6 ways to prepare for a VA mortgage
In addition to being a core component of the American fabric, the U.S. military - both active-duty members and veterans - represent a significant portion of the country's homeowners. According to the National Association of Realtors, homeowners on active duty have the youngest median age at 34 years old compared to 42 for their civilian counterparts. They're also far more likely to have a spouse, with roughly 75% married compared to 63% for non-military buyers.
When soldiers past and present enter the housing market, they frequently do so through VA loans. Backed by the Department of Veterans Affairs, VA mortgages have helped men and women in the armed forces become homeowners more affordably.
Indeed, in 2018 - the most recent year for which data is available - 77% of active-duty military financed their properties with a VA loan. At nearly 60%, a majority of veterans used the same mortgage product, which was created in 1944 under the GI Bill of Rights during World War II. It's been through a number of iterations since, but it still boasts some of the same perks today that it did back then, with no down payments required, nor private mortgage insurance, among its signature highlights.
All this being said, the application process that determines eligibility is fairly rigorous. If you're an active member of the military or veteran and interested in buying a house for yourself or your family, here are a few ways you can prepare to successfully apply for a VA loan while rates are low:
1. Determine length of service
Just being in the Army, Navy, Air Force, Marines or Coast Guard isn't quite sufficient enough to be VA loan eligible; you need to have served for a few months. Generally speaking, length of service must be one of the following:
90 consecutive days during wartime
181 in peacetime
Six years of service in the National Guard or Reserves.
Meeting one or more of these criteria gives you authorization to apply for a VA loan. You may also be eligible if your wife or husband was killed or injured in the line of duty.
2. Get a certificate of eligibility
Otherwise known as a COE, a certificate of eligibility acts as written proof that you've met the initial qualifications needed to apply for a VA loan, such as length of service. A COE also helps both you and your mortgage provider determine the amount of money the Department of Veterans Affairs will insure.
There are several options to obtain a COE. You should be able to get one from your lender, real estate agent or if you go online to the VA's website at VA.gov. It should be available through the eBenefits portal.
3. Obtain Form DD-214
If you're retired from the military, you should have received a document called DD-214, which is more formally known as a certificate of release or discharge from active duty. Issued by the Department of Defense, a DD-214 corroborates that you have in fact served in the armed forces and that your time is completed. You should already have this document, but if you need a free copy, you again can go through the VA's eBenefits web portal.
4. Determine your debt-to-income ratio
DTI, or debt-to-income ratio, assesses what percentage of your monthly salary goes toward outstanding balances. It can be ascertained very quickly by doing some simple arithmetic.
All you do is add up what you spend on debt payments each month - for things like a car loan or and credit card debt - and divide that number by how much you earn in salary before taxes are taken out. So, if your monthly expenses add up to $2,500 and your gross income is $7,500, your DTI would be roughly 33%. The lower the percentage, the better. According to the Consumer Financial Protection Bureau, the ideal DTI is anything at or lower than 43%, but your mortgage lender can give you a more accurate figure based on your financial situation.
5. Ensure the house conforms to VA loan limits
Due primarily to robust demand in today's market, home prices are on the rise throughout the country. Indeed, based on the most recent statistics available from the NAR, the median cost for an existing home in January was $266,300, making it the 95th straight month that number rose on a year-over-year basis.
Currently, the conforming loan limit for VA loans is $484,350. Given the national median is well below this figure, you shouldn't have a problem finding a house with a selling price that is below the cap. The limit may be slightly higher in certain parts of the U.S. where asking prices are more expensive.
6. Get a pre-approval letter
Although pre-approval is not necessarily required to obtain a VA loan - or any other mortgage, for that matter - it's a great way to prepare for homeownership because it helps potential sellers see that you're serious about buying and have the requisite qualifications. It also provides you with a general idea of what houses are inside and outside your price range.
Some of the things you'll need for VA loan pre-approval are the same as for other home loan products. They include:
- Identification (driver's license, Social Security card, etc.)
- Two years' worth of tax returns (W-2 forms)
- Hard copies of two most recent pay stubs
- Credit report
- Statement of funds (e.g. savings account, checking account, etc.)
Be mindful of the fact that pre-approval is not a formal authorization that you'll get VA loan. That happens when you're ready to make an offer on a potential home purchase.
If homeownership is your destination, a VA loan can provide an affordable pathway, whether you're a veteran or remain on duty. Best of luck on the journey to find the home you're looking for.