How Much Home Can You Buy with a VA Loan?

As a veteran, active-duty service member or surviving spouse, loans backed by the Department of Veterans Affairs (VA) can be a valuable, cost-effective way to help you buy your dream home. Whether you’re finally taking that first step to becoming a homeowner or already are one and are considering another property to add to your portfolio, a VA loan can be your answer. 

In order to start searching for your next home, you must understand your homebuying and mortgage price range. There are a number of factors that make up your affordability with a VA loan, some within your control and others outside. Check it out below.

What Affects Home Affordability

While different lenders have different guidelines and minimum borrower qualifications, there are common factors they consider when qualifying you for a loan. 

Income

You must provide proof of consistent income to show you can pay your monthly mortgage bill. This documentation can include paystubs, W-2s, bank statements and employment history. Lenders also use your income to determine your debt-to-income (DTI) ratio. 

Credit Score

Your credit score represents your ability to pay back your debt. Typically, the higher your credit score, the less of a risk you are to lenders, and oftentimes, you can qualify for a lower interest rate.  

Debt-to-Income (DTI) Ratio

A DTI ratio refers to your ability to manage your debt in comparison to your gross monthly income, expressed in a percentage. To get this number, you’d add up all your monthly debt, divide the sum by your gross monthly income and multiply it by 100. In general, a lower DTI will show lenders you can take on more debt without struggle. 

Interest Rate

You may already know that many borrowers tend to shop around for the lowest interest rate. This is because the lower your interest rate, the lower your monthly payment. Even a small difference in rate can add up to hundreds of dollars saved a month. 

Term

How much time you have to pay off your mortgage in full can also affect your affordability. The more time you have, the more spread out your payments will be. As a result, your monthly payments will also be less. 

Property Taxes

Depending on where you live and how much your property’s value is, you’ll need to pay property taxes based on your local government’s millage rate. You can look up your local property tax rate on the Tax Foundation® website. 

Down Payment

While VA loans don’t require a down payment, some borrowers may want to consider making one if it’s within their abilities. The larger your down payment, the less you’ll need to borrow and the less you’ll need to pay back monthly.  

Homeowners Insurance

Lenders typically require borrowers to pay homeowners insurance, and this cost can vary between location, company, coverage and more.  

Important Facts to Know About VA Loans

VA loans are particularly unique compared to other traditional mortgages for a number of reasons, which can also affect your affordability. 

VA Loan Limits

VA loan limits are a cap on how much you can borrow with a VA loan before you need to make a down payment. However, if you have full entitlement, these loan limits don’t apply to you.

Entitlement

Your entitlement is the dollar amount that the VA will pay back to a lender if you happen to default on your mortgage. As stated previously, if you have full entitlement, you can buy a home at any price point within the amount your lender qualifies you for. If you have partial entitlement (meaning your entitlement is tied up in another property), you’ll have to make a down payment. 

Funding Fee

Because VA loans don’t require a down payment or mortgage insurance, the VA requires borrowers to pay a VA funding fee on any VA loan. This helps lower the cost of the loan for taxpayers.

Types of VA Loans

There are a handful of loans that the VA backs. Read on to learn more about them. 

Purchase

Buy, build or renovate a home with a VA purchase loan without having to make a down payment or paying for private mortgage insurance (PMI). These loans typically have more favorable interest rates as well. Because of these variables, first-time homebuyers may find this loan option ideal.  

Cash-Out Refinance

If you’re already a homeowner who has been building home equity with every mortgage payment, you may want to tap into this asset with a cash-out refinance. With a cash-out refinance, you’d replace your current loan with a new one that has new, different terms. You’d then receive the difference in loan amounts in one lump sum at closing.  

This money can then be used for anything you need, including debt consolidation, funding higher education or making a big purchase, such as a second home or investment property. 

A cash-out refinance can also let you replace a non-VA loan with a VA loan. 

Interest Rate Reduction Refinance Loan (IRRRL)

For borrowers who already have a VA loan, you can use a VA IRRRL (also known as a VA streamline refinance) to decrease your monthly payments or make them more stable. If interest rates have decreased since you first obtained your loan, you can save some money on interest by refinancing.  

Additionally, if you currently have an adjustable-rate mortgage (ARM), you may want to consider refinance to a fixed-rate mortgage to have more predictable monthly payments.

Be Smart When Buying

Now that you understand all the different factors that go into your ability to afford a home with a VA loan, you’re likely more equipped to start the homebuying process than before. Take all of these variables into consideration as you apply for a VA loan and search for your dream home.