A VA loan is a type of mortgage loan guaranteed by the United States Department of Veterans Affairs and designed for American veterans, military members currently serving in the U.S. military, reservists, and select surviving spouses if they are not remarried.
The loan can be used to purchase single-family homes, condominiums, multi-unit properties, manufactured homes, and new constructions.
The loan intends to supply home financing to eligible veterans by helping them purchase properties without a down payment. While the VA doesn’t originate the loans, it sets the rules for who may be eligible, and the loan is then issued by qualified independent lenders.
You might find yourself wondering who is eligible for a VA loan, and whether or not you can be denied a VA loan. In this article, we’ve covered all the information you need on eligibility and VA loans.
Eligibility for VA loan
As you might have guessed, there is a criterion that needs to be met in order to qualify for a VA loan, and these include your length of service or service commitment, duty status, and character of service. This criteria also depends on the type of VA loan you’re applying for.
Here are the guidelines set out by the U.S. Department of Veteran Affairs:
Purchase Loans and Cash-Out Refinance
VA-guaranteed loans are available for purchasing homes for yourself to occupy, or a spouse and/or dependent if you’re an active duty service member.
Eligible applicants need to have satisfactory credit, sufficient income to meet the expected monthly obligations, and a valid Certificate of Eligibility (COE).
Interest Rate Reduction Refinance Loan (IRRRL)
This is also known as a "VA to VA" loan, and you’re only eligible if you have an existing VA guaranteed loan on the property. The IRRRL is generally carried out to lower the interest rate and reduce the monthly payment on an existing VA guaranteed loan.
Native American Direct Loan (NADL) Program
The NADL is designed to help Native American Veterans purchase, construct, improve, or refinance a home on Native American trust lands. This requires your tribal organization to be a participant in the VA direct loan program, and you’ll also require a Certificate of Eligibility (COE).
Adapted Housing Grants
If you are a veteran with certain, total and permanent disabilities relating to your military service, you may be eligible for suitable housing with either a Specially Adapted Housing (SAH) or Special Housing Adaptation (SHA) grant.
Can you be denied for a VA loan?
Yes, you can.
In fact, about 15% of VA loan applications get denied, and there are numerous reasons for this, such as:
1. Your income is too low
Your income will have a big influence on your application, as you need to be able to prove to the lender that you can afford the loan payments each month.
2. Property doesn’t meet VA standards
When using a VA loan to purchase a home, the property you are looking to buy must meet certain requirements, for example, it must be in livable condition with functioning electrical and plumbing systems, and you must be willing to use the property as your primary residence.
If you’re attempting to use a VA loan for an investment property, it’ll be denied.
3. Different Lenders Have Different Standards
It’s important to remember that while the VA sets out the guidelines for loans, these loans are issued by individual lenders, not the VA.
Therefore, the lender is able to impose specific requirements for each borrower. This means that your personal credit score or income may be too low for one lender and they’ll deny your loan, however you may have success with a different lender.
That’s why it’s a good idea to get quotes from different lenders, as some will have more flexible requirements than others.
What to do if your VA loan gets denied
There are two stages to the underwriting process: automated and manual.
If you get denied during the automated underwriting stage, you may be able to seek approval through manual underwriting.
If a manual underwriter denies your loan, you can consider the following options:
- Apply again with a co-borrower who has a stronger credit history or lower debt-to-income ratio than you, or both.
- Try reducing your debts and improving your credit score before applying again.
- consider a different loan program, for example, FHA loans are known to be more lenient on debt-to-income ratios than VA loans are.
- If possible, making a down payment can help your application, as it reduces the risk for the lender.
- You should also seek clarity on why you were denied in the first place. Ask your loan officer for more specific suggestions on how you should proceed.
Reasons for your VA loan getting denied
It’s easy to make mistakes if you rush through the paperwork, which is why it’s important to double-check yours before submitting your application.
Most mistakes are easy to fix and double-checking can prevent delays further down the line. Plus, underwriters are notorious for accuracy, so don’t slack when it comes to submitting details.
If your income can’t be verified, you make minor errors to do with things like your family size, or you have a debt that wasn't disclosed, your application could get denied or stalled later down the line. Accuracy is the easiest way to ensure your application goes as smoothly as possible.
Change in employment
You should be as consistent as possible with your employment during the loan process, as an employee who is frequently changing jobs will be perceived as unreliable.
If a change is necessary, talk through this with your loan officer, as if they’re unaware of the context, an underwriter could easily consider income from a new job to be unreliable.
Even a positive career change could stall your loan application or require a whole new set of documentation and verifications.
Change in credit
Before your loan goes through, the underwriter will re-verify your credit to check for any last minute changes, they’ll be looking for red flags: whether it’s an expensive splurge or a default on your car loan.
In fact, even little things can cause concern, so avoid credit checks whenever possible and don’t take out any new debt until your loan has closed.
Monitor your spending during the process too, as any new debts could affect your debt-to-income ratio, your purchasing power, and ultimately your eligibility for a VA loan.
If an underwriter asks for additional financial statements and other information, make sure you understand the requests and talk these through with your loan officer if you’re uncertain about anything.
There may be other ways to satisfy the requirement that your loan officer can find. Remember to be prompt with your reply whenever a document is requested, as underwriters will not issue final loan approval until every piece of required information has been reviewed.
Factors beyond your control
If you’re following all of the above steps and communicating well with your loan officer, there’s no reason why your loan will be denied, unless it’s for a reason that’s beyond your control, such as the seller backing out or the property not meeting the VA requirements.
These things happen, but so long as you are doing everything in your power to ensure the loan application goes smoothly, that’s all you can do.
Applying for a VA loan, or any other kind of big loan can seem daunting, but so long as you communicate well, meet the eligibility requirements, and provide all the necessary documentation and certifications, there’s no reason why your loan should be denied - unless it’s for reasons out of your control, as mentioned above.
While you may not have the power to change those things, you do have the power to check your information thoroughly, and ensure you submit all documentation in a timely manner.
Doing these things will have a bigger impact than you might think on your application, and it’s important to make a good impression on your loan officer.
Don’t forget, there are solutions to every problem, and just because you get denied the first time around, doesn’t mean that’s the end of the road for your VA loan. Different lenders will have different requirements, and there’s always the option of considering a different loan program if the VA loan doesn’t work out for you.