December 30, 2022
Buying Your First Home with a VA Loan: Getting Started
Special military home loans weren’t on your radar when you enlisted, but after years of living in barracks, along with communal dining, your sights are on buying your first house. In the unfamiliar territory of real estate, it can be hard to know for sure what step to take first.
That’s why we created this simple, three-step guide. We’ll help you get on a solid route to buying your first home – from the financial foundation to VA loan eligibility.
If buying a house is in your future, there’s no better place to start than with a budget. A typical home buying budget includes allotments for a down payment (usually 3% to 20% of the purchase price), mortgage insurance (often .5% to 1%), closing costs (2% to 5%), and moving costs ($2,500 to $10,050).
If you want to purchase a $250,000 home at three percent down, your budget may include:
A VA loan has unique benefits (more on those later) that can reduce your expenses. However, there are expenses you can expect to pay. Take a look:
Because VA loans are backed by the government, U.S. taxpayers provide the funding for them. The VA funding fee helps lower the cost of the loan to taxpayers. Most VA borrowers will pay a funding fee based on the total loan amount, type of loan, down payment amount, and whether it’s their first VA loan. Some military members are exempt from this fee.
As a first-time VA home buyer, you can anticipate the funding fee will be 2.3 percent of your total loan amount. If that sounds high, you may be able to roll it into the loan instead of paying it up front. Just remember that option will cost you more overall.
The good news: VA borrowers have options available that can significantly reduce the loan’s upfront costs. Frequently, the down payment is waived, fees normally paid at closing can be rolled into the loan, and some costs can be negotiated for the seller to pay.
The bad news: There are unique VA closing costs that can range from 1 to 5 percent of your loan amount. These include:
- VA funding fee (if applicable)
- Origination fees
- VA appraisal fees
- Title and insurance fees
As you’re saving up for your mortgage, it’s also helpful to manage the financial factors that will influence your loan approval, amount, and interest rate.
Your credit score is based on the information in your credit history. The calculation takes into account several factors, such as the type and amount of debt you have and your repayment history. The higher your score, the less of a risk lenders see you as – thus, boosting your odds of loan approval and more favorable interest rates and loan terms.
The VA does not require a minimum credit score, but many lenders set their own standards. A common requirement for a VA loan is a score of 680 or higher. By law, you can receive a free copy of your credit report each year from all three national credit bureaus.
- Paying your bills on time
- Fixing any errors on your credit report
- Paying down your debts
- Keeping your card balances below 30 percent of their limits (this is known as credit utilization)
- Leaving zero-balance accounts open, even if you don’t use them
- Whenever possible, making extra payments toward the principal in order to accelerate paying off the debt
Besides helping with your credit score, lowering debt affects another important element in a lender’s mind: your debt-to-income ratio. Also called DTI, this ratio tells lenders how much of your current income is going to pay off existing debt. It helps them better understand your financial situation and estimate your ability to take on a monthly mortgage payment.
To calculate DTI:
- Add up your monthly expenses from loans and credit cards, including your estimated mortgage payment
- Divide the total by your pre-tax income
With a VA loan, strive for a DTI of no more than 41 percent. This is more lenient than other mortgage types.
Now that you have a strong financial foundation, it’s time to decide whether a VA loan is right for your situation. Here are two questions to ask:
There are many VA loan benefits, especially for first time home buyers:
- Have limited savings for a down payment? Qualified borrowers can take advantage of the VA’s minimum down payment requirement of zero down.
- Weighed down by other debts? VA loans are more lenient on credit history and DTI ratio.
- Want to avoid mortgage insurance? Even with a low or no down payment, borrowers don’t have to pay PMI or MIP – lowering your monthly payments.
What are the qualifications for a VA loan? To get approved for the loan, you must meet standards set by the VA and your lender. Following are VA requirements and common financial guidelines:
- VA Certificate of Eligibility (COE) – Proof you meet the VA’s military criteria
- Credit score – No minimum set by the VA; lenders prefer 620 or higher
- Debt-to-income ratio (DTI) – 41% or lower
- Proof of income – Documentation showing consistent income sources
- Down payment – As low as zero down
- VA minimum property requirements (MPRs) – Strict safety standards verified by a VA-backed appraiser
- Primary residence requirement – Not available for second homes or investment properties
For a deeper dive, see what you need to qualify for a VA loan.
To learn more about PenFed loans or what loan is right for you: