A Military Spouse's Guide to VA Loans

Military spouses often play a critical role in the VA loan process.

Some handle the entire transaction for their veteran or service member. Others come to the process solely as co-borrowers on their spouse’s loan, providing effective income that helps couples qualify for a larger loan amount. Some military spouses even have their own VA loan eligibility in the wake of a loved one’s passing.

Whatever brings you to the VA loan program, getting a good handle on how it works can help you get the most from the benefit and your budget.

That’s why we created this guide to the VA loan for military spouses. To be sure, every veteran and spouse’s homebuying journey looks different. But this is a good place to start, because knowledge really is power when it comes to one of the largest financial transactions you’ll ever undertake.

Section 1: VA Loan Benefits

VA loans are the most powerful home loan option on the market for so many military families. These loans are made by private lenders like Veterans United and backed by the Department of Veterans Affairs.

VA loans have been helping veterans, service members and military families become homeowners for more than 75 years, thanks in large part to some big-time benefits.

Here’s a look at four big ones:

• $0 down payment
  It’s tough to overstate how huge this advantage is for military buyers. FHA loans require 3.5 percent down, while conventional loans often require at least 5 percent. On a $250,000 loan, that translates to an $8,750 down payment for an FHA loan and a $12,500 down payment for a conventional loan. VA buyers don’t have to spend years scraping together that kind of upfront cost.

• No mortgage insurance
  FHA, conventional and other mortgages often come with expensive monthly mortgage insurance unless you can make a substantial down payment. That extra cost limits your buying power.

• Relaxed credit guidelines
  VA loans have more flexible credit requirements than other loan types. You don’t need top-tier credit to qualify, and it’s possible to bounce back faster with a VA loan after a bankruptcy or foreclosure than with other loan types. Having less-than-perfect credit is not a deal-breaker.

• Low interest rates
  VA loans have had the lowest average fixed interest rate on the market for years. That can help veterans stretch their budget, spending more of their money on building equity rather than paying interest.

This isn’t to say that a VA loan is the right fit for every veteran or military family. There are pros and cons to all the different loan types. But the VA loan remains an incredibly powerful tool for veterans and service members. In some cases, it’s the veteran’s only financially feasible shot at homeownership. In others, it’s far and away the best financial option, period.

A good mortgage lender can help you evaluate your options and get a clear understanding of what all loan types you’re eligible for and what might be the best fit for you.

Section 2: Basic Steps of the VA Loan Process

Aside from the advantages, VA loans aren’t much different from other types of home loans, especially when it comes to the homebuying and mortgage process.

The VA loan process has five basic steps, and we’ll take a quick look at each of them.

Step 1: Getting Preapproved

This is the first big step. Loan preapproval is important for a couple of reasons.

One, it gives VA buyers a clear sense of how much they can afford. Two, it shows home sellers and their real estate agents that you’re a solid homebuying candidate who can make a strong offer.

Borrowers will need to meet the lender’s credit score requirement and other initial guidelines in order to secure loan preapproval. Those requirements can vary depending on the lender and other factors. Check out our detailed look at VA loan preapproval for more details.

Getting preapproved means you’re ready to shop for homes with confidence and spring into action when you find a home you love.

Step 2: Shopping for Homes

This is usually the fun part. With your preapproval letter in hand, you can start the house hunt fully prepared to take the next step. Some veterans and military families look at dozens of homes before making an offer, while others might look at just a few.

There’s no right approach, and so much depends on your needs and wants and your specific situation. Shopping for houses might be fun and exciting for some couples. For others, a deployment or PCS orders can introduce stress or unexpected hurdles.

Having a real estate agent who understands the needs of military buyers and the power of the VA loan is important in either case. A good agent can help you identify homes that are a good fit for the VA loan process and negotiate a contract that maximizes your budget.

Additionally, using that agent to find the right neighborhood and best school districts is essential when you're in unfamiliar territory.

"When buying a home, it's important to study the local school districts, even if you don't have kids!" said Lizann Lightfoot of Seasoned Spouse. "Quality schools mean higher home values, and also make it more likely for your house to retain a higher price after several years. When it's time to sell, you may be selling to other families with kids who will definitely care about the local school district."

Step 3: Getting Under Contract on a Home

Lean on your real estate agent when you’re ready to make an offer a home. But also talk with your loan team about your closing costs and how best to address them in your offer. Every market and every transaction is different, but it’s possible for sellers to cover all of a VA buyer’s closing costs.

Once you get under contract, the clock starts ticking toward closing day. Most purchase agreements will have deadlines and contingencies to protect both buyers and sellers. VA loans typically close in 30-45 days, just like conventional loans.

The loan process ramps up for lenders once you’re under contract, too.

