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- VA loans are mortgages guaranteed by the U.S. Department of Veterans Affairs, available to eligible veterans, active-duty service members and surviving spouses.
- VA loans can be used to purchase a primary residence, refinance a current mortgage or cover renovation costs.
- VA loans offer several benefits, including no required down payment, no private mortgage insurance (PMI) and competitive interest rates.
A VA loan is a great option for you if you’re a qualifying active-duty military personnel or veteran. They often have more relaxed financial requirements than conventional loans, requiring no down payment or private mortgage insurance. They also typically have lower interest rates than FHA and conventional loans.
Here’s a breakdown of what VA loans are, how they work and how you can get one.
What is a VA loan?
A VA loan is a loan guaranteed by the U.S. Department of Veterans Affairs (VA). That’s not to say the VA provides these loans. Instead, mortgage lenders offer VA loans, knowing that the government guarantees them. This makes lenders more confident in lending, often offering a VA loan with a lower interest rate than a conventional mortgage.
The VA doesn’t officially set a credit score requirement for these loans. Instead, it leaves this up to the lender, with lenders requiring anywhere from a 580 to 640 minimum score. VA loans don’t require a down payment, which can make homeownership more attainable for those who qualify because you’ll need less money upfront.
How does a VA loan work?
Getting a VA loan is similar to securing a conventional loan.
Basically, you fill out paperwork from the VA that verifies your eligibility for the program. You also receive what’s known as your entitlement, which is the dollar amount guaranteed on each VA loan. While VA loans technically have no loan limit, lenders might be willing to loan up to four times the amount of your entitlement.
You can get a VA loan with no money down and, unlike other loans, you won’t have to pay for mortgage insurance. That’s because the government guarantees your loan. However, you’ll need to pay a funding fee, which costs a certain percentage of the loan total. This fee keeps the program functioning so future veterans and service members can use it.
|VA loan type
|Allows qualified service members to purchase a home with no minimum down payment.
|VA construction loan
|Eligible service members can use this loan to build the home of their dreams.
|VA rate-term refinance
|Allows service members without an existing VA loan to change their loan term or secure a lower interest rate.
|VA cash-out refinance
|Allows service members to swap their conventional mortgage with a VA loan, with an option to turn home equity into cash if needed.
|Allows service members to replace a VA mortgage with a VA Interest Rate Reduction Refinance Loan (IRRRL), which can offer lower interest rates. It can also be used to change from an adjustable-rate loan to a fixed-rate loan.
|VA rