VA Home Loan Approval: Facts You Should Know
If you are eligible for a VA home loan and want to apply to buy a home, there are some issues you should be familiar with long before you begin the process. The VA loan benefit is one of the most important options offered for some military members and veterans; the ability to qualify for a government-backed mortgage with no money down is a major advantage.
What do you need to know about the VA home loan process when compared to conventional mortgages or even other government-backed home loans? We’ll explore some important differences below, but remember that the VA mortgage program’s uniqueness starts with the fact that these loans are not open to the public, but for those with qualifying military service, certain surviving spouses, and certain members of the other “uniformed services” such as the National Oceanic and Atmospheric Administration, and the U.S. Public Health Service.
VA Home Loan Approval: FICO Scores
The government-backed FHA loan and USDA home loan programs both have specific FICO score requirements listed for many loan products. There are other qualifying guidelines for each home loan option but the FICO score issue is standard across the board. Except for VA home loans, which have no VA-specified FICO score ranges for qualifying.
Instead, those requirements are left up to the lender’s own standards. The only caveat (for the lender) is that most features of the VA home loan program are typically required to be “reasonable and customary” for similar loan products in that market.
Lender standards for government-backed mortgages tend to vary in general but typically you may find lenders looking for FICO scores ranging from 620 upward. Your experience may vary depending on the lender.
VA Home Loans vs USDA Mortgages
Both are government-backed home loans and both offer important perks for first-time homebuyers, though the VA may not specifically target those perks toward any one type of loan applicant. The zero-down option for VA mortgages is one of the most first-time-homebuyer-friendly options available.
The USDA home loan program may also offer no money down home loans, but USDA mortgages are generally intended as need-based home loans, and income limits may apply. You read that correctly, USDA loans have a maximum household income limit depending on the loan you seek and other variables.
VA mortgages are not need-based loans, they do not have income limits or require you to purchase within a targeted area for the most competitive rates and terms. USDA loan options may include better pricing, lower rates, or other advantages if you buy a home in a targeted area identified by the agency, depending on the program.
VA Home Loans vs FHA Mortgages
There are many reasons why VA loans are different than FHA mortgages–too many to list them all here. But the most important ones you should know include the fact that FHA mortgages require both an Up-Front Mortgage Insurance Premium, and a monthly mortgage insurance premium.
VA home loans have no mortgage insurance requirement, which is another reason why VA mortgages can be an advantage for the borrower.
VA loans also have no down payment, while FHA mortgage down payment requirements start at 3.5% but could be as high as 10% if the applicant’s FICO scores are not within the FHA’s standards for maximum financing.
FHA loans and VA mortgages are similar in some respects; both offer an Energy Efficient Mortgage loan add-on so you can get extra funds to apply toward approved energy-saving upgrades to the home.
VA and FHA loan approval rules both say that the number of add-ons to your home loan may increase your monthly mortgage payments; too many additions to the loan amount can be just as tough for the lender to justify approving as trying to buy a home that has a price tag above your budget.
VA Home Loan Approval: Appraisals Required
Like FHA and USDA mortgages, VA loans require the property to pass an appraisal as a condition of loan approval. All three government-backed mortgage loan programs feature this requirement as a way to ensure the property has remaining economic life for the duration of the loan.
What does that mean? It means that the house you buy with a VA mortgage should be financially viable to sell or keep for the full term of the mortgage. What good is a home you pay for but cannot sell? VA loan rules are designed to prevent that from becoming an issue.
The appraisal process for VA mortgages is similar to the FHA appraisal; your lender will arrange it and receive the appraisal report when it is finished. You, the borrower, are entitled to know what is in the appraisal report but do not expect to communicate directly with a VA appraiser; this is generally not done.
Appraisals Lower Than the Sale Price
If your appraisal comes back with a fair market value lower than the asking price of the home, you can use something called the VA Loan Escape Clause to walk away from the deal without penalty. Federal law says you cannot be compelled to buy a home that appraises lower than the asking price with a VA mortgage. The Escape Clause is non-negotiable for the lender–they must provide you with the opportunity to walk away from the loan in such cases.
You also have the option of buying the house anyway, but you will be required to pay the difference between the asking price and the appraised value of the home in cash at closing time. It cannot be rolled into the loan amount or financed as part of the VA mortgage.
Buying a house that appraises lower than the sale price involves a risk for the buyer. What if you cannot sell the home for at least what you put into it? Expect to take a loss on such a deal and consider your options accordingly.
VA Loan Approval and Your Credit
One mistake borrowers make with VA home loans, and indeed ANY home loan program is when a home loan application is in the system and the borrower chooses to apply for another line of credit before the home loan is closed. Doing this is a big mistake,. Don’t assume your lender will pull your credit report only once during the home loan process. That is not true. Your lender will check your credit multiple times during the journey from approval to closing day.
If your credit changes too much, or if you experience other sudden financially-related changes that can affect your ability to afford the home loan, the lender may be required to re-qualify you for the mortgage. Whether that is done successfully or not depends greatly on the details involved and there are no one-size-fits-all answers, but in general, you should expect it to be much harder to remain qualified for the loan in such cases.
Learn to Think Like a Lender
Learning to think like a loan officer can be a big help when it’s time to decide what to do about your credit, your loan repayment history, your credit utilization, and other important factors. Remember that your lender must justify you as a good credit risk and that making a mistake in that area can be career-threatening. A lender’s caution in approving or denying a home loan is a lot more understandable knowing that’s a factor when you are ready to start the journey toward homeownership.
Are you ready for a VA mortgage? If you know your credit scores and what your credit reports say, you’re a lot closer than some. If you already know what kind of down payment you might like to make (if any), have a price range for the homes you want to consider, and know your debt repayment history has been reliable over the last 12 months, you’re likely a lot closer to being ready than you might think.
>> Interested in a no PMI, zero down payment possible home loan? For a no-obligation, free consultation regarding your VA Loan eligibility, please go here.
- VA Loan Basics
- VA Loan Limits 2022
- The VA Loan, A Military Benefit You Should Use
- Best Practices for the VA Loan Process
- VA Loan: Can You Borrow More Than Your House is Worth?
About the author
Joe Wallace is a 13-year veteran of the United States Air Force and a former reporter/editor for Air Force Television News and the Pentagon Channel. His freelance work includes contract work for Motorola, VALoans.com, and Credit Karma. He is co-founder of Dim Art House in Springfield, Illinois, and spends his non-writing time as an abstract painter, independent publisher, and occasional filmmaker.