How much does a VA loan cover for a house?

One of the best lending options available to Veterans, active duty personnel, and qualified surviving spouses who want to become homeowners is the Department of Veterans Affairs (VA) loan. With no down payment and low credit standards, these loans enable qualified buyers all throughout the nation to finance house purchases. Having said that, your interest rate, location, and financial situation will all affect your ability to buy with a VA loan. Here's how to determine how much VA loan you can qualify for and how to cut your mortgage payment.

"We can never do enough for our Veterans and their families. We must ensure that those who have served our nation are always provided for, especially in their own homes and communities." - Ronald Reagan, 40th US President

What is your VA loan capable of buying?

Your financial situation will determine how much home a VA loan allows you to purchase. Your credit history, income, type of property, and down payment will all have an impact on your ability to buy a house. We will investigate these elements in more detail later on in the process. You may, however, quickly determine what you can afford with the assistance of a few tools.

The Rules About VA Loans

The 28% rule, which says your monthly housing payments should not exceed 28% of your gross monthly income, is a widely used approach to figuring out how much VA loan you can afford. Knowing 28% of your gross monthly income will help you estimate how much you can afford to pay on your VA home loan, even though other factors like your debts and recurring payments can affect how much house you can afford.

Factors Affecting Your VA Loan Affordability

Your financial situation, including your salary and monthly debt commitments, will determine how much of a VA loan you get. Keep in mind that the VA does not directly offer mortgages. Instead, it gives the green light for private lenders to create and oversee the loans. It's essential to look around because each lender that services VA loans has somewhat different requirements. Lenders give you a VA loan, taking into account these things:

Credit History

A number between 300 and 850, your credit score is a numerical indicator of your borrower's reliability. Higher scores tell lenders you're more likely to make your VA loan payments on time because they represent steady debt payments in the past. As a result, lenders often have cutoff scores for qualified borrowers. To approve you for a VA loan, your lender might, for instance, need a credit score of 580 or higher.

Better scores also frequently result in cheaper credit rates for borrowers. A lower interest rate will also let you secure a larger loan or pay off your mortgage more quickly each month. Before taxes and insurance, for instance, a $300,000 30-year mortgage with a 7% interest rate results in a monthly payment of $1,995. However, a 5% interest rate for the identical loan would result in a $1,610 payment. In this case, the interest differential of two percentage points amounts to $385 a month for the same loan. A high credit score enables you to obtain a bigger loan.

Income

You can afford a monthly mortgage payment if your salary is higher. To be eligible for a VA loan, one must show steady income. Generally speaking, lenders want to see pay stubs, bank statements, a 24-month work history, and records of any benefits you receive. As will be covered later, lenders also compute the debt-to-income ratio using your gross income.

Relationship of Debt to Income

Your debt-to-income (DTI) ratio is one-way lenders determine how much you can borrow. DTI calculates and displays a proportion of your total monthly income by comparing your monthly debt payments, including possible mortgage payments. Lenders look to this number to see if you make enough money to comfortably pay off your debts.

DTI Illustration

With a VA loan, you may find out how much house you can afford using DTI. To determine how much your mortgage and combined debt payments can be, multiply your income by the highest DTI (stated as a decimal) that your lender permits. Your maximum allowed debt payments would be $6,500 × 0.43 = $2,795. For instance, if your monthly income is $6,500 and the lender requires a DTI of no more than 0.43 (43%),. You may receive a mortgage with a $2,295 payment and remain within the permitted DTI level if your monthly debt payments total $500.

VA Loans And DTI Ratio Limits

Though your lender probably will, the VA does not set a DTI loan limit. For a VA loan, your lender might, for instance, mandate that borrowers have a DTI of 45% or less. Should your DTI be higher than the threshold, your lender might offer particular concessions to assist you in getting a loan.

VA loans require the borrower to budget leftover income. The size of your mortgage, home, and location determine the necessary sum. Even with a very high DTI, your lender might still approve you for a loan if you have 120% residual income. Your gross income less all of your debts and costs is your residual income.

