What is a VA loan, how does it work, and are you eligible to obtain one? All are good questions to ask, especially if you’re a military servicemember, activity duty borrower, or have a veteran in the family. That’s because a VA loan is a type of home mortgage loan that offers preferred terms to borrowers who have served and currently serve our nation.
A VA loan is available to veterans and active duty service members, and offered through the U.S. Department of Veterans Affairs (VA). You may be wondering, though: How does a VA loan work? What types of VA home loans are available? And of course: What interest rates, closing costs, and terms can I expect to see from a VA loan product?
Let’s take a closer look!
VA Loan Meaning
VA loans are federally sponsored home mortgage loans that are backed by the Department of Veterans Affairs and designed to help provide affordable mortgages and housing for veterans, active duty service members, and qualifying spouses. A VA loan offers a number of advantages over traditional home mortgage products, including some of the lowest available interest rates and the ability to purchase or refinance a property with no down payment.
In other words, if you’re eligible to receive one of these government-backed loans, you’ll enjoy access to a plethora of helpful benefits such as lower monthly payments and the opportunity to avoid mortgage insurance. Providing a useful way to qualify for a low-cost mortgage, even if your credit isn’t ideal, they’re one of the most popular and most highly sought-after types of home loans today.
How Does A VA Loan Work?
Note that the VA itself does not actually offer loan products. (Although the agency does determine who qualifies to obtain one under its guidelines, and which financial lenders can issue them.) Rather, it insures loans that private lenders such as banks and mortgage companies themselves extend and provides financial guarantees to these lenders, which is why they’re willing to extend loans to borrowers on more favorable terms.
As opposed to conforming loans, which meet requirements to be purchased by government-sponsored entities (GSEs) like Fannie Mae and Freddie Mac, VA loans are considered nonconforming loans because of their easier credit requirements. VA loan terms are generally more favorable for prospective home buyers and borrowers, as there is no down payment due at closing and no private mortgage insurance (PMI) required. When considering how VA loans work, be advised that upsides also include lower interest rates and more lenient requirements.
VA Loan Limits
Keep in mind that VA loan limits are not based on the type of VA loan that you choose as a borrower, noting that several types of VA loans are available. Rather, they are determined by Federal Housing Finance Agency (FHFA) limits, and how much mortgage that your preferred individual lender is willing to extend. VA loan limits may also be influenced and impacted by the county that your property (or future property) is located in as well as your income, credit score, debt-to-income (DTI) ratio and other factors.
VA Funding Fee
Borrowers seeking to obtain a VA loan must pay a one-time VA funding fee to the Department of Veterans Affairs to manage and oversee their loan program. The VA loan funding fee is intended to help the government continue funding the VA program for the benefit of future generations, including tomorrow’s active duty military members, retired veterans, and surviving spouses.
All VA loans come with a funding fee, which varies from borrower to borrower and is paid at closing or financed into the total cost of the loan. The amount that you’ll pay in funding will be a percentage of your overall loan amount, although the precise funding fee and exact percentage that you’ll pay will depend on myriad factors such as:
- Type of VA loan acquired
- Your military status
- Amount of your down payment at purchase
- Whether or not it’s your first VA loan
Helpful to keep in mind as well is that certain individuals are exempt from having to pay the VA loan funding fee. Specifically: Eligible surviving spouses and veterans receiving VA disability, in addition to those who are active duty personnel who’ve received a Purple Heart, are currently exempt from having to make a funding fee payment.
Types Of VA Loans
Several types of VA loans are available to eligible borrowers. You’ll want to consider each of the following options as you work to determine which is right for your individual household and situation:
- VA IRRRL: Also known as a VA Streamline Refinance, a VA interest rate reduction refinance loan (IRRRL) is one of many popular choices among VA home loans. It’s designed to help you lower monthly mortgage payments on an existing home loan by lowering your interest rate or enjoy greater stability by switching from an adjustable-rate mortgage (ARM) to a fixed-rate mortgage product. On the upside, you don’t have to conduct an appraisal or provide additional income documentation to secure a VA streamline refinance. But you will want to consider closing costs, which can add to out-of-pocket expenses, when determining whether a VA IRRRL makes sense for you.
- VA Purchase Loan: One of the most common types of VA loans issued, it greatly increases and speeds up public access to homeownership by allowing buyers to purchase properties without having to save up for or provide a down payment. Qualify for a VA purchase loan, and you’ll be able to secure better terms than you would on a conventional mortgage issued by a private lender (though terms will vary by individual lender).
- VA cash-out refinance: A VA cash-out refinance loan offers a handy way to get money out of your home – specifically, funds that can be used for a variety of other purposes. In effect, it allows you to take up to 100% of your home’s equity out to pay for medical bills, pay down debt, cover education expenses, etc. Because you can also put funds taken out in a VA cash-out refinance toward home improvements or put them into your investment and savings accounts, it’s a helpful way to boost your current buying power. Relatively speaking, a VA cash-out refinance lets you access more of the value in your home – and enjoy greater borrowing power – than with a conventional or FHA refinance.
VA Loan Eligibility Requirements
To qualify for a VA loan, you’ll have to meet both general qualifications set by the Department of Veterans Affairs and financial qualifications set by the individual lender.
Note that if you meet the government’s VA loan eligibility requirements though, lenders will generally apply more lenient credit requirements when considering your application than under other mortgage loan programs.