Step 4: VA Loan Underwriting

Your loan team will get a copy of your signed contract and start working on full underwriting approval. That includes verifying financial, income and employment information. But another big part of this step is the VA appraisal.

The VA appraisal considers two important questions: Is the home’s market value at or above what you’ve agreed to pay for it, and does it present any health, safety or marketability concerns?

The appraisal process for VA loans is a bit different than the one for conventional mortgages. But it’s rooted in ensuring veterans are purchasing homes that are safe, sound and sanitary. Take a deeper dive into the VA appraisal for more information.

Your loan team will be working with title companies on closing paperwork and other third parties while the appraisal process unfolds. It’s standard for lenders to have additional questions and document requests during the underwriting phase. Don’t worry – just try to knock out the requests as quickly as possible to keep things moving forward.

“I found that creating and safely storing a binder of documents needed in the VA loan process is one of the best things you can do to keep the homebuying process moving forward," said Holly Daily, Military Spouse and Family Advisor at Veterans United Home Loans. "Having documents, such as paystubs/LES, W2s, 1099s, VA disability awards, etc. ready to go helps immensely."

It’s also important to understand that big changes during the VA loan process can cause big problems. Try to avoid taking on new credit, making big purchases or changing jobs while you’re waiting for your loan to close. Check out these seven missteps to avoid to keep your VA loan on track.

When the underwriters are satisfied with your loan file and the property, you’ll be “clear to close” and ready for closing day.

Step 5: Your Loan Closing

The final step of the VA loan process is your loan closing. You’ll sign (or e-sign) a raft of paperwork and get the keys to your new home.

Section 3: Will You Be on the Loan?

This key question sets the path for military spouses. Many veterans and service members want or need their spouse’s income in order to maximize their homebuying budget, but that doesn't mean spouses have to be on the VA loan.

When it comes to how much you can borrow, lenders can count income only from people on the loan. But being on the loan also means military spouses must meet lender and VA guidelines for credit, debts, income and more. We’ll take a closer look at some of those considerations shortly.

The bottom line is spouses with credit or debt issues might have to stay off the loan, which can limit the veteran borrower’s purchasing power. Veterans with sufficient income can also opt to be the sole borrower. In either scenario, the military spouse becomes what’s known as a “non-purchasing spouse.”

In most cases, lenders won’t consider the credit score or financial information of a non-purchasing spouse. But there are nine states where this isn’t always the case -- Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin. These are the country’s nine community property states, where lenders can consider a non-purchasing spouse’s credit and debts.

Guidelines on community property states can vary by lender. At present, Veterans United doesn’t consider a non-purchasing spouse’s credit score or derogatory credit (things like collections, foreclosures, bankruptcies and more). But we do look at a non-purchasing spouse’s debts and liabilities in community property states, which get factored into the loan file’s overall debt-to-income ratio and residual income. We also have to consider a non-purchasing spouse’s judgments or liens in community property states.

Moving forward, we’ll focus on military spouses planning to be co-borrowers on a VA loan.

Section 4: Military Spouse Credit Considerations

Every borrower on the loan must meet the lender’s minimum credit score for VA loans. Those benchmarks can vary by lender and other factors.

A veteran with outstanding credit can’t somehow compensate for a spouse whose score is below the lender’s cutoff, and the reverse holds true, too. Both borrowers either meet the requirement or they don’t. At Veterans United, prospective buyers who don’t meet our current benchmark can work for free with our credit experts on a plan to boost their scores into qualifying range.

Lenders will quote interest rates based on credit scores. When there are multiple borrowers on a loan, lenders will base their rate quote on the lowest score.

Credit score is an important consideration, but lenders are also on the lookout for negative issues on your credit reports, like bankruptcies, foreclosure, judgments, liens, collections and more. Some derogatory events, like bankruptcy and foreclosure, can mean a mandatory waiting period before you’re able to close on a home loan. Others, like judgments and liens, could be satisfied at closing or with a solid repayment history.

Guidelines and policies for these types of derogatory credit can vary by lender.

Getting a good handle on your credit is key before starting the VA loan process. Use a credit monitoring service or get free copies of your reports from AnnualCreditReport.com. Look for errors, credits accounts that aren’t yours, and other issues that might be hurting your score.

Section 5: Military Spouse Income & Debts

Lenders consider each co-borrower’s credit score separately, but they look at your combined debts and income when calculating things like debt-to-income (DTI) ratio and residual income. These are two important guidelines for VA lenders.

DTI ratio is the relationship between your gross monthly income and your major monthly debts. For example, if your gross monthly income is $5,000 and your major monthly debts (including the new mortgage payment) are $2,000, then the two of you have a DTI ratio of 40 percent.

