When you’re applying for a VA loan, it’s not always easy to tell how much house you can afford. Here’s a primer on what to consider. —-
If you’re a veteran, actively serving in the military, or a qualified military spouse — you’re entitled to special benefits to help you purchase a home through the Department of Veterans Affairs (VA). (And thank you for your service!) This is undoubtedly a good thing, especially as these loans typically have no down payment — a huge benefit and a major assist toward your goal of buying that new home. But it’s not always easy to understand exactly how much house you can afford with a VA loan.
There are online calculators that can help point you to some raw numbers, but that’s just a start when assessing affordability for your house hunt. To help you better understand the full context of your home search with a VA loan, ask yourself (with help from your agent and lender) these nine questions about your entitlement, current military activity or enrollment, and finances to help paint a clear image of the kind of house you can buy with a VA loan.
Have you used your VA home loan benefits before?
If you qualify for a VA loan, the VA grants you an entitlement, which in conversational language is known as the amount that the VA will guarantee on the loan.
The basic entitlement is $36,000. Lenders are typically willing to lend as much as four times that amount to borrowers without a down payment. (More on this later.)
Whether or not you’ve used your VA home loan benefits already will affect your level of entitlement. And that obviously influences how much you can borrow.
What kind of entitlement do you have?
You can learn what your entitlement is on a certificate of eligibility (COE); applying for one is the first step in getting your VA loan.
Let’s take a closer look at the types of entitlement so you can identify where you fall.
In addition to the basic entitlement of $36,000 and a maximum loan amount of $144,000, most borrowers around the country are granted an additional “full” (maximum) entitlement amount of 25% of the conforming loan limit for the county where the home is located. Conforming loan limits are set by the Federal Housing Finance Agency on a county-by-county basis.
You’re looking at full entitlement if you haven’t used your VA loan before, or you’ve paid off any previous VA loans and sold the property associated with them and you’re looking to purchase a home valued over $144,000 (if the value is less than the $144,000 the basic entitlement is all that will be needed to purchase the home).
The conforming loan limit for most of the nation as of 2020 is $548,250. That means the VA will generally guarantee up to $137,062, which then means VA lenders should be willing to offer you a loan up to that $548,062 loan limit — as long as you have not utilized all or a portion of your entitlement.
If after purchasing a home and using only a portion of your full entitlement, you wish to buy another home, or if perhaps you ran into a little difficulty and defaulted on your original VA loan, you may still have access to the remaining entitlement, or unused entitlement, for a new loan.
With remaining entitlement, your VA home loan limit is based on the county loan limit where the house is located. If you default on the loan, the VA will guarantee up to 25% of the county loan limit, after subtracting the amount of entitlement that you already used.
You’re going to be looking at using your remaining entitlement if you see yourself in any of the following categories:
- You have an active VA loan and want to take out a second loan.
- You’ve previously paid off a VA loan, and you still own the home.
- You’ve refinanced your VA loan into some other type of loan, and you still own the home.
- You’ve done a short sale on a previous VA loan and didn’t repay it in full.
- You’ve done a deed in lieu of foreclosure on a previous VA loan (meaning you’ve transferred your home’s title to the lender in order to avoid foreclosure).
- You’ve had a foreclosure on a previous VA loan and didn’t fully repay it.
As an example: Say you bought a first home for $200,000 using a VA loan and no down payment. That purchase would have used up to $50,000 of your full entitlement. You have $87,062 remaining entitlement. This means that you could potentially qualify to buy a second home with a value up to $348,062 (four times the remaining entitlement).
However, if you lived in a county where the maximum loan limit was $300,000, you would only be able to utilize $75,000 of your remaining entitlement on that home due to the county loan limit. You can try to buy a home requiring a larger loan, but you will then have to come up with a down payment equal to the difference between the VA maximum loan amount and the loan amount you are seeking.
What’s your DTI?
The acronym DTI refers to your debt-to-income ratio, a figure that affects how much lenders can offer to loan you. For VA loans, lenders usually like to see a maximum DTI of 41%, but that’s not a hard and fast rule and some buyers may qualify for more.
For these purposes, your income is not just your salary alone; you’ll need to figure out how much income you have from all sources, including non-military sources (this might include alimony, child support, payments from rental properties, and so on), and how much debt you’re carrying. Note that typically, self-employment income requires a two-year history to count toward your income.
How much residual income do you have?
Residual income is the money you have left over each month after all your major expenses are taken care of. VA loans are unique in the fact that they use residual income as a qualifying factor. This figure is used in VA loan calculations to ensure VA buyers have enough income to withstand any challenges that life invariably has in store.
What do interest rates look like?
How much interest you’ll pay on a home clearly factors into how much home you’re able to afford, so you should have a good understanding of the current interest rates.
The good news for buyers in 2021 is that rates are incredibly low (historically low, in fact) in response to the coronavirus pandemic and its economic fallout.
Are you active duty?
You do not need to be on active duty to qualify for a VA loan.
That said, if you are on active duty and receiving BAH (basic allowance for housing), this can be counted as income to qualify for your VA loan and used to pay part or even all of your mortgage payment.
Do you have a down payment?
Again, you don’t necessarily need a down payment to buy a home using a VA loan; in fact, 90% of borrowers get their VA loans without any down payment at all, according to the U.S. Department of Veterans Affairs.
But, generally speaking, if you do bring a down payment to the table, you can afford more house.
What lender are you using?
The VA is guaranteeing the loan, but your lender will determine how much they will approve you for a loan based on your credit history, income, and assets. It’s always smart to get quotes for mortgage loan rates and terms from more than one lender so you can compare what they offer.
“Rates are all very competitive and very similar,” he says.
“When rates go back up, there’s going to be much more difference between everybody again, but when it’s so low and so tight, there’s very little deviation.”
Still, shopping around can help you find a lender you trust and who is responsive, providing you the most thoughtful personal attention. “Rates are so great right now, with a very minimal difference from lender to lender, so we just recommend going with the one that gives the best service,” Jacobs says.
How competitive is the market?
Jacobs notes that a buyer coming in with a VA loan might spook some sellers, who could have the impression that this type of offer comes with a higher bar to clear for inspection and appraisal. (A pest inspection is required in some states for a purchase using this type of loan.)
“A seller might freak out because there are old stories that show the appraisals were much harder. I don’t think it’s true anymore, but in some people’s perception it is, so we have that obstacle to overcome,” Jacobs says.
This tends to matter more in a seller’s market — which is what buyers in early 2021 are facing. “Right now, sellers are getting multiple offers. So if you come in with a VA loan versus a conventional loan, it could be perceived as a disadvantage,” Jacobs says. “If everything else is equal, the conventional loan will typically win.”
His advice: If you really love a property, and you’re planning on using a VA loan, plan to come with the strongest possible offer to make that home yours. A top real estate agent in your area can help you unpack what a strong offer means to the seller and craft an offer that speaks directly to the seller.
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