What is a VA Loan?

A VA loan is a no-down-payment home loan available for veterans of the United States military. VA loans offer borrowers a no-down-payment option when taking on a mortgage, and the loans are guaranteed by the U.S. government through the Department of Veterans Affairs. These loans are available to all branches of the military and come with a variety of benefits.

How does a VA loan work?

While named after the Department of Veterans Affairs, VA loans are not issued by the department. Instead, the VA “guarantees” the loans, meaning if for some reason you cannot repay the debt, the VA will repay your lender. This gives a lender confidence in you as a borrower—even if you have a low credit score.

While available to all service members, there are some requirements for getting a VA loan and using a VA loan, including the type and size of the property you are trying to buy. VA loans are designed for primary residences and typically are limited to move-in-ready, single-family homes.

Types of VA loans

VA purchase loan
A VA purchase loan is the most similar to a conventional home loan. These loans allow the borrower to purchase a home with no down payment with the backing of the federal government.

VA loan refinance
Homeowners sometimes refinance their home in order to have cash available for major renovation projects or other financial needs, like sending a kid to college. As with a conventional loan, service members can refinance a mortgage with the VA, but in this case, you can get up to 100 percent of the home’s value, rather than the 80 percent that’s typical when you refinance with a conventional loan.

VA streamline refinance loan
If interest rates fall, VA loan borrowers have the ability to refinance their loan to get a lower interest rate. By using the VA streamline refinance process, borrowers can use their original application to speed up the process.

VA loan pros and cons

Benefits of VA loans

• VA loan benefits available to those with bad credit
• You can get a VA loan even if you’ve foreclosed in the past
• Pre-approval speeds the lending process
• You can get more than one loan over time, as long as you pay it off

Disadvantages of VA loans

• Mandatory fees
• Stricter co-borrower guideline
• Not all homes qualify—they must be move-in-ready and your primary residence

VA loan vs. conventional loan

Unlike a conventional loan, VA loans are guaranteed by the government. This can make your application more favorable in the eyes of a lender, especially if your credit history isn’t the best. You also don’t have to pay for mortgage insurance, because the VA’s guarantee acts as that insurance for you. Additionally, most conventional home loans require a minimum down payment up to 20 percent while a VA loan requires no down payment.

However, there are limitations to VA loans that you wouldn’t have with a conventional loan. With a conventional loan, there is typically no restriction on the type of property you can buy and where it is located. With a VA loan, you are limited to using it for your primary residence, and the focus is on move-in-ready houses, rather than a fixer-upper or a condominium.

Bottom line

If you have served in the military, VA loans are a valuable benefit that can provide a path to home ownership that may otherwise be hard to obtain and difficult to navigate. If you are a veteran or are in the military and can afford a 20 percent down payment, going with a conventional loan might still be your best option to avoid additional fees.