Applying for a VA home loan isn't complicated—in fact, in some ways it can be easier than a conventional loan. Buying a home with a VA loan is a 10-step process that takes a little organization and planning, not unlike most home loans. Of course, the big advantage of a VA loan is its low cost, which more than makes up for any extra steps that may be involved.
Step 1: Determine How Much You Can Afford
The first step in purchasing a home, whether you intend to use VA benefits or not, is establishing whether you are financially ready to purchase a home. It's integral to the VA loan process to determine the maximum mortgage payment you can afford. Your lender will focus primarily on your monthly gross income as well as the payments that show up on your credit report (though credit score is not as much a factor in the VA home loan process as it is with conventional loans).
The Consumer Financial Protection Bureau has a home loan toolkit that may help you calculate your DTI and assess a home's affordability. If you want to estimate your maximum loan amount, you can use these steps to get an idea.
Calcuate Your Gross Income
Determine your gross annual income amount. Depending on the time of year, refer to your prior year's income tax statement. If you are well into a new calendar year, use a Year-to-Date from your most current paystub to calculate an estimated gross annual income for the current year. Do this by dividing the Year-to-Date figure by the number of weeks you've worked this year so far. Then multiply that number by 52.
Add Up Your Debts
List and add up all of your debts, such as credit cards, auto payments and any home, equity, personal, or student loans, as well as any other debts. Anything that will come up on a credit report with a balance and payment due counts as debt. Remember also to include any additional expenses such as child care, health care or alimony payments. You should also consider adding the amount you put aside for retirement, college or other savings.
Do the Math
Lenders use two standards to determine whether a veteran's current and anticipated income are adequate to qualify for a VA home loan: debt-to-income ratio and residual income. Typically, a vet must meet both standards to qualify, though there may be exceptions.
Your debt-to-income ratio is the ratio of your total monthly debt payments (housing, installment debts and others) to your gross monthly income.
For the purposes of acquiring a VA home loan, an acceptable debt-to-income (DTI) ratio is 41 percent or less of your gross income. To determine your DTI, enter your gross monthly income and monthly debt payments into a DTI calculator.
Residual income is the amount of your net income that remains after housing and other debts, obligations and monthly living expenses are subtracted. Because it's a measure of day-to-day affordability of living expenses, it takes into consideration the number of people living in the household, regardless of whether they are named on the loan. Simply add up your expenses and subtract them from the amount of income you take in (net income) each month. Divide that by the number of people living in your household, and that's your residual income figure.
Acceptable residual income amounts are set by the federal government according to size of the loan ($79,999 and below or $80,000 and above), region of the country (Northeast, Midwest, South and West) and number of people living in the household.
Though meeting both standards is ideal, every situation is different, and a number of mitigating factors may come into play. Should a DTI come in at over 41 percent or the residual income fall below the government-prescribed levels, underwriters will evaluate several other factors when considering whether to extend a VA home loan—for instance, a high DTI may be negated with a high residual income, or a low residual income may be negated with a low DTI. Other compensating factors may include:
- Excellent credit over a long period of time
- Minimal debt
- Good or conservative use of credit
- Long-term, stable employment
- Access to a down payment
- Little to no increase in monthly housing expense
- Military benefits
- Good experience with past home ownership
- Significant liquid assets
- Tax benefits (for example, of homeownership or for child care)
The bottom line is that you need to be aware of exactly how much money you're bringing in and paying out each month, and think realistically about whether the expense of a new home is realistic for you.
Step 2: Determine VA Loan Eligibility
Of course, you can't obtain a VA home loan, or even apply, without confirming eligibility and your property's compliance with the VA's standards. The U.S. Department of Veterans Affairs says that veterans must have satisfactory credit, sufficient income and a valid Certificate of Eligibility to qualify for a VA-guaranteed home loan.
Generally, veterans who meet length of service requirements, servicemembers on active duty who have served for a minimum period of time, certain Reservists or National Guard members and certain surviving spouses of deceased veterans are eligible. You'll need to submit a DD-214 and/or other applicable service documents.
Apply for a VA Certificate of Eligibility
See our guide on VA Loan Eligibility to learn how to apply for a Certificate of Eligibility (COE), which you'll need to apply for a VA loan. Your COE is proof to any lender you approach that you're eligible for a VA loan.
