What is a VA loan
U.S. military personnel and veterans can get government-backed mortgages with 0% down
The pride of owning a home is a powerful feeling. And for veterans, active-duty service members and surviving spouses of the U.S. military, that dream is within reach through VA loans.
Backed by the U.S. Department of Veterans Affairs, VA loans can help service members from all branches achieve homeownership. However, there are some rules and requirements to be aware of before you start home-hunting and sign the paperwork. Here’s what you need to know if you want to apply for a VA loan for your home.
- VA loans are government-backed mortgages for veterans, active-duty service members and surviving spouses of the U.S. military.
- The advantages of VA loans include no down payment requirement, competitive interest rates, no prepayment penalty and no need for mortgage insurance.
- VA loans differ from conventional mortgages and have specific property restrictions.
How a VA loan works
VA loans are a special type of mortgage backed by the U.S. Department of Veterans Affairs (VA). These loans are provided exclusively to veterans, active-duty service members and surviving spouses of the U.S. military.
If a borrower is unable to repay a VA loan, the VA will reimburse part of the outstanding loan amount to the mortgage lender. This reduces the risk that a lender assumes and allows for less restrictive mortgage approval requirements.
Here are some of the key advantages of VA loans:
- No down payment: Unlike traditional mortgages, VA loans do not require a down payment. This means that eligible individuals can purchase a home without having to save a large sum of money first.
- Competitive interest rates: VA loans often offer low interest rates, which can save borrowers money over the life of the loan.
- No private mortgage insurance: Most conventional mortgages require borrowers to pay for private mortgage insurance (PMI) if they don't make at least a 20% down payment. VA loans do not require PMI, which can save you money each month.
- No prepayment penalty: VA loans do not have a prepayment penalty, allowing you to make extra payments or pay off the loan early without incurring any fees.
- Lifetime benefit: The VA home loan is a lifetime benefit for eligible individuals. This means that even if a borrower has previously used a VA loan, they may still have the opportunity to take out another VA loan in the future, either for purchasing a different home or refinancing their current home.
VA loan vs. conventional mortgage
A conventional mortgage is a private loan not backed by the government. The terms and requirements of a conventional mortgage can vary depending on the lender. But they generally involve a minimum down payment requirement and PMI for borrowers who put down less than 20%, as well as certain minimum credit score and income criteria.
One restriction with VA loans is that they’re limited to borrowers who intend to use the mortgaged property as a primary residence. Conventional mortgages, on the other hand, may allow borrowers to purchase any type of property.
Here’s a brief comparison of VA loans and conventional mortgages:
|VA loan||Conventional mortgage|
|Property type||Primary residence only||Primary, secondary or investment properties|
|Minimum down payment||0%||As low as 3% or as high as 20%|
|Minimum credit score||No minimum set by the VA||620 in most cases|
|Mortgage insurance||Not required||Required with less than 20% down|
Types of VA loans
There are several different types of VA loans. The most suitable type of VA loan for you will depend on the amount you need to borrow, how you plan to use the loan and your individual profile as a borrower.
“Choosing the right VA loan hinges on individual circumstances and objectives,” said David A. Krebs, the principal broker at DAK Mortgage in Miami. “For first-time homebuyers, a VA purchase loan would be fitting. If reducing your monthly mortgage payment is your aim, an IRRRL could be an ideal choice.”
- VA purchase loan
- VA purchase loans are for purchasing a new home with no down payment or PMI.
- VA refinance
- A VA refinance can be used to lower your monthly mortgage payment, shorten your loan term or take cash out of your home equity.
There are two main types of VA refinances:
Cash-out VA refinance
A cash-out VA refinance enables you to refinance your mortgage for an amount greater than what you currently owe. The extra cash obtained from this type of refinance can be used for various purposes, including home improvements, consolidating debt, covering education costs or meeting other financial needs.
The VA typically permits borrowers to borrow up to 100% of their home's value in a cash-out refinance, but individual lenders may have their own restrictions.
To be eligible for a cash-out VA refinance, you must live in the home you’re refinancing and demonstrate your ability to repay the new loan. Because the refinance replaces your existing mortgage, you’ll need to provide the lender with new documentation and undergo a home appraisal.
Interest rate reduction refinance loan (IRRRL)
Also known as a “streamline” refinance, an IRRRL allows you to lower your interest rate or switch from an adjustable- to a fixed-rate VA loan. It may offer a faster and more simplified process compared with a typical refinance, as the VA does not require you to submit new documentation or undergo a new home appraisal or credit check for an IRRRL (though individual lenders’ requirements vary).
This type of refinance is available to veterans with an existing VA loan.
- Native American Direct Loan (NADL)
- The NADL program helps Native American veterans or the veteran spouses of Native Americans buy homes on federal trust land. To qualify, applicants must belong to a tribe that participates in the program and plan to live in the home they’ll buy.
Benefits of the NADL program include no down payment in most cases, no PMI and low interest rates. Borrowers get a 30-year fixed-rate mortgage, and they can use the benefit more than once. Refinancing options are also available.
VA loan eligibility
The VA does not set a minimum credit score requirement for VA loan eligibility, but lenders typically do. Most lenders require a credit score of at least 620 to obtain financing.
However, VA loans do have specific criteria regarding permitted property types and a borrower’s military background. VA loans also have a debt-to-income (DTI) ratio limit of 41%. This means that your monthly debt payments, including your mortgage payment, cannot exceed 41% of your monthly gross income.
Property type and occupancy requirements
To be eligible for a VA mortgage, a property must be located in the U.S. or its territories and considered habitable. The VA also has some specific requirements for the size and foundation type of a manufactured home.
