Applying for a VA loan is not complicated. Buying a home with a VA loan is a ten-step process that takes a little organization and planning. The big advantage of a VA loan is its low cost, which more than makes up for the slight inconveniences the VA imposes.
Step 1VA Loan Eligibility
You must first confirm your eligibility and your property’s compliance with the VA’s standards before you apply for a VA loan.
VA Certificate of Eligibility
See the MoneyGeek.com VA Loan Eligibility page to learn how to apply for a Certificate of Eligibility (COE), which you will need to apply for a VA loan. Your COE is proof to any lender you approach that you are eligible for a VA loan.
VA Eligible Property
The property must pass a Compliance Inspection to make sure it meets the minimum standards for habitability and safety.
Promise to Occupy
You must promise to occupy the property you purchase. You cannot use a VA 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 2 Determine How Much You Can Afford
Integral to the VA loan process is your determining 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. If you want to approximate your maximum loan amount, you can use these steps to get an idea.
What is 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 thus far. Then multiply that number by 52.
What are Your Debts?
List and add up all of your debts — such as credit cards, auto payments and any home, equity, personal, student loans or other such debts. Anything that will come up on a credit report with a balance and payment due counts as debt. Remember for your own sake that you should consider adding the amount you have for savings for retirement, college and other plans. Remember also to include any additional expenses like child care, health care or alimony payments.
Do the Math
Use a Home Affordability Calculator to get an idea of the house you can afford. An acceptable debt to income (DTI) ratio for most lenders is 36% of your gross income. All you need to use an Affordability Calculator is your gross annual income, the amount of your monthly debt and your down payment amount, if any.
Step 3 Shop For a Great Deal
The rates and closing costs offered by VA lenders vary, so don’t commit to the first lender you contact. You can compare lenders’ closing fees and establish a rapport with the right loan officer, someone you feel you can trust and who specializes in the VA loan process. Making the effort at this step of the VA loan process will more than likely pay off, saving you time, headaches and money. Some lenders offer incentives such as lower closing costs for VA loans, so voice your intention to apply for a VA loan. Finding a lender and building trust with a loan officer (LO) can help make the VA loan process run smoothly and often expedite final approval.
Compare Closing Costs
Look into the range of closing costs you will 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. See this VA 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 loan approval process is not credit-score driven, so lenders can offer the same prime rates regardless of your credit score. You can get an idea of the applicable interest rates by asking various VA lenders for the going rates for your target loan amount. The more specific you can be with your loan type and terms, the more accurate 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 upfront.
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 4VA 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.
What’s a Pre-Qualification?
A pre-qualification is the lender’s initial assessment of a potential buyer; it is not an official approval. The lender bases a pre-qualification letter solely on verbal information from you about your income, debt and credit history — all information that the lender has not yet officially verified. A pre-qualification letter does not guarantee your VA loan approval.
What’s a Pre-Approval?
A pre-approval involves a more thorough look into your income, expenses and credit history. The pre-approval includes some verification, such as an official credit report to verify your debt. Compared with a pre-qualification, a pre-approval lends more credence and carries more weight because the lender has verified your information and has made an accurate assessment of the mortgage payment you can afford.
Why a Pre-Approval is Better
Showing sellers that you’re pre-qualified is helpful, especially in competitive markets. But having a pre-approval letter gives you a greater advantage. A seller may choose to accept a bid from a potential buyer who has a pre-approval over someone with a pre-qualification letter.
Step 5Find a House That Fits Your Budget
Savvy house-shopping means setting down the house rules before you begin shopping. You should resolve to follow your house rules as closely as possible. For example, deciding on an acceptable price range can serve you well. In doing so, factor in the various expenses you might need for capital and cosmetic repairs. 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.
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 your reserves meant for rainy days. Straying too far from your budget can put you in an uncomfortable position of constantly wondering if you can keep up with your property expenses. 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.
Utility Costs Matter
You should also 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. You can learn a lot about a property with an inspection of its utility bill history. 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 utilities.