Ensure it's a VA Eligible Property
The property must pass a Compliance Inspection to make sure it meets the minimum standards for habitability and safety.
Submit a Promise to Occupy
You must promise to occupy the property you purchase. You can't use a VA home loan to purchase a house you intend to rent. Your lender will have you sign paperwork confirming your intention and promise to occupy the property you buy.
Step 3: Select a Lender
You'll need to find a lender who participates in the VA home loan program and is very familiar with how the process works. The rates and closing costs offered by VA lenders vary, so don't commit to the first lender you contact. Follow the steps below to compare loan officers and offers. Making the effort at this step of the VA home loan process will more than likely pay off, saving you time, headaches and money.
Compare Closing Costs
Look into the range of closing costs you'll face for your VA loan amount. Some closing costs vary, but others are fixed and dependent on where you're buying. The VA sets the maximum you can pay as well as which fees veterans are allowed to pay and which they aren't.
See this VA Home Loan Fees page to learn more about allowable closing costs. Your lender will provide you with an initial Good Faith Estimate (GFE) or CFPB Loan Estimate, which itemizes the projected costs of your VA loan.
Compare Interest Rates
Determine the rates lenders will offer you. The VA home loan approval process is not credit-score driven, so lenders can offer the same prime rates regardless of your credit score. Fortunately, VA loan rates tend to run at about .25 percent less than conventional rates because the VA backs the mortgages, lowering the risk for lenders.
You can get an idea of the applicable interest rates by having various VA lenders provide the going rates for your target loan amount. The more specific you can be with your loan type and terms, the more accurate the information the lender can provide, which means you'll be better able to draw comparisons between lenders. Try to specify the same loan amount and term for each inquiry.
After you've decided on a VA lender, you can have your loan officer lock in a rate or let it float if you feel the rates might take a dip. In timing your decision, ask your loan officer for an assessment of the current market and a recommendation. Another way to lower the rate is to buy down the interest rate by paying extra money up front.
Establish a Relationship with a Loan Officer
It's important to work with someone you believe will work for you, on your behalf and with your best interests in mind. One way to locate a suitable loan officer is to request references from family and friends. Learn about your loan officer's loan origination record of accomplishment, including the loan officer's number of years of loan experience and relevant VA loan processing. Choose someone who is knowledgeable about the VA loan process.
Step 4: Get a VA Loan Pre-Qualification
A vital early VA loan step involves sharing a copy of your COE with the lender to show you are eligible for a VA loan. Ask the lender if it issues pre-qualifications, pre-approvals or both.
Step 5: Find a House That Fits Your Budget
Each property comes with its own set of details to consider — including the state of its heating and cooling systems as well as the need to update landscaping and make improvements. Following these steps will help you buy a house you can actually afford:
Stick to Your Budget
Make it a top priority to stick to your budget. Once you start wandering off budget, you'll begin dipping into the reserves meant for rainy days. Don't allow yourself to become house poor; you want to enjoy life in your new home without the worries.
Learn Each House's Hidden Costs
An essential aspect of your house-shopping homework includes learning about applicable property taxes and homeowner's association (HOA) or condominium fees. A more affluent neighborhood generally translates to higher property taxes. A property located in a master-planned community will have an HOA agreement with fees for the upkeep and maintenance of the subdivision.
Consider Utility Costs
You also should examine a property's utility bills. Ask the real estate agent or seller to provide copies of utility bills for the last few months at minimum. Seeing the utility payment history for various seasons, including summer and fall, periods that typically require air conditioning or heating in many climates, will help shape a more complete picture of the property expenses you can expect.
For example, you might find that one home is more energy efficient than another similarly priced home in the same neighborhood, which can result in significant savings in the long term. A slightly more expensive house with low utilities can be cheaper than a house that's in your budget but with higher utility payments.
Step 6: Make an Offer
Once you've found a home that matches your needs and budget, you can move on to the next VA loan step: Submitting an offer to the seller. You may have decided to work with a real estate agent or lawyer to negotiate the purchase price with the seller.
Now it's time to put in a formal offer.
Negotiate a Purchase Agreement
When making an offer on a home that you intend to finance with a VA home loan, you'll need to submit an official Offer to Purchase and Contract of Sale, usually called a purchase agreement. This document differs somewhat from the standard offer form used in a conventional transaction.
Confirm that the offer includes a contingency that voids the contract if you cannot obtain VA-guaranteed financing. Giving a heads up to the seller is essential to your negotiations because government loans such as VA loans place additional financial and performance obligations on the seller.
VA home loans have fees that can't come out of the veteran's pocket: No commissions, brokerage fees or buyer broker fees may be charged to the veteran buyer. Another party, usually the seller, must foot the bill for these fees.
Additionally, the veteran can only pay a maximum lender charge of 1 percent, in addition to the reasonable, standard itemized fees and charges that are part of closing costs (e.g. recording fees, appraisals, inspections, credit report, etc.).
Your offer must include a requirement that the seller or other party pay for these non-allowable loan fees. In addition to this VA-loan specific condition, you should include specifics about the move-in time frame, contingencies relating to the sale of your current home, an acceptable professional inspection of the property and final approval of your VA loan.
Including an inspection contingency allows you to renegotiate the purchase price or require the seller to provide a credit in the event you find significant maintenance, repair or other issues with the property. In some cases, you can specify that the seller pay for any repairs or necessary expenses over a certain dollar amount that come to light as a result of the inspection. Talk to your real estate agent about whether including such a contingency is reasonable or typical in your real estate market.
Your agent should include the VA-recommended option clause in your offer. This VA loan language is intended to protect your rights as a VA loan borrower by giving you the option to back out of the contract in the event the VA's reasonable value of the property comes out lower than the purchase price you negotiated with the seller.
Once all the information on the purchase agreement is complete, you'll sign it and submit your offer.
Hire A Real Estate Attorney To Handle Your Closing, If Necessary
Depending on your property's location, you may have to hire a real estate attorney, or the lender will choose one. Some states require that both parties — seller and buyer — be represented. In states where this is the case, the attorney has a primary responsibility to the lender. In states that don't require a real estate attorney to represent you (usually called "escrow states"), you may choose instead to have a real estate agent guide you through the closing transaction.
A real estate agent can monitor your property transaction and take care of the details, such as providing you with a copy of the signed contracts and closing documents that confirm the property transfer. However, your real estate agent can't give you legal advice.
Step 7: Apply for VA loan
Once all the details are hammered out, the offer is accepted and you have a fully signed contract, or purchase agreement, it's time to apply for the VA loan. If you've anticipated this next VA loan step — hopefully, thanks to a lender with sufficient VA loan experience to guide you — you'll have all the information and documents ready to hand over to your lender. Provide your loan officer with the requested income, debt, credit and asset documents.
Answer Requests for Information Promptly
After you've submitted the requested information and documents, you may find that your role in the process subsides somewhat. Your loan officer will be busy working behind the scenes to keep your loan approval process in motion. Sometimes, your loan officer may need to bring your records up to date and require current paystubs or other information. Keeping your documents within easy reach will be helpful.
To keep the process moving along, make an effort to be accessible. Be available when your loan officer calls with additional requests. And make sure your loan officer has a convenient method — perhaps your cell phone number — to contact you.
Stay In Contact With Your Lender
If your lender promises to call you by a certain day and doesn't, follow up. Maybe your loan officer has had a busy week and you were next on the to-do list, or maybe there was an oversight and a call to you fell through the cracks. If you send information to your lender via email or fax, you should always confirm it was received. It never hurts to follow up.
Have Patience
Many people believe that the VA home loan process is considerably longer than that of conventional loans, which may cause them to shy away from pursue a VA loan. However, according to information by Ellie Mae, the average time to close a conventional loan is 49 days (as of 2016), while the time to close a VA loan was 53 — it's a difference of only about four days longer.
Nonetheless, sometimes the paperwork process doesn't run as smoothly as planned. Like with any home purchase, setbacks can happen. Have patience and regularly following up with your lender. Your loan officer is motivated to close your VA home loan. The VA lender has every reason to make your VA loan approval a reality.
Step 8: Wait for the VA Appraisal & Loan Processing
An essential VA loan step that is out of your control is the VA appraisal. The lender will ask the VA to assign a fair-market value to the property. A licensed VA appraiser determines this value by inspecting and evaluating comparable properties. The appraiser will determine whether the property is safe, sound and sanitary, and he or she produces a report on the reasonable value of the property. Typically, the cost of the appraisal falls on you, unless the seller agrees to pay this cost.
