Many home buyers and agents shy away from the Department of Veterans Affairs home loan program for fear that the process is too difficult or restrictions are too numerous. But if you’re a veteran in search of a mortgage, you don’t have to let these misconceptions drive you away.
These government-backed mortgages are actually among the most flexible and forgiving. In fact, this loan program is booming right now because it’s become increasingly difficult for veterans to secure conventional and even FHA financing. VA loan volume is up 370 percent since 2007, and the program backed a record 630,000 mortgages in 2013 alone.
VA loans have some notable benefits. But they’re also a specialized loan product with unique requirements, some of which can become sticking points for veterans and real estate agents.
Here’s a look at five common potential hurdles for VA home buyers and how to clear them.
1. Occupancy
The VA loan guarantee requires that you live in the home as your primary residence. This means the VA loan can’t be used to purchase a rental property or vacation home. But it doesn’t mean that you can never rent out the property.
Many VA buyers purchase in one location and are then transferred to another location. There’s no prohibition on renting out a property after you’ve occupied it. In fact, renting a former primary residence is a tool many military buyers use when they receive a Permanent Change of Station. It’s even possible to have two or more VA loans active at once, allowing you to rent the home at your old duty station and purchase a home at your new one.
Takeaway: If you’re looking to purchase a primary residence, you’ll likely meet the VA occupancy requirement.
2. A Less-Than-Optimal Credit Score
The VA doesn’t set a minimum credit score requirement, but it also doesn’t actually make home loans. The lenders that do will have credit standards prospective borrowers must meet. VA lenders are typically looking for a minimum credit score of 620. That’s considerably lower than the 740 many conventional lenders require. Even FHA lenders often want to see a borrower at 690 and higher.
But credit and finances can suffer given the unique strain and sacrifices of military service, making even a 620 tough to maintain. Checking your credit scores and looking for opportunities to improve your credit ahead of time can benefit you once you’re ready to buy a house.
Takeaway: A sub-620 credit score isn’t the end of the road. With a little time and dedication you can improve your score and use your hard-earned VA benefits.
3. Residual Income and Affordability
Despite their no-down-payment requirement, VA loans have been considered to be among the safest mortgages on the market for nearly all of the last five years. One of the big reasons is the VA’s residual income requirement.
This standard was established to ensure military buyers were purchasing truly affordable homes. Basically, the VA wants to confirm that you have enough money remaining each month after major bills to cover things such as food, gas and other necessities that don’t show up on a typical loan application.
Residual income is based on geography and family size. For example, a family of four in Missouri would need at least $1,003 in residual income each month in order to meet the guideline.
Your loan officer will consider residual income when calculating your loan pre-approval amount.
Takeaway: If you don’t meet the residual income requirement for the home you desire, consider lowering your loan amount or look at options to discount a portion of the residual with outside income.
4. Appraisals
True or false: You can only buy a home in immaculate condition with a VA loan.
False. A home doesn’t have to be immaculate or brand new, but it does have to meet the VA’s minimum property requirements to ensure the home is safe, sound and sanitary. Is there awful wallpaper from the ‘70s? That’s OK. Is paint chipping off the outside of the home? That’s probably not going to fly.
The good news is many minimum property requirements can be remedied to allow the sale to move forward. Agents who know and understand the requirements can guide you to “move-in ready” homes or include provisions in the contract that will remedy known issues early on.
5. Manufactured Homes
Understand at the outset that you’ve got a tough road ahead if your goal is to purchase a manufactured home using your VA benefit. Many VA lenders steer clear of these properties, perhaps more commonly known as mobile homes.
Start with your local credit union to see if they offer this specific type of financing, and then work your way through a list of other lenders until you find a company you feel comfortable managing your loan process.
Takeaway: Purchasing a manufactured home with the VA loan guarantee is possible. You’ll just have to conduct some research into mortgage companies, and prepare for a lot of trial and error.
[Editor’s note: Knowing where you stand with your credit can prepare you for your search for a home. By checking your credit reports – which you can do for free once a year at each of the major credit bureaus – for errors and negative items, and your credit scores — which you can do using a free tool like Credit.com’s Credit Report Card — you can have a better idea of whether you'll qualify.]
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