For instance, your lender needs $1,500 residual income from VA borrowers. You can get the VA loan with 120% of the necessary residual income or $1,800 if your DTI exceeds the lender's cap. $1,500 × 1.2 = $1,800

Down Payment

Your down payment also influences how much your VA loan will cost to buy a house. The lack of a down payment on VA loans provides flexibility for customers seeking low initial outlays. Less borrowing will be necessary the more you put down. Recall that a greater principal balance and higher monthly payment result from a 0% down payment. Conversely, a large down payment will lower the entire amount owing and, consequently, your monthly payment.

Down Payment Illustration

For instance, a 30-year term, 7% interest rate, and $350,000 mortgage cost $2,328 monthly (not counting insurance and taxes). At the same interest rate, a 10% down payment ($35,000) lowers your beginning loan balance to $315,000, or $2,095 monthly. A down payment can help a more expensive house fit your budget by lowering monthly expenses and interest paid over the loan term.

Remember that VA loans have a funding fee, even though there might not be a down payment needed.

Market Interest Rates

Your mortgage interest rate is the amount your lender charges you for borrowing money. When computing your monthly payment and overall loan cost, your lender will include the interest rate. Therefore, affordability falls when interest rates rise.

Interest Rate Illustration

A lower interest rate will result in lower monthly payments. Principal and interest on a $400,000 30-year fixed-rate loan at 7%, for instance, amount to $2,661 monthly. Monthly payments for the same loan at 6% interest are $2,398. One percentage point in this case translates into $263 in monthly savings.

Loan term

You have a set amount of time to pay off your VA debt; hence, it matters a lot. You can divide payments over a longer period of time, lowering monthly expenses. For instance, the monthly cost of a $250,000 loan with a 15-year term and a 7% interest rate is $2,247, excluding taxes and insurance. However, extending the term to 30 years makes the payment $1,663, which raises affordability.

Tax on Properties

An additional monthly cost for homeowners is property tax. The jurisdiction can have different or unique property tax computation procedures. But municipalities typically follow this broad procedure:

Assessors determine the value of your property using factors such as size, location, condition, and similar sales.

The local government establishes the millage rate, the tax rate per thousand dollars of assessed value. At a tax rate of five mills (.005), for instance, every $1,000 of assessed value would result in $5 in taxes.

To find your yearly property tax obligation, multiply the assessed value of your property by the tax rate. Your annual property tax would be $300,000 × 0.005 = $1,500 if your property is valued at $300,000 and the tax rate is five mills (0.005). Usually, using an escrow account, lenders handle homeowners insurance and property taxes, covering these costs on your behalf. Then, they bill borrowers each month to pay the outstanding taxes. In this case, your monthly property taxes come to $125.

Exemptions can lower property taxes. The homestead exemption specifically lowers taxes for main dwellings. Senior exemptions also lower property taxes for senior citizens, while many communities exclude homeowners with disabilities from paying property taxes.

Homeowners Insurance

Finally, homeowners insurance drives up monthly housing costs. Usually, the lender covers this expense, which is then included in your monthly payment. Lenders require homeowners insurance, so you must have it when using a VA loan to buy a home. Companies, locations, coverage limitations, credit history, and coverage modifications affect costs.

Get your home purchase approved.

You can start looking at houses sooner with Travis Egan, VA Mortgage Vet.

With a VA loan, am I required to get mortgage insurance?

Mortgage insurance is not needed with VA loans. Rather, a one-time funding charge of 2.15% of the loan amount for first-time home buyers and 3.3% for any further loans is required of people who obtain a VA loan. Making a larger down payment can lower the VA funding charge.

On a VA loan, what is the amortization schedule?

A VA loan amortization schedule shows the monthly principal balance and interest payments. Interest consumes most of the monthly payments. Throughout the loan, more payments are allocated to the principal as the balance falls.

Bottom Line

Your credit score and DTI, as well as the terms and interest rate of the loan, determine how much house you may purchase with a VA loan. The 28% rule, according to which you should spend no more than 28% of your gross monthly salary on your housing payment, is one guideline useful when figuring out how much house you can afford with a VA loan. As such, you must secure your financial situation before requesting a loan.

Starting the mortgage approval process now will allow you to finance your home purchase with a VA loan if you are qualified and ready.