What is a VA Loan? A Comprehensive Guide
JD
Summary:
A VA loan is a type of home loan available to eligible veterans who are interested in homeownership. These loans do not require a down payment and typically offer lower interest rates than conventional loans. However, VA loans also require borrowers to pay a funding fee as well as other closing costs, which can discourage eligible veterans from applying.
Eight out of 10 veterans own their own homes. Impressive when you consider only six out of 10 civilians are homeowners. (Source) Why do more veterans own homes than civilians?
More veterans are homeowners, in part, because of the success of the Veteran Affairs loan programs, also known as VA loans. Since the program was started in 1944, the VA has helped more than 21 million veterans buy a home. (Source)
Unfortunately, many veterans miss out on these programs because they think they are not as good as traditional mortgages. Additionally, some lenders may try to steer veterans toward simpler conventional loans to gain wider profit margins. (Source) This article discusses what a VA loan is, how VA loans work, and reviews the pros and cons of VA loans compared to conventional loans.
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What is a VA loan?
A VA loan is a mortgage that is guaranteed by the U.S. government. A VA home loan (also known as a Department of Veterans Affairs home loan) is one of the most useful military benefits.
The VA acts as a cosigner to the loan. If the veteran cannot make payments, the VA promises to pay for part of the loan. In total, the VA may provide up to 100% financing on the value of the home. This allows lenders to offer lower rates and better terms to veterans who are eligible for a VA loan.
How does a VA loan work?
VA loan programs work similarly to other loan programs. However, there is one huge difference between conventional mortgages and VA loans — particularly the terms of fees and costs. VA loans have fewer interest costs, more restrictive borrowing rules, and fewer down payments required when closing.
The Department of Veterans Affairs does not offer VA loans. Instead, the VA helps service members, veterans, and eligible surviving spouses to become homeowners. They provide a home loan guarantee benefit and other housing-related programs to help you buy, build, repair, retain, or adapt a home for your own personal occupancy. Eligible borrowers can also use a VA loan to refinance a mortgage.
VA home loans are provided by a VA-approved lender, such as a bank or mortgage company. The VA guarantees a portion of the loan, enabling the lender to provide you with more favorable terms. VA loans are more attractive and pose less risk as they are funded from government sources.
The qualifying standards and terms of the mortgages offered are dictated by the VA. However, the VA does not actually provide the loan amount to the borrower.
Main assets of VA loan benefit programs
- No down payment is required.
- Competitively low interest rates.
- Limited closing costs to eligible borrowers.
- No need for private mortgage insurance (PMI).
- The VA home loan is a lifetime benefit, meaning you can use the guarantee multiple times.
VA loan applications have been described as nonconforming due to ease in creditability. VA loans are also not covered by mortgage insurance.
The main attraction for qualified service members to apply for a VA loan is having no upfront payments. In addition, some VA-approved lenders offer lower interest rates than others. There’s no monthly mortgage cover for this group.
IMPORTANT! Some borrowers may be required to provide a down payment, even when using the VA home loan guarantee. This all depends on the lender you work with, as the VA itself does not require a down payment.
Who qualifies for a VA loan?
VA home loan program eligibility is dependent on time spent as an active service member. VA home loans are available exclusively to eligible veterans with enough service to meet the VA loan eligibility requirements. Although lenders have their own qualifications, VA loan applicants have fewer credit requirements than most other mortgages in the country.
You can apply for a VA loan if you are a member of the military, the National Guard, a veteran, or a reservist. If you’re the surviving spouse of a veteran or the spouse of a veteran who is missing in action or being held as a prisoner of war (POW), you may also qualify for a VA loan.