Step 6Make 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. Confirm the offer you submit is contingent on your VA loan approval and make sure this contingency is written up in the offer. 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.
What Should You Include In Your Offer?
VA loans have fees that cannot come out of your pocket. Another party, usually the seller, must foot the bill for these fees. Your offer must include a requirement that the seller or other party pay for these now-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.
Should You Hire A Real Estate Attorney To Handle Your Closing?
Depending on your property’s location, you may have no choice. Some states require that both parties — seller and buyer — be represented. In states that don’t require a real estate attorney to represent you, 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 cannot give you legal advice.
Include An Option Clause In Your Offer.
Your offer should include the VA-recommended option clause. 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.
Step 7Apply for VA loan
Once all the details are hammered out, the offer is accepted and you have a fully signed contract, or purchase and sales agreement, in hand, you can turn your attention back to your VA loan process. It’s time to apply for the VA loan. If you’ve anticipated this next VA loan step, you will have all the information and documents ready to hand over to your lender. Provide your loan officer with the income, debt, credit, and asset documents it requests. To keep the process moving along, make an effort to be accessible by providing your contact information. Be available when your loan officer calls with additional requests. Your lender may request additional documentation so make sure it has a convenient method — perhaps your cell phone number — to contact you.
Answer Requests For Information Promptly.
After you’ve submitted the requested information and documents, you may find that your role in the process subside 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.
Stay In Contact With Your Lender.
If your lender says it will call you by a certain day, and it doesn’t, give your loan officer a call. 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. Perhaps in the flood of emails received one day, your loan officer overlooked your email. If you send information to your lender via email or fax, you should always confirm it was received. It never hurts to follow up.
Sometimes the paperwork process doesn’t run as smoothly as planned. Unexpected obstacles can arise. Setbacks do happen. Have patience, regularly following up with your lender and ensuring your loan officer is diligently working to get your loan approved and closed. Your loan officer is motivated to close your VA loan. Without a closing, your VA lender doesn’t get paid, so it has every incentive to make your VA loan approval a reality.
Step 8Wait for the VA Appraisal & Compliance Inspection
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 produces 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 will also 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.
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.
VA Reconsideration of Value.
What can you do if the property appraises less than you expect? 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. 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.
An Appraisal is Not an Inspection.
Although a VA appraisal is a required VA loan step, it does not replace a professional home inspection. A VA appraisal is not a guaranty 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 9VA Lender Approval or Denial
After your lender collects the necessary documentation from you and other sources, your loan officer submits your paperwork to underwritingfor final review. Underwriters ensure the loan conforms to the appropriate VA loan program guidelines. They also determine if you meet the requirements to repay the loan. This underwriting process can take weeks. Sometimes, you may experience a delay if the underwriter returns with a request for further documentation.
Who will let you know if your loan approval comes through? Most likely you’ll hear from your loan officer. The underwriter contacts your lender, not you, to let it know of its decision. Your loan officer turns around and notifies you — typically by phone — of your VA loan 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.
How to Handle a Denial.
You may salvage your loan with a few adjustments. You will 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 fatal issues and re-submit 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. Your loan officer’s experience with VA loans may prove useful to achieving the stamp of approval the second time around. If, however, you determine you probably cannot 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.
Your lender must provide two documents to you — the Truth in Lending Act (TIL) disclosure and the Good Faith Estimate (GFE) — during the VA loan process. (After August 1, 2015, you will receive a CFPB Loan Estimate and Closing Disclosure that contain similar information.) 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 10VA Loan Closes
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 at the closing? 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.
Your closing is also the point at which you establish escrow accounts. Your mortgage lender typically uses escrow accounts to pay recurring property-related costs, such as property tax and homeowner’s insurance. The closing agent collects the initial amount to fund the escrow account. 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.
Funding Your Escrow Account.
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 property-related costs. For instance, your lender will undoubtedly 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.
Escrow Funding Option.
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. The time to ask the seller to pay for escrow is not at closing.
VA Loan Application Questions and Answers
What if the house I want to buy fails the VA appraisal?
