The Department of Veterans Affairs administers the VA loan program. As such, many active duty military members don’t know if they can also use these loans. Yes, active troops can absolutely use the VA loan. And, we’ll use this article to outline how VA loans for active duty military work.
Specifically, we’ll discuss the following:
- VA Loan Overview
- VA Loan Eligibility Requirements for Active Duty Military
- Using Active Duty BAH to Qualify for a VA Loan
- Considerations when Nearing End of Active Duty Service
- Meeting VA Loan Occupancy Requirements
- Final Thoughts
VA Loan Overview
The VA loan offers active duty military members an incredible path to homeownership. Though administered by the Department of Veterans Affairs, these loans are actually originated by VA-approved lenders (e.g. banks, credit unions, and mortgage companies).
The VA guarantees a portion of each of these loans. This means that, if a borrower defaults, the VA will repay the lender a portion of the outstanding loan balance. This reduces lender risk and means they can offer borrowers the following outstanding terms:
- No down payment required
- No private mortgage insurance (PMI) required
- Low interest rates
- Streamlined refinancing option via the Interest Rate Reduction Refinance Loan (IRRRL)
VA Loan Eligibility Requirements for Active Duty Military
To qualify for the VA loan, active duty military members must meet certain minimum service requirements. But, most service members will meet this threshold shortly after beginning their first tours, as active troops must only complete 90 continuous days of service to qualify.
However, active service members also need to understand that VA loan eligibility does not equal VA loan approval. As outlined above, the VA guarantees loans – it doesn’t actually issue them. Individual lenders provide the loans, and active duty borrowers need to meet the loan requirements established by these lenders. This means that, in addition to VA loan eligibility, veterans need to have the income, credit scores, and other financial requirements necessary to qualify for a loan.
Simply put, just because the VA says you have VA loan eligibility does not mean that a lender will actually issue you one. But, if you understand the information in the next three sections, you’ll increase your chances of qualifying for a VA loan as an active duty service member.
Using Active Duty BAH to Qualify for a VA Loan
When you apply for any home loan, you’ll need to demonstrate that you have enough income to make your monthly mortgage payments. And, lenders confirm this through a metric known as debt-to-income ratio, or DTI. They calculate this by adding up all of your monthly debt payments – including your future mortgage payments – and dividing them by your gross (pre-tax) income.
For example, assume you have $200 in monthly car loan payments, and your future mortgage payment totals $1,300 per month. Now, assume you have $5,000 in gross monthly income. In this scenario, you’d have a DTI of 30% ($1,500 in monthly debt payments divided by $5,000 in income).
Generally speaking, the VA recommends DTI ratios less than 41%. But, active duty service members can use their basic allowance for housing (BAH) towards DTI requirements. In other words, lenders will count both your military base pay and your BAH when they calculate DTI.
This BAH inclusion provides active troops significantly more buying power. Continuing the above example, assume that, of $5,000 in monthly income, $3,500 was military base pay and $1,500 BAH. Without BAH, this buyer would have a DTI of 43% ($1,500 / $3,500), which likely wouldn’t meet lender requirements. But, by adding $1,500 in BAH to gross income, that DTI drops to 30%, well within lender standards for VA loans.
To consider your BAH in gross income, lenders will typically require copies of your Leave and Earnings Statement, or LES. If unable to access a copy online, your unit admin shop will provide one for you.
Considerations when Nearing End of Active Duty Service
Active troops nearing the end of their service face additional requirements when using a VA loan. As stated, before approving a VA loan, lenders want to make sure that you can make your monthly payments. If you’re nearing the end of military service, you’re also nearing the end of military paychecks. This concerns lenders, and they’ll want some guarantees that you can continue making loan payments.
According to VA guidelines, lenders must “identify service members who are within 12 months of release from active duty or end of contract term.” If within this time period, lenders must then determine whether the loan applicant A) plans on reenlisting, and B) is authorized to reenlist. To meet this requirement, lenders will ask for one of the following items:
- Documentation that the service member has already reenlisted or extended his or her service beyond 12 months from the loan closing date.
- If not reenlisting, the service member must provide a valid civilian job offer, to include starting date and pay.
- If planning on reenlisting, the service member must provide a signed statement that he or she plans on enlisting or extending service beyond 12 months from the loan closing date.
Borrowers in this final category must provide an additional statement from their commanding officer. This statement must declare that the loan applicant is eligible to reenlist and that no reason currently exists to deny this reenlistment request.
Meeting VA Loan Occupancy Requirements
The VA loan program exists to promote homeownership. As such, active duty troops can only use these loans to purchase primary residences, not vacation homes or investment properties. To enforce this, the VA has an occupancy requirement. This requirement states that buyers must A) occupy their homes within 60 days of closing, and B) live there as a primary residence for at least one year.
However, this can pose a challenge for many active service members, especially ones on deployment. Fortunately, the VA offers a spousal exception. If the service member cannot meet the occupancy requirements, the VA will still approve the loan so long as the spouse can.
For example, assume a service member stationed in California receives orders to a base in Virginia. Frequently, military spouses – especially ones with children – will move in advance of their active duty spouses to buy and move into a new home. In this example, a military member could use VA loan benefits to purchase a home in Virginia, even if he or she won’t transfer there until after the 60-day period. But, to do this, the spouse must move into the new Virginia home during that 60-day post-closing window.
The VA loan is not just for veterans. Most active duty military members qualify for this outstanding loan program, as well. And, by understanding the unique aspects of applying for a VA loan while on active duty, service members can significantly increase the likelihood of receiving lender approval.
Maurice “Chipp” Naylon spent nine years as an infantry officer in the Marine Corps. He is currently a licensed CPA specializing in real estate development and accounting.
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