If you’re an active-duty member of the military, you must have at least six months of service before you apply. The waiting period drops to three months during war periods. Members of the National Guard and reservists must wait six years. (Source)
Veterans with a dishonorable discharge don’t qualify for a VA loan. Your character of discharge must be either honorable, under honorable conditions, or general to be eligible. (Source)
To get a VA loan you first need a Certificate of Eligibility (COE) from the Veterans Affairs. A VA COE shows a mortgage lender that your military service meets the requirements for a VA loan. Although you don’t need a COE to start the VA loan application process, a COE is required to close the mortgage.
| Qualifying Wartime & Peacetime Periods | Qualifying Active Duty Dates | Minimum Active Duty Service Requirements |
|---|---|---|
| WWII | 9/16/1940 – 7/25/1947 | 90 total days |
| Post-WWII | 7/26/1947 – 6/26/1950 | 181 continuous days |
| Korean War | 6/27/1950 – 1/31/1955 | 90 total days |
| Post-Korean War | 2/1/1955 – 8/4/1964 | 181 continuous days |
| Vietnam War | 8/5/1964 – 5/7/1975 * For Veterans who served in the Republic of Vietnam, the beginning date is 2/28/1961 | 90 total days |
| Post-Vietnam War | 5/8/1975 – 8/1/1990 | 181 continuous days |
| 24-month rule | 9/8/1980 – 8/1/1990 * The beginning date for officers is 10/16/1981 | • 24 continuous months, OR • The full period (at least 181 days) for which you were called or ordered to active duty |
| Gulf War | 8/2/1990 – Present | • 24 continuous months, OR • The full period (at least 90 days) for which you were called or ordered to active duty |
| Active Duty Servicemembers | N/A | 90 continuous days |
| National Guard & Reserve Members from the Gulf War | 8/2/1990 – Present | 90 days of active service |
| Six years of service in the Selected Reserve or National Guard, AND • Were discharged honorably, OR • Were placed on the retired list, OR • Were transferred to the Standby Reserve or an element of the Ready Reserve other than the Selected Reserve after service characterized as honorable, OR • Continue to serve in the Selected Reserve | ||
| *If you do not meet the minimum service requirements, you may still be eligible if you were discharged due to (1) hardship, (2) the convenience of the government, (3) reduction-in-force, (4) certain medical conditions, or (5) a service-connected disability (source) |
How can I get a Certificate of Eligibility (COE)?
Given the importance of a COE, the VA has made it easy to apply for one through multiple avenues. You have three ways to apply for a COE.
- First, you can apply through your lender. Most lenders can request a COE through the VA’s online loan guarantee system.
- You can also apply online by visiting the eBenefits portal.
- If you prefer, you can apply by mail by filling out VA Form 26-1880, Request for Certificate of Eligibility, and mailing it to the address on the top right corner of the form.
If you are a surviving spouse, you must fill out a form in addition to the one listed above — VA Form 26-1817. To ensure you’re an eligible surviving spouse, check with the VA’s qualifications listed here. (Source)
What if I don’t meet minimum service requirements?
Even if you don’t meet the minimum service requirements, you may still be eligible. If you were discharged for one of the following reasons, you may still be approved to receive a COE: (Source)
- Hardship
- The convenience of the government (you must have served at least 20 months of a 2-year enlistment)
- Early out (you must have served 21 months of a 2-year enlistment)
- Reduction in force
- Certain medical conditions
- A service-connected disability (a disability related to your military service)
How to get a VA loan
The first important step is to find out if you qualify for a VA loan and apply for a COE using the eBenefits portal. After confirming your eligibility to receive VA financing, you will usually take the following five steps to complete your final application:
- Preapproval
- The home search
- Getting under contract
- Underwriting
- Closing
For veteran homebuyers, this journey doesn’t look much different than the process of acquiring a typical home loan. The big difference of a VA home loan is most evident when you look at the advantages VA loans offer.
Loan preapproval is a key step to take before making an offer on your dream home. The preapproval process – which can be done using your phone, laptop, or tablet – often just takes minutes. Having a preapproval letter gives a clear idea of your buying power and shows sellers and listing agents you have what it takes to get to closing.
Types of VA loans
Depending on your current situation, you may find one VA loan more helpful than another. Review your options below to ensure you choose the best loan option for you.
