidelines. Your inability to fulfill every requirement will not necessarily stop you from securing a loan. Unlike conventional lenders, VA Lenders have more flexibility in considering plans you have for the future that may support your ability to make monthly mortgage payments.

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