The VA requires borrowers to occupy the property they purchase with a VA loan as their primary residence for at least 12 months. This means you generally cannot rent out the property or use it as a vacation home. There are some exceptions to this rule, such as if you are on active-duty military orders or are a reservist who is called to active duty.
Military service requirements
Current service members, veterans, members of the National Guard and Reserve members may be eligible for VA loans. Eligibility varies depending on these factors:
- Length of service
- Time period in which the service was completed
- Nature of the service
- Type of discharge received
There are a few eligible borrower profiles among those who have not served in the U.S. military, such as the surviving spouses of veterans or the spouses of veterans who are missing in action or being held as prisoners of war.
Pros and cons of VA loans
While VA home loans offer advantages such as no down payment or PMI, they also come with more rules and regulations than conventional mortgage loans.
For example, there are limits as to how a VA-backed property can be used, and the home will have to undergo a VA appraisal. If the home doesn’t meet the VA’s standards, the VA won’t approve the loan. As such, sellers may view selling to a buyer with a VA mortgage as too much hassle.
Here are some of the key benefits and drawbacks of a VA mortgage:
- No down payment required
- No PMI
- Easier borrower qualification requirements
- One-time funding fee
- Only for primary residences
- Potential seller resistance
How to apply for a VA loan
Applying for a VA home loan isn’t that different from applying for a conventional mortgage. But there are a few additional steps worth noting, including ensuring your lender is approved by the VA, obtaining specific paperwork and getting a VA-specific appraisal.
Select a VA-approved lender
You’ll need to find a lender approved by the VA. While it may seem like any lender will do, it's crucial to choose a lender with expertise in VA loans. Opting for a VA specialty lender can make the loan process easier and faster.
Obtain a Certificate of Eligibility
A Certificate of Eligibility (COE) serves as evidence of your eligibility for VA loan benefits and indicates the amount of entitlement you can receive. The VA guarantees this amount on your VA loan.
In most cases, you can get your COE instantly online through a lender's portal or via the VA’s website. If you're unable to acquire it online, you can request it by mail. Your VA lender or the VA itself can guide you to the appropriate resource based on your circumstances.
Get a VA appraisal
Your lender will order the VA appraisal for the property. Note that only appraisers certified to perform appraisals to VA standards can evaluate the home being considered for VA financing.
The VA appraiser assesses the value of the home and ensures it meets the VA's minimum property requirements. However, a VA appraisal does not replace a home inspection, which focuses on code violations, defects and the overall condition of the property.
The appraisal can take seven to 21 business days to complete, depending on the home’s location.
Pay VA fees and closing costs
During closing, you'll sign documents that confirm your agreement with the loan terms. You’ll also need to pay closing costs. While most home purchases and refinances come with closing costs, VA loans also include a VA funding fee and VA appraisal fee.
The VA funding fee depends on the type of loan and your down payment, but will generally be no more than 3.3% of your loan amount. VA appraisal fees range from $525 to $1,550, depending on the type of home and its location.
What is the VA loan funding fee?
The VA loan funding fee is a one-time payment required by the Department of Veterans Affairs to help offset the costs of the VA home loan program. The fee amount can vary based on factors such as the type of loan taken out, the down payment amount and whether the borrower has used the VA loan benefit before.
What are VA loan entitlements?
VA loan entitlements are the maximum loan amounts that the VA will repay a lender if the borrower defaults. An entitlement is determined based on the VA loan amount and whether the borrower has taken out a previous VA loan.
Can you get a VA loan more than once?
Yes, you can get a VA loan more than once as long as you meet the eligibility requirements and have sufficient remaining entitlement.
Can you be denied a VA loan?
Yes, it is possible to be denied a VA loan. While the VA loan program provides certain benefits and guarantees, lenders still have their own criteria for approving loans, such as credit score, income and debt-to-income ratio requirements. Merely meeting the VA's eligibility criteria does not guarantee loan approval.
- Article sources
- ConsumerAffairs writers primarily rely on government data, industry experts and original research from other reputable publications to inform their work. Specific sources for this article include:
- U.S. Department of Veterans Affairs, "VA Home Loans." Accessed July 7, 2023.
- Military.com, “Prepaying Your VA Mortgage: Is It Worth It?” Accessed July 19, 2023.
- U.S. Department of Veterans Affairs, “Cash-out refinance loan.” Accessed July 19, 2023.
- U.S. Department of Veterans Affairs, “Interest rate reduction refinance loan.” Accessed July 19, 2023.
- U.S. Department of Veterans Affairs, “Native American Direct Loan.” Accessed July 21, 2023.
- MilitaryVALoan.com, “VA Renovation Loan | Limits & Requirements 2023.” Accessed July 20, 2023.
- Veteran.com, “VA Renovation & Rehab Loans.” Accessed July 19, 2023.
- U.S. Department of Veterans Affairs, “Debt-To-Income Ratio: Does it Make Any Difference to VA Loans?” Accessed July 19, 2023.
- VALoans.com, “VA Loans For Purchases In Other Countries.” Accessed July 20, 2023.
- U.S. Department of Veterans Affairs, “VA Pamphlet 26-7, Revised. Chapter 3: The VA Loan and Guaranty.” Accessed July 20, 2023.
- Military.com, "Step-by-Step Guide to the VA Loan Process." Accessed July 7, 2023.
- U.S. Department of Veterans Affairs, “VA funding fee and loan closing costs.” Accessed July 19, 2023.
- U.S. Department of Veterans Affairs, “VA Appraisal Fee Schedules and Timeliness Requirements.” Accessed July 19, 2023.
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