The VA also will order a Compliance Inspection to make sure it meets local zoning codes and national standards. Although the Compliance Inspection is not trivial, it is usually the appraisal that causes headaches.
Review the VA Certificate of Reasonable Value
The appraiser issues a Certificate of Reasonable Value. This certificate establishes the maximum value of the property for VA loan purposes. The maximum value of the property sets the maximum amount of your VA mortgage loan. Ideally, your appraised value matches the amount of the loan you are requesting. If your appraisal comes in at a different value than the amount you are hoping to finance with a VA home loan, you have the following options:
- Invoke your rights under the Tidewater Initiative to provide documents supporting the price you agreed to pay, or even proceed to a Request for Reconsideration of Value.
- Renegotiate the sale price to get it to the appraised value or less.
- Bring cash to the closing table to cover the difference that will not be covered by the VA home loan.
Understand the Tidewater Initiative
The Tidewater Initiative of 2003 made a major change to the VA home loan appraisal process. In short, it provides the opportunity for a home buyer's point of contact (usually the real estate agent) to provide market evidence for the appraiser's consideration prior to establishing a final Uniform Residential Appraisal Report (URAR).
The process begins with the appraiser alerting the buyer's agent that the value is likely to come in under the sales price, though the appraiser is not allowed to provide details about the appraisal report's contents.
At that point, the clock begins ticking. The agent has two business days in which to provide additional comparable sales information that supports the sale price — reports of closed sales in the area that are comparable in price. It may be a case where the appraiser simply didn't have access to all the data about comparable sales in your area.
If, however, the appraiser still arrives at a value that is lower than the sale price, you may need to take it a step further.Request a VA Reconsideration of Value
If you believe the reasonable value set by the VA is too low, you can challenge the determination. Involve your lender and request a Reconsideration of Value. Ask the real estate agent or contact neighborhood homeowners to find out if any nearby homes have recently sold for lower-than-market value due to circumstances such as a sudden job relocation, divorce or death. A low sales price of a neighboring property may have caused the appraiser to set an unjustified reasonable value, a value that should be higher.
You may be charged a reasonable, mutually negotiated fee for a value reconsideration for information that was not available to the appraiser at the time of the original appraisal. However, if the reconsideration of value is based on market data that was available to the appraiser but not used, you will not be charged because the appraiser is supposed to consider all available data.
An appraiser has five days to respond to the request for reconsideration of value.
If you don't find any recent lower-than-market value sales in the neighborhood, perhaps you can examine the details of the appraisal and find an error. If that doesn't work, ask the seller to decrease the price, or you can increase your down payment.Know That an Appraisal is Not an Inspection
Although a VA appraisal is a required VA home loan step, it doesn't replace a professional home inspection. A VA appraisal is not a guarantee that the home is free of defects. The appraisal's primary purpose is to confirm the property's general condition so that the VA knows the value of the property.
Step 9: Review Your VA Lender Approval or Denial
After your lender collects the necessary documentation from you and other sources, your loan officer submits your paperwork to underwriting for final review. Underwriters ensure the loan conforms to the appropriate VA loan program guidelines. They also determine whether you meet the requirements to repay the loan. This underwriting process can take weeks if you are using a non-delegated VA lender; it's usually a lot shorter with VA-approved lenders and brokers. Sometimes, you may experience a delay if the underwriter returns with a request for further documentation.
How You'll Receive Approval or Denial
Most likely you'll hear from your loan officer. The underwriter contacts your lender, not you, to explain the decision. Your loan officer turns around and notifies you — typically by phone — of your VA loan approval or about further documentation you may need to provide.
Though VA home loans actually are more likely to close than conventional loans — 70 percent of VA loans applied for actually close, versus 67 percent of conventional loan purchases and only 61 percent of FHA loans — it is possible that your underwriter will deny the loan.
You may salvage your loan with a few adjustments. You'll receive a phone call and an official letter in the mail stating the reasons for the denial. Once you and your loan officer have identified the causes for denial, you can determine if you can adequately rectify the issues and resubmit your loan request for a second attempt at underwriting approval. Perhaps additional supporting documentation would help pull the loan through.
