The VA Loan Process - Qualifying for the Loan - Fincancial Web

Part 3: Qualifying for the Loan

In Part 2, Determining Eligibility, we discussed who might be eligible to apply for a VA loan and the requirements that must be met for eligibility to be granted. We shall now set our attention upon the actual VA loan qualification process.

In order to qualify for a VA loan, the borrower must be a veteran who meets the eligibility requirements. The veteran must also have available home loan entitlement, which would be listed on his or her Certificate of Eligibility. The loan must be used for an eligible purpose, i.e. to purchase or build a home, to purchase a condominium or townhouse, to repair or improve a home, to purchase and simultaneously repair a home, or to refinance an existing home or existing VA loan to obtain a lower interest rate. In addition, the borrower must intend to occupy the property within a reasonable amount of time after closing the loan. A good credit record and sufficient income to make the loan payments and meet all other financial obligations are also required.

The veteran can obtain his or her own Certificate of Eligibility from the VA website. Banks and mortgage companies can also order the document for the veteran. It is recommended that the veteran obtain the Certificate of Eligibility as early in the house-hunting process as possible, if not before, because this document lists the veteran’s home loan entitlement, which determines the maximum 100% (or, no down payment) loan that can be obtained. This will give an idea of the price range of the property that the veteran can obtain using only VA funds.

The Veterans Administration will guarantee up to 50% of home loans up to $45,000. For loans between $45,000 up to $144,000, the minimum VA guaranty is $22,500 up to a maximum guaranty of 40% of the loan or $36,000, depending on the veteran’s available home loan entitlement. For loans in excess of $144,000 the maximum guaranty is 25% of the loan up to a limit of $89,912 (for certain loans). This creates a de facto maximum limit on VA loans of $359,650 (maximum home loan entitlement of $89,912 x 4). Although the VA does not mandate this limit, lending institutions will generally not loan more than that $359,650 on VA loans. This is because the vast majority of VA loans are sold in the secondary market, which will not buy VA loans greater than that amount.

Because the VA only guarantees the loan, the borrower must apply at a traditional lending institution, which could be a bank, savings and loan, or mortgage company. Therefore, the application process for obtaining a VA loan is virtually the same as that of any other conventional mortgage loan. Generally, the first step in obtaining a VA loan is requesting an appraisal of the property. This is because the Certificate of Reasonable Value (CRV), which the VA uses to establish the value of the property and maximum size of the loan, is based on the appraiser’s estimate. The borrower will then need to provide income and credit obligation documents to the lender, along with proof of VA eligibility in the form of his or her Certificate of Eligibility, appropriate discharge or unit of assignment paperwork. The lender will then check the borrower’s credit record and underwrite the loan. If the borrower is approved and the appraised value of the property is enough to cover the loan needed, the lender can usually close the loan under the VA’s automatic procedure. Only about ten percent of loan applications have to be sent to a VA office for approval before closing.

A basic funding fee of 2.0% of the value of the loan must be paid to the VA by all but certain exempt veterans. Reserve and Guard members must pay 2.75%. The fee can be reduced by increasing the down payment from 0 to 5- or 10%. Veterans using their entitlement for the second or subsequent times and not making a down payment of at least 5% are charged a 3.0 % funding fee. The funding fee may be paid in cash or included in the loan as long as the maximum qualified loan amount is not exceeded.

The lender may charge reasonable closing costs. They may not be included in the loan. They can be paid by the borrower, the seller of the property, or they can be shared. Some examples of the these costs include the VA appraisal, the borrower’s credit report, loan origination fees (usually one percent), discount points, title research and insurance, etc. No commissions or brokerage fees may be charged to veteran borrowers.

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