As mortgage experts, we are big fans of VA loans. With this program, a veteran can buy a home with no down payment, rates lower than for conventional loans, and no mortgage insurance.
This means that a veteran buyer can buy a home with a lower payment than if he or she used a conventional loan.
Most borrowers assume VA loans are attractive because of the no-down-payment benefit. While that’s certainly important, the real advantage often appears during underwriting. In many cases, a veteran may qualify for substantially more home than a conventional borrower with the same income.
One of the reasons VA loans can offer no down payment and no monthly mortgage insurance is the VA Funding Fee. This one-time fee helps support the VA loan program and allows future generations of veterans to access the same benefit.
The amount varies based on factors such as whether you’re using your VA benefit for the first time, the size of your down payment, and the type of loan you’re obtaining. The good news is that many veterans never have to pay the fee at all. Borrowers with qualifying service-connected disabilities, certain surviving spouses, and some active-duty Purple Heart recipients may be exempt. For those who do pay it, the funding fee can typically be financed into the loan rather than paid out of pocket at closing.
The VA home loan benefit is available to many veterans, active-duty service members, National Guard and Reserve members, and certain surviving spouses. While the VA establishes military service requirements, lenders must also verify that borrowers meet standard mortgage qualification guidelines for income, credit, and repayment ability.
Before closing on a VA loan, borrowers must obtain a Certificate of Eligibility (COE). Think of the COE as the document that confirms to the lender that you’ve earned access to the VA home loan benefit. In many cases, lenders can obtain the COE electronically within minutes, making the process simpler than most borrowers expect. Once eligibility is confirmed, the focus shifts to determining how much home you can qualify for – which is where the VA’s unique residual income approach often creates an advantage over conventional financing.
Most veterans know about the no-down-payment benefit. Far fewer realize that the way VA loans are underwritten can often be an even bigger advantage.
What most people don’t know, however, is that the underwriting standards for getting a VA loan approved are very different—and much easier—than for other loan programs. VA loans use a completely different (some would say more sensible) method of evaluating the veteran’s ability to qualify for the loan. This may also mean being able to qualify for more home.
Please note: What you are about to read is somewhat technical. It also uses something that, for many, is an instrument of torture: math. Stick with us, though. We promise it will be worth your pain and suffering.
Lenders approve most loans by calculating a number called the Debt To Income Ratio (DTI). They add up the total housing expense (mortgage payment plus taxes, insurance and homeowner’s association dues and mortgage insurance, if any) and all other debt payments. That number, the Total Debt, is then divided by the borrower’s total gross income (how much money he made) before taxes to arrive at the DTI.
A borrower with monthly income of $6,000 and total debt of $2,400 would have a DTI of 40%. Conventional loans allow a maximum DTI of 45%. Under these guidelines, a buyer earning $6,000 a month, with $250 per month in debt payments, making a 5% down payment would qualify to buy a home for about $325,000.
| This difference can be especially important in higher-cost housing markets throughout Washington State. In areas such as Bellevue, Redmond, Kirkland, Tacoma, and parts of Kitsap County, additional purchasing power can significantly expand the number of homes available to veteran buyers. |
We qualify VA buyers using the “Residual Income” method. We need to know that the veteran buyer has enough money left over after making the house payment and paying other obligations to support a reasonable lifestyle.
The Department of Veterans Affairs (the VA) provides a form: the Loan Analysis. If you want to look under the hood, you can find it here. Here’s how it works:
We first calculate the total house payment, including taxes, insurance, homeowner’s association dues (if any) and maintenance and utilities. VA assumes that those costs will amount to $0.14 per foot. A 1,200 square foot home will have utilities and maintenance of $168/mo. If the veteran is buying a home for $490,000, his total housing expense is $2,933. If he has $250 in monthly payments (car, credit cards, etc.), his total debt is $3,183.
If the veteran buyer has a salary of $6,000, his take-home (net) pay will be about $4,500, depending on how many exemptions and deductions he claims on his tax return. We subtract the total debt ($3,183) from his net income to get Residual Income of $1,317.
VA publishes guidelines for Residual Income in different areas of the country and for different family sizes. In the West Region, the guidelines look like this:
This means that our veteran buyer’s family will qualify for this loan easily—if they are a family of four, they have more than the required $1,117 left over each month.