Engage your loan officer's help in this stage. His or her experience with VA loans may prove useful in achieving the stamp of approval the second time around. If, however, you determine you probably can't work cooperatively with your lender and successfully obtain a loan approval from a resubmission of your loan, it may be time to move on. You may have to apply through another lender or rethink your loan financing strategy.
Once you do finally receive word of an approval, your official approval letter will follow soon after in the mail. Now that you've passed the VA loan process's biggest hurdle, your last step is to schedule a closing date and close the deal.
What Mandatory Disclosures You'll Receive
Your lender must provide two documents to you — the Truth in Lending Act (TIL) disclosure and the Loan Estimate (LE) — during the VA loan process. Required by federal regulation, the disclosures inform you of your loan closing costs as well as your rights as a borrower.
The TIL shows you the true costs associated with the terms of the loan, such as the interest rate and total cost to repay. The GFE itemizes estimated loan processing and closing costs; it gives a range of costs associated with obtaining and closing the loan. You receive the TIL and GFE soon after you first apply for your VA loan. If the costs and fees change, your lender must provide you with a new, revised TIL and GFE to reflect these changes.
Step 10: Prepare for VA Loan Closing
Now that your VA loan is approved and you've schedule a closing date, you can look forward to the closing. What can you expect? For starters, you may wonder who attends the closing besides you and your co-signer, if any, to the loan. The likely suspects will include the real estate agent, your loan officer, your real estate attorney if you've hired one and the closing agent that acts on behalf of the title insurance company.
The closing agent is responsible for producing and bringing the loan documents — including the loan note and mortgage document — to the closing. You can expect the closing agent to play an active role at the closing, explaining the purpose and content of each document to you before you sign it. Be sure to bring your picture ID for the closing agent, who will want to verify your identity.
Fund Your Escrow Account
Your title agent will establish an escrow account for you, and part of what you pay at closing will fund the escrow account. This account is used to pay recurring property-related costs, such as property tax and homeowner's insurance. Prorated tax and insurance payments are included in your monthly principal and interest payments to the mortgage lender.
The lender takes these prorated amounts and deposits them into the escrow account. It holds these amounts in escrow until it comes time to pay taxes and insurance. You should know your lender does not collect any interest on these funds.
Your lender will require you to deposit amounts into the escrow account for certain property-related costs. It may however be more flexible with other costs. For instance, your lender will require you to deposit the first month's mortgage payment in escrow at the closing.
Most lenders will also require you to place tax and insurance payments in escrow for the lender to handle. In some cases, a lender will allow you to handle tax and insurance payments on your own if you prefer this. If this is the case with your lender, you may find that your lender will charge you a fee for this preference.
Consider Your Escrow Funding Options
Upfront escrow costs are something you can ask the seller to cover. For a VA loan, the seller can pay up to 4 percent of the loan amount in concessions for prepaid costs. If this is something you are interested in asking the seller to pay, be sure to put it in writing in the terms and conditions of your purchase offer. At the closing table is not the time or place to ask the seller to pay for escrow.
VA Loan Application Questions and Answers
Richard Bettencourt is a Certified Military Housing Specialist (CMHS) and NAMB-Certified Residential Mortgage Specialist (CRMS) who works as branch manager for Mortgage Network, non-depository mortgage lender in Danvers, MA. He has 14 years' experience helping veterans buy homes with VA home loans, and this type of work comprises the bulk of the transactions he deals with. Here, he weighs in on a few frequently asked questions about the VA home loan process.
What if the house I want to buy fails the VA appraisal?
Richard Bettencourt:
It depends on the circumstances and why the appraisal failed.
If the appraiser finds that the home does not meet the minimum property requirements that the VA has established, you either don't buy the house, or you can negotiate with the seller to see if they'll consider making the necessary repairs. Or, in some cases, veterans can make those repairs as well. Most of the time, the issues that arise that cause failure are typically peeling paint or, like in our area of Massachusetts, missing handrails. That's what we see most of the time.
If it fails, it could be for any number of things: You could have structural deficiencies or sanitary problems. Remember, appraisers aren't inspectors; they don't judge the quality of the electrical or plumbing. If they see safety, structural or sanitary issues, something like a sagging roof or a garage that's ready to topple over, the house will get dinged for those, and then it's a matter of negotiation.
But if we're talking about an appraisal that comes back with a valuation issue, that's where the Tidewater Initiative comes into play, and the agent needs to get involved in order to assist with getting the valuation to where it needs to be.