A failed VA loan appraisal means the VA doesn’t think the house you want to buy is safe, structurally sound or sanitary. Looking on the bright side means that the VA has helped you identify serious problems with the house that you might not have otherwise discovered until after you purchased or moved into it. An agent familiar with VA loans will most certainly steer you away from properties that cannot pass a VA appraisal. If, however, you remain interested in purchasing the property despite the property’s condition, your first step is to find out why the property failed the appraisal. Once you know, you can come up with an estimate of rectifying those conditions. Weigh the options once you have a complete picture. If the necessary repairs to bring the property up to code are too costly, you may be better off abandoning your hope of owning the house and instead restart your house search elsewhere.
What if the VA appraisal is lower than the asking price?
Should the VA Certificate of Reasonable Value fall short of the sales price you and the seller agreed to, find out why. If comparative properties are falling short, ask your real estate agent or residents living nearby the property to explain the low selling prices. Request a Reconsideration of Value (ROV) by supplying the appraiser with supporting documentation.
If there is no good answer and you still want to purchase the property, you may want to consider taking out your wallet and increasing your down payment to lower your VA loan amount. A larger down payment lowers the loan-to-value (LTV) ratio, which increases the likelihood that you’ll get your loan approved.
If you prefer not to increase your down payment or you don’t have enough cash to cut your down payment amount, you might consider asking the seller to reduce the sales price to the VA’s appraised reasonable value. Alternatively, you can split the difference by the seller agreeing to cut the sales price and you add cash to a down payment.
Who orders the VA appraisal?
Your lender requests and schedules the VA appraisal. The lender will ask the VA to assign a licensed appraiser to determine the fair-market value for the property. Your loan officer will also inform you once the appraisal report is complete.
Do I need a lawyer to complete a VA loan?
Some states require a real estate attorney to represent the buyer at the closing, even if a closing attorney is present. The closing attorney is the attorney for the title insurance company or the mortgage lender. Even if your state doesn’t require you to hire an attorney, you may nevertheless want to have an attorney represent you at the closing or throughout your real estate transaction process.
It’s always a good idea to have an attorney look over the paperwork that you will sign at closing. Although much of the paperwork is considered standard and cannot be altered, your attorney can help you understand the many terms and conditions — including your rights — of your loan obligation and identify any discrepancies or inaccuracies in the loan terms. Additionally, an attorney is extremely helpful during the negotiation of the purchase and sales agreement with the seller.
Although you may have a real estate agent assisting you, keep in mind the real estate agent cannot advise you on legal matters and the agent’s ultimate priority is to get the loan closed to release the sale proceeds and pay the broker commission.
Do I need a real estate agent for a VA loan?
You aren’t required to use a buyer’s real estate agent for a VA loan, but an agent who is experienced with the VA loan process could save you trouble and headaches. An experienced real estate agent knows which direction to lead you and can answer many questions along the way. Another reason to use an agent? It doesn’t cost you a dime because the agent’s commission comes from the seller. You’re preparing to make one of the biggest investments of your life, so use all the help you can get.
This seems complicated. Is VA financing worth the trouble?
VA home loans are not as complicated as you may believe. Compared with conventional loan financing, VA financing adds a few extra steps and a few additional documents. The effort is probably worth your time because VA loan requirements create an easier path to loan approval. A VA loan can also save you money in the end. VA loans do not require a down payment, PMI premium or prepayment penalty. Additionally, if you run into difficulty making timely mortgage payments down the line, the VA offers resources to assist you. Or, if you later want to refinance your VA loan, you won’t have to re-qualify or obtain another appraisal. The benefits do indeed outweigh the extra steps necessary to obtain a VA loan.
Must I occupy the property I buy with a VA loan?
A critical requirement of VA loan financing is your promise to occupy the property you purchase. You can only take out a VA loan for property you plan on occupying. You cannot use a VA loan to purchase a house you intend to rent. Your lender will have you sign paperwork confirming your intention and promise to occupy.