Guidelines and maximums for DTI ratio can vary by lender and your specific situation. But borrowers with a DTI ratio above 41 percent face more stringent requirements for residual income, which is essentially VA’s guideline for discretionary income.

With residual income, the VA wants to make sure you have a minimum amount of money left over each month after covering your big expenses, including the new house payment. Residual income guidelines vary by family size and where you’re buying.

Borrowers with a DTI ratio greater than 41 percent have to exceed their required minimum by 20 percent to meet the guideline.

It’s important to understand that income isn’t always as simple as what you make every month. Lenders are looking for income sources that are stable, reliable and likely to continue. Borrowers with part-time jobs or who are self-employed will often face tougher requirements than those with full-time employment. Commission and overtime pay can also complicate the picture.

Military spouses may need to provide their two most recent W-2 tax statements, their most recent paystub, and information about their financial assets. You won’t typically need to provide federal tax returns unless you’re self-employed or you’re wanting to count income from unique sources, such as rental properties.

Lenders will evaluate employment and income scenarios on a case-by-case basis. We’ll take a closer look at some common employment considerations for military spouses in the next section.

There are certain situations where military spouses might be able to use their income to basically cancel out some of the veteran’s debts, even if the spouse isn’t on the loan. Talk with a Veterans United loan specialist for more details.

Section 6: Military Spouses & Employment

Income stability is a key factor for VA lenders, who want to feel good about your willingness and ability to repay the loan. For military spouses relocating to a new community or state, lenders will want to know more about your employment situation if you'll be on the loan.

Generally, you would need to have a job lined up in the new location or have the type of job where you can work from anywhere. If you’re getting a new job, lenders will take a closer look at how it relates to your previous line of work or your education.

Lenders might not be willing to count your new income right away if they feel there isn’t sufficient continuity between the new job and your past experience.

Every co-borrower’s employment scenario is different, and polices on job gaps and changes can vary by lender.

If you’re planning to change jobs as part of a home purchase, it’s best to talk with a loan officer as soon as possible. You don’t want to get too far down the road before learning you won’t be able to count your income for the new loan.

Section 7: Military Spouses & Occupancy

Like all government-backed loans, VA loans come with occupancy requirements. Borrowers must intend to occupy the new home as their primary residence, typically within 60 days of closing.

In most cases, military spouses cannot fulfill the occupancy requirement for the veteran buyer. Couples might not be able to move forward on a VA loan if the veteran can’t move into the home within the acceptable time frame.

The big exception is for active duty borrowers. Military spouses can always fulfill the occupancy requirement for service members on active duty, including geographic bachelors.

Some lenders may also require military spouses to meet the occupancy guidelines if they’re a co-borrower on the loan. Polices on this can vary by lender, but Veterans United doesn’t currently require this.

That means military spouses don’t have to make the move to the new home. The most common scenario is when a spouse wants to stay behind because of their job.

Generally, we would still count the military spouse’s income in the old location as long as it appears likely to continue. We would also have to consider their travel expenses between the two communities when calculating things like DTI ratio and residual income.

Every occupancy scenario is different. Talk with a Veterans United loan officer about your particular situation and how best to move forward.

Section 8: Power of Attorney (POA)

Many military spouses are familiar with Power of Attorney, which allows veterans and service members to designate another person to sign legal documents and execute contracts on their behalf.

VA buyers can utilize POA and their attorney-in-fact to close on a loan, and it’s important for military spouses to understand the basic requirements and guidelines.

The VA requires the veteran’s written consent for the transaction in either a General POA or a Specific POA.

General POA is a broad-based green light for the attorney-in-fact to make all kinds of financial decisions for the veteran or service member. These aren’t limited to a particular type of contract or financial activity.

With a Specific POA, the attorney-in-fact is limited in what they can execute on for the veteran or service member. These typically feature clear restrictions that spell out exactly what the attorney-in-fact is allowed to do, along with the terms of the transaction in the case of VA lending.

A General POA can be used if the veteran borrower signs:

• The initial Uniform Residential Loan Application and the purchase agreement, or

• All of the closing documents

Lenders will often defer to the title company on the final acceptability of a General POA.

If the veteran or service member can’t utilize a General POA, then the couple will need a Specific POA for the transaction. These need to have details about the home purchase, including the price and terms, occupancy status, entitlement usage and more.

Talk with a Veterans United loan specialist if you’re likely to use Power of Attorney.

Section 9: Questions?

Learning about the VA loan process before you start can make a huge difference, especially for first-time buyers. This guide is meant to be an overview – every veteran and military spouse’s purchasing picture is different.

If you have questions about your specific situation, please feel free to leave them below or contact me directly at chris@vu.com.

Thank you for all you do.