What if the VA appraisal is lower than the asking price?
Richard Bettencourt:
With every single VA loan transaction, the minute the appraiser identifies that the value is going to be lower than the contract sales price, he or she is required to initiate the Tidewater process. Tidewater is the only initiative like this; it's only available with VA home loans. When the appraiser invokes Tidewater, he or she reaches out to the point of contact — usually the real estate agent — and says, "This property, as it is, is going to come in under value."
From that moment, the point of contact has 48 hours, or two working days, to identify comparable properties that have come in at this value and actually closed.
The VA understands that there may have been listings that weren't available to the appraiser, or listings that didn't go through MLS, so appraisers can only use the data that's been provided. It means that the point of contact just needs to dig deeper. Sometimes that works, and the appraiser says, "Oh, I missed that, I'll adjust it."
But if those comps still don't justify the sale price, the property is released to lender with the appropriate appraised value. If parties involved are still unhappy with the appraisal once they've received a Notice of Value, they can request a Reconsideration of Value. This is a process initiated by the borrower, or veteran, in writing to the regional loan center in the buyer's state.
There is no specific time frame on this; I've seen it take a few days or a few weeks. You pull together no more than three comparable sales that are superior to those selected by the appraiser to demonstrate the value, as well as a narrative explaining why the listings provided are superior. Sometimes, if it's questionable, the VA will order another review or appraisal to try to justify the value there. The process is pretty intricate. And as the buyer, you can walk away if the value doesn't come in where you want it.
But I've only done one Reconsideration of Value in the last 10 years. It doesn't happen a lot. I do a significant number of VA loans, and I think I've seen five involve Tidewater in the last year. It doesn't happen that often. Boston, for example, is a hot market right now, so we're seeing bidding wars, and it's not hard to justify value.
Who orders the VA appraisal?
Richard Bettencourt:
The lender orders the appraisal using a program called the Veterans Information Portal call WebLGY. It has to be done by a VA-approved appraiser.
Do I need a lawyer to complete a VA loan?
Richard Bettencourt:
It depends what state you're in. It's always a good idea to have legal counsel in a transaction. And it's smart to have an attorney review purchase and sales agreements, but it's not required in every state. Less than half of states require an attorney to close or consummate the transaction. If yours requires it and you don't have an attorney, your lender or mortgage broker can recommend one.
Do I need a real estate agent for a VA loan?
Richard Bettencourt:
Technically no, you don't need a real estate agent to represent you when purchasing a new home. That being said, I'd never personally purchase a property without buyer's representation, especially in a VA transaction.
It's extremely important for a veteran to utilize the services of a realtor who is familiar with VA transactions. It's integral that they be familiar with the process, write the contract to protect the veteran's interest and know what to look for in terms of the minimum requirements for appraisal. They'll be familiar with the VA mandatory escape clause, what's involved in pest inspection, how the VA inspection and closing works ...
Plus, if a veteran engages the services of a real estate agent, it doesn't cost anything. In a VA transaction, the buyer's agent is paid for, 99 percent of the time, by the commission on the subject property. But by law, veterans obtaining a VA-guaranteed home loan cannot be charged commissions, brokerage fees or buyer-broker fees at any time.
It costs you nothing, so why wouldn't you want to have buyer's agent in a contractual negotiation?
Do I have to live in the property I buy with a VA home loan?
Richard Bettencourt:
The VA home loan is an owner-occupied benefit. This means that the veteran buyer signs a document that promises that within 60 days of closing, he or she will occupy the property as a primary residence. So if I close on Oct. 1, I'd better be in the house by Dec. 1.
That being said, there are thousands, or even hundreds of thousands, of veterans who are currently not living in homes that they bought with VA loans. The world of a veteran is very transient. They may receive a Permanent Change of Station, or PCS. So if a veteran at Fort Bragg bought a home and then got a PCS that to Hanscom in Boston, then they no longer can live in the Fort Bragg property.
So they have to take possession of the purchased property within that specific time, but do they have to keep that property as their permanent residence for the duration of the loan? No, there is no duration of stay requirement. The VA is very understanding of the challenges and duties of our veterans. But veterans usually know that if they abuse the benefits that come with VA loans, they'll be taken away, so it doesn't usually happen.
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