To be eligible to receive a VA loan, you must meet a minimum of one of the following criteria. Specifically, you must have served for:
- A minimum of 181 days of active service during peacetime.
- At least 90 consecutive days of active service during wartime.
- More than 6 years of service with the National Guard or Reserves or 90 days under Title 32 with at least 30 of these days having been consecutive.
Alternately, you can also meet VA loan eligibility requirements if you’re the spouse of a servicemember who lost their life either in the line of duty or as the result of a service-related disability.
VA Loan Certificate Of Eligibility (COE)
A VA loan certificate of eligibility is a document that is issued by the Department of Veterans Affairs and serves as a form of verification to your mortgage lender that you qualify to receive a VA home loan. Under federal guidelines, you must demonstrate proof of service to the VA in order to receive a COE, and the proof that you must provide will differ depending on if you’re an active duty member of the military, veteran, surviving spouse, etc.
- Veterans must submit DD Form 214 – a certificate that verifies military discharge.
- Active duty service members need a statement of service supplied by their superior.
- Current National Guard or reserve members also require a similar statement of service.
- Discharged members of the National Guard must provide NGB Forms 22 and 23.
- Discharged members of the Selected Reserve must submit a copy of their annual Retirement Points Statement along with proof of honorable service and discharge.
- Surviving spouses that don’t receive dependency benefits need to submit their spouse’s DD Form 214, their marriage license, and their spouse’s death certification, as well as a copy of VA From 21P-534-ARE.
- Surviving spouses who receive dependency benefits need to print and finalize VA Form 26-1817.
Armed with this documentation, you can apply online at the VA’s eBenefits website to receive your COE or mail your documents and a completed VA Form 26-1880 to the Department of Veterans Affairs.
Additional VA Loan Qualifications
Per earlier discussions, you’ll also have to meet several other financial requirements in order to receive a VA home loan. Likewise, your property will also have to meet certain eligibility guidelines. These qualifications include:
- Credit score: While the VA itself won’t require you to hold a specific minimum credit score to receive a VA loan, your financial lender will. This credit score requirement varies by individual provider, but generally sits around 580 or above.
- Income: Individual financial lenders will also require you to show proof of stable, recurring income such that you are able to comfortably meet your monthly and long-term payment obligations.
- Debt-to-income ratio (DTI): Lenders will also take your DTI into account when considering how reliably they might expect you to be able to pay back any sums borrowed – and the lower this score is, the better. While the VA doesn’t set a cap on DTI, this figure is used by many lenders to get a sense of how much of your monthly income goes toward paying off debt, and therefore how much of a risk that you represent.
- Property type: VA loans can be used for homes, apartments, condos, and manufactured homes, though individual loan providers will determine which types of properties that they’re willing to service. For example, Rocket Mortgage® does not offer financing on apartments, manufactured or mobile homes. In any event, any real estate holding that you buy must serve as your primarily residence within 60 days of purchase – and you can’t use a VA loan to pay for a vacation or investment property. That said, it is possible to put a VA loan toward the purchase of a multi-family (specifically, one-to-four family) home if the property is used as a primary residence by the eligible applicant.
- Down payment: No down payment is needed to qualify for a VA loan by the Department of Veterans Affairs, helping put homeownership within the reach of millions of aspiring home buyers. Of course, lenders may require you to have a better DTI or higher credit score if you’re going to go the no-money down route, however. Likewise, don’t assume a no down payment loan comes free of charge either – you’ll still have to pay closing costs at the time that you close on the property, so be sure to save up for them in advance.
Benefits Of VA Loans
Millions of satisfied home buyers can attest to the many benefits of VA home loans, which can be considerable. Sample upsides include:
- Lower interest rates than under conventional home mortgage programs.
- A chance to purchase a home with no money down, and avoid the wait associated with saving up for a down payment.
- Allows you to avoid having to pay for mortgage insurance by paying a one-time funding fee (that can be paid at closing or built into the loan) instead.
- Comes in several loan options, including those with varying term lengths and packages that include fixed- and adjustable-rate solutions.
How To Apply For A VA Home Loan
If you’re wondering how to apply for a VA home loan, the good news is that applying for one is generally similar to the process of applying for other types of mortgage. That means following the below process:
- Obtaining a Certificate of Eligibility (COE) to serve as proof of military service.
- Getting preapproved for a loan to find out how much home that you can afford and so that you can make more convincing offers on properties of interest. (As sellers take offers from potential home buyers with preapprovals in-hand more seriously.)
- Shopping around for a house that meets the VA’s minimum property requirements.
- Making a purchase offer to buy a home, and negotiating with the seller to address any counteroffers, before putting together a sales contract with the help of a real estate agent or attorney.
- Going through the VA home appraisal and underwriting process to get your loan approved for financing.
- Closing on your new property.
The Bottom Line
A VA loan can help you get into a home faster and on more advantageous terms than traditional mortgages if you meet the eligibility criteria required to obtain one.
Likewise, the upsides of a VA loan include the ability to purchase a home with no down payment and secure a home mortgage at more favorable interest rates.
Designed to help support active duty servicemembers, military veterans, and qualifying spouses, a VA loan is one of the most popular options through which to finance (or refinance) a property today.
Wondering how to get started applying for a VA home loan? Learn how to get preapproved for a VA loan today!
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