VA purchase mortgage
This type of VA guaranteed loan is available for homes you, a spouse, and/or dependent (for active duty service members) occupy. To qualify, you must have satisfactory credit, sufficient income to meet monthly obligations, and a valid COE. (Source)
VA cash-out refinance loan
A VA-backed cash-out refinance loan allows you to replace your current loan with a new one under different terms. This type of loan allows you to take cash out of your home equity or refinance a non-VA loan into a VA-backed loan. To replace a conventional mortgage with a VA loan, a valid COE is required. (Source)
VA streamline refinance or Interest Rate Reduction Refinance Loan (IRRRL)
The IRRRL is a VA to VA loan, meaning this type of loan can only be used if you have an existing VA guaranteed loan on the property. The IRRRL is made available to lower the interest rate and reduce the monthly payment on an existing VA guaranteed loan. (Source)
VA rehab and renovation loan
This type of VA loan allows those with a valid COE to use their mortgage to pay for repairs or improvements to their home, rolling both the purchase price and renovation costs into a single, affordable loan. This makes it possible to purchase a home in need of repairs or upgrades without a separate loan. Instead, the repair costs and purchase price are combined into a single loan.
Native American Direct Loan (NADL) program
The NADL program helps eligible Native American veterans purchase, construct, improve, or re-finance a home on Native American trust lands. Your tribal organization must participate in the VA direct loan program to qualify for this type of loan. To apply for this type of loan, you must have a valid COE. (Source)
Adapted housing grant
The VA helps veterans with certain total and permanent disabilities due to military service obtain housing with either a Specially Adapted Housing (SAH) or Special Housing Adaptation (SHA) grant. (Source)
Choosing the right VA loan
The principles you should follow to choose the right VA loan are the same as with any other loan.
- Check your credit. You may need to improve your credit before you qualify for a mortgage.
- Decide what type of loan you want. In addition to the options above, you may have a few other decisions to make about your VA loan. This includes getting a fixed or adjustable interest rate and choosing the length of your loan’s term.
- Shop around. Ask for detailed estimates from at least three lenders and verify they are approved lenders with the VA.
- Compare rates and terms. Make sure you include all costs and fees.
If you’re looking for a VA loan make sure you compare multiple lenders to see which one gives you the best rates and terms.
Pros and cons of VA loans
Lenders can offer veterans more favorable terms because they know the loan is guaranteed by the full faith and credit of the U.S. government. However, despite all the advantages listed above, there are some factors to be aware of before deciding to apply for a VA loan.
Even with the funding fee, VA loans offer eligible borrowers a great chance at homeownership. These benefits make VA loans cheaper and safer for borrowers, which also helps protects lenders. To illustrate, in 2015, the VA saved 90,262 borrowers from foreclosure by making over $1 billion in mortgage payments. (Source)
VA mortgage loans vs. traditional mortgages
Veteran homebuyers have access to one of the most unique and powerful loan programs created. See how VA mortgage loans compare with traditional home mortgages below.
| VA loans | Conventional loans |
|---|---|
| • 0% down. VA loans are among the last 0% down home loans available on the market today. | • Up to 20% down. Conventional loans generally require down payments that can reach upwards of 20% to secure a home loan. This makes acquiring a home loan out of the reach for many homebuyers. |
| • No PMI. Since VA loans are government-backed, you are not required by banks to purchase private mortgage insurance. | • PMI may be required. Depending on the size of your down payment, you may need to purchase private mortgage insurance, which adds to the expense of a conventional loan. |
| • Competitive interest rates. VA loans generally have the lowest average fixed interest rates on the market. | • Low rates at a cost. Buyers often need to have top-tier credit scores in order to be approved for good conventional mortgage rates. With a VA loan, veterans have access to low rates without the need for sky-high credit scores. |
| • Easier to qualify. Unlike conventional loans, the VA loan program is known for being more flexible and having more forgiving credit underwriting guidelines. | • Qualification procedures. Conventional mortgages require higher credit scores and larger down payments than VA loans. Along with stricter underwriting guidelines in some cases, this makes for a more difficult qualification process. |
What are VA loan entitlements?