To put this into perspective, if this were a conventional loan, the DTI would be over 50%—far too high for a conventional loan. Where this veteran will qualify to buy a $490,000 home with no down payment, the same borrower would be limited to $325,000 if he used conventional financing with a 5% down payment.
There are some who might say that approving a loan with no down payment and such a high DTI is risky; the fact is that VA loans, even during the difficult times following the 2008 financial crisis, have had a lower rate of delinquency and default than conventional loans.
One of the most misunderstood aspects of VA loans is the concept of entitlement. Many veterans assume there is a maximum VA loan amount, but for most borrowers, that is no longer the case.
Since 2020, veterans with full VA entitlement have not been subject to VA loan limits. If you have never used your VA benefit or have fully restored your entitlement, you may be able to borrow as much as a lender is willing to approve – with no down payment and no VA-imposed loan cap.
Loan limits may still apply if you currently have a VA loan or have previously used your VA benefit and have not restored your entitlement. In those situations, your available entitlement and the conforming loan limits for your county may affect how much you can borrow without making a down payment.
The good news is that VA entitlement is not a one-time benefit. In many cases, it can be restored and used again after a home is sold and the VA loan is paid off. This flexibility allows eligible veterans to take advantage of the program multiple times throughout their lives.
Combined with no down payment requirements, no monthly mortgage insurance, and the VA’s residual income qualification approach, the VA home loan program remains one of the most powerful home financing benefits available to veterans and active-duty service members.
Are you interested in applying for a VA loan to buy a home? Sammamish Mortgage can help. We serve clients across Washington, Idaho, Colorado, Oregon, and California. Since 1992, we’ve been providing several mortgage programs and products with flexible qualification criteria to borrowers across the Pacific Northwest. Visit our website to get an instant rate quote or to use our online mortgage calculator. Or, reach out to us if you are ready to get pre-approved for a mortgage.
A VA loan is a mortgage program backed by the U.S. Department of Veterans Affairs that allows eligible veterans, active-duty service members, and surviving spouses to purchase a home with no down payment, no mortgage insurance, and typically lower interest rates than conventional loans.
Eligibility for a VA loan generally extends to veterans, active-duty military personnel, National Guard members, reservists, and certain surviving spouses who meet the VA’s service requirements. Washington State residents who qualify can use the program to purchase homes throughout the state.
Residual income is the amount of money a borrower has left over each month after paying all debts and housing expenses, including taxes, insurance, HOA dues, and estimated maintenance and utilities. The VA uses this method because it measures a borrower’s actual ability to maintain a reasonable standard of living, rather than relying solely on a debt-to-income ratio.
Residual income is calculated by subtracting the borrower’s total monthly obligations—including the full housing payment and all other debt payments—from their net (take-home) monthly income. The VA also factors in estimated maintenance and utilities at $0.14 per square foot of the home.
Residual income requirements vary by family size and region. Washington State falls in the West Region. For example, a family of four in the West Region must have at least $1,117 in residual income remaining each month after all obligations are paid.
Conventional loans are approved primarily using the Debt-to-Income (DTI) ratio, which compares total monthly debt payments to gross income, with a typical maximum of 45%. VA loans use the residual income method, which evaluates net income after taxes and all obligations, often allowing veterans to qualify for higher loan amounts than they could with conventional financing.
No. One of the primary benefits of the VA loan program is that eligible borrowers can purchase a home with no down payment, making homeownership more accessible for veterans and service members.
No. VA loans do not require private mortgage insurance (PMI), which is typically required on conventional loans when the down payment is less than 20%. This can result in significantly lower monthly payments for VA loan borrowers.
Historical data shows that VA loans have had lower rates of delinquency and default than conventional loans, even during the financial difficulties that followed the 2008 financial crisis. The residual income qualification method is considered a reliable indicator of a borrower’s ability to sustain homeownership.
Yes. Because VA loans use the residual income method rather than a strict DTI cap, veterans can often qualify for significantly more expensive homes. For example, a borrower who might only qualify for a $325,000 home with a conventional loan using a 5% down payment could potentially qualify for a $490,000 home with no down payment using a VA loan.
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