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?
A VA loan is a mortgage, or home loan, that is guaranteed by the Department of Veterans Affairs. The VA does not issue the loan itself; it insures the loan for the lender, meaning if for some reason you cannot repay the debt, the VA will repay a portion of the loan to your lender. This gives lenders added confidence in you as a borrower — even if you have a lower credit score or little credit history, making VA loans easier to obtain than conventional mortgage loans.
VA loan requirements
VA loans are available to veterans, service members and surviving spouses of veterans. There are specific requirements to qualify for a VA loan, including when the time of service occurred. VA loans are designed for those moving into primary residences.
To use your VA benefit to purchase a home, you’ll need to obtain a few documents and go through a number of steps:
Request a Certificate of Eligibility from the VA to get started.
- Request your Certificate of Eligibility (COE) from the VA: You can use the VA’s online portal or apply by mail to get a VA Certificate of Eligibility.
- Get preapproved: Apply for preapproval with your lender(s) of choice and wait for their response.
- Go house-hunting and make an offer: This is the fun part — find your dream home! Just make sure it’s within your preapproved budget.
- Schedule your VA appraisal: An appraisal is an assessment of a property’s conditions and value. With a VA loan, an appraisal must be completed by a VA-approved appraiser. This is a requirement for all VA loans. The appraised value cannot come in lower than the offer you made.
- Close on the home: Closing on your VA loan is the last step before you move in. Read over all documents carefully before signing them.
Types of VA loans
VA loans are available for both purchasing and refinancing properties.
- VA purchase loan: A VA purchase loan is the most similar to a traditional home loan. These loans allow the borrower to purchase a home with no down payment or private mortgage insurance.
- VA loan for new construction: You can also use your VA loan to build a new home if you do not find an existing property you want to purchase.
- VA cash-out refinance: Homeowners sometimes refinance their home in order to have cash available for major renovation projects or other financial needs. Veterans can refinance a mortgage with the VA, but unlike with other types of loans, you can get up to 100% of the home's appraised value, rather than the 80% that's typical when you refinance with a conventional loan.
- VA streamline refinance loan: Also called an interest rate reduction refinance loan (IRRRL), this type of refinance can help you take advantage of lower interest rates to lower your payment or switch from a variable-rate loan to a fixed-rate loan.
VA loan vs. conventional loan
Unlike a conventional loan, VA loans are guaranteed by the U.S. government. Conventional loans require a down payment of up to 20%, but a VA loan requires no down payment. You don't have to pay mortgage insurance premiums or private mortgage insurance, which is generally required on conventional loans if your down payment is less than 20%. VA loans also have lower closing costs and no prepayment penalty.
Conventional loans require a down payment up to 20%, but 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's typically no restriction on the type of property you can buy and where it's located. With a VA loan, you are limited to homes you plan on using as a primary residence.
| VA loan | Conventional loan | |
|---|---|---|
| Property type | Primary residence only | Primary, secondary or investment properties |
| Down payment | 0% | As low as 3%; as high as 20% |
| Credit score | No minimum set by VA | 620 (in most cases) |
| Mortgage insurance | Not required | Required if putting less than 20% down |
VA loan pros and cons
As with any type of home loan, VA home loans have both pros and cons.
Pros
- Less strict credit requirements
- No down payment
- No mortgage insurance premiums
Cons
- One-time VA funding fee
- Only for primary residences
- Sellers may be reluctant
Benefits of VA loans
The main benefits of a VA loan are the lower credit score requirements and the ability to get a loan with no down payment. Interest rates are generally lower, and you also don’t have to pay for mortgage insurance. VA loans are designed to get veterans, service members and their families into safe homes.
Disadvantages of VA loans
While there is no required down payment, there are still fees associated with a VA mortgage. According to the VA, the VA funding fee is a one-time payment the veteran is required to make to help offset the cost to U.S. taxpayers. The fee can be paid upfront or financed into the home loan.
The total amount you’ll pay will vary based on the type of VA loan you get and the amount of the loan. It can also depend on whether it’s your first time getting a VA loan and the amount of your down payment. VA funding fees on purchase loans range from 1.4% to 3.6%.
Keep in mind also that putting no money down on a VA loan can be a disadvantage over the long run. While not being required to make a down payment sounds great, you’ll end up paying more over the life of the loan, because you’re financing a larger amount than you would if you put money down.
VA home loan FAQs
- Can you get a VA loan more than once?
- Yes, you can qualify for a VA loan more than once, as long as you meet eligibility requirements. If you have questions about your entitlement, contact your nearest VA regional loan center.
- Can I be denied a VA loan?
- Yes. While VA loans offer more flexibility for applicants than conventional mortgages, getting denied is possible. If your application is not approved, the lender is required to tell you why in writing. If your credit score was deemed too low, you can work on repairing your credit. You might also consider applying again with a different lender.
- What can disqualify you from a VA loan?
- The VA may deny a Certificate of Eligibility, which you need for a home loan if you received a dishonorable discharge or you don’t meet the service requirement, which is based on when you served.
- Is a VA loan really worth it?
- Whether or not any loan is worth it is always best determined on a case-by-case basis. The VA loan program has both pros and cons. For example: By taking advantage of the no-down-payment benefit, you can get into a home faster, but you’ll also end up paying more interest over the life of the loan.
Bottom line: Are VA loans good?
VA loans are a valuable benefit that provide a path to homeownership for those who have served in the military. If you qualify for a Certificate of Eligibility from the VA, you can purchase a primary residence or refinance an existing loan with no down payment, and you don’t have to pay mortgage insurance. VA home loans are easier to obtain than conventional home loans, and they also usually have lower interest rates. You can also get a VA loan much faster after bankruptcy or foreclosure than you can get a conventional loan after these events. Just remember that, as with any type of loan, there are drawbacks, and you should still compare lenders as you shop for the loan with the best terms. For more, read about how to refinance a VA loan next.
Michele Lerner, author of “HOMEBUYING: Tough Times, First Time, Any Time”, has been writing about personal finance and real estate for more than two decades. Michele writes for regional, national and international publications in print and online for a variety of audiences including consumers, real estate investors, business owners and real estate professionals.
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