A VA loan entitlement refers to the amount the VA will guarantee on a given loan. Basically, this is the maximum the VA will repay your lender if you default on your loan.
What does this mean for a veteran applying for a VA loan? Since you aren’t required to make a down payment, your VA entitlement amount helps you to determine the maximum amount you can borrow.
As of January 1, 2020, VA loan borrowers with full entitlement don’t have a limit on how much they can borrow.
VA loan limits
The VA does not set a cap on how much you can borrow to finance your home. There are, however, limits on the amount of liability VA will assume. This will usually affect the amount of money an institution will therefore lend to you.
Loan limits vary by county since the value of a house depends in part where it is located. However, the VA will only guarantee a maximum of 25% of the VA county loan limit for loans over $144,000.
To view the maximum guarantee amount the VA will approve for your property location, check out the current list of county loan limits. (Source)
What does it cost to get a VA loan?
As we mentioned before, the VA loan process can offer many benefits to eligible veterans, but it does come with a cost. As well as the loan itself, these are the other fees you’re likely to see as you apply for a VA loan.
VA loan funding fees
Generally, veterans and active service members using the VA Home Loan Program must pay funding fees. Paying funding fees is required by law.
Funding fees vary based on the type of loan, your military category, if you are a first-time or subsequent loan user, and whether you will make a down payment.
You do not have to pay the funding fee if you are a:
- Veteran receiving VA compensation for a service-connected disability;
- Veteran who would be entitled to receive compensation for a service-connected disability if he or she were not receiving retirement or active duty pay;
- Surviving spouse of a veteran who died in service or from a service-connected disability; or
- Veteran who is eligible to receive VA disability compensation based on a pre-discharge rating and examination, or a rating based on existing medical evidence, such as treatment or service records.
For those that do not fall into one of the categories described above, expect to be charged a funding fee.
How much is the funding fee?
The fee ranges from 1.25% to 3.30% of the loan amount. The average loan amount for a VA loan in 2015 was $243,176. The VA funding fee on that loan amount would range between $3,040 and $8,025.
Your VA funding fee depends on three factors. (Source)
- Down payment size. Veterans who don’t make a down payment pay 2.15% of the loan amount, while a 10 percent down payment reduces the fee to 1.25%.
- Whether it’s a first-time loan. First-time loans range from 1.25% to 2.15%, while subsequent loans range from 1.25% to 3.30%.
- Type of service member. Whether the borrower is a veteran or a National Guard (or reservist) member will also affect the funding fee price. Reservist and National Guard members usually pay 0.25% more than veterans.
The VA funding fee can be a substantial chunk of change. That being said, VA loans don’t require a down payment or private mortgage insurance. You can pay the funding fee in cash or finance it with the same VA loan.
VA loan closing costs
Under the VA home loan program, both sellers and buyers must pay some of the closing costs associated with the purchase. Fortunately, the buyer using a VA loan can negotiate who will pay closing costs.
| Seller | Buyer |
|---|---|
|
|
Note: Under the VA program, a seller cannot pay more than 4% of the total home loan under the seller’s concessions. But keep in mind that this rule only covers some closing costs, including the VA funding fees, but doesn’t cover loan discount points. (Source)
Do VA loans require PMI?
There is no need for private mortgage insurance (PMI) or mortgage insurance premium (MIP) when buying a home using a VA loan.
PMI is designed to protect a lender when the down payment for a home is less than 20% of the mortgage amount. Similarly, the Federal Housing Administration (FHA) requires you to self-insure your loan against potential loss through MIP if your down payment is less than 10%. This is not required when applying for a VA loan.
Key Takeaways
- VA loan benefits are available to active duty service members, veteran service personnel, and their surviving spouses.
- Though these loans are sponsored by the federal government, borrowers still work with private lenders.
- VA loan benefits include terms such as no down payment, no mortgage insurance, and no prepayment penalties.
- While the VA home loan benefit is a great option for many veterans, closing costs and funding fees can make this option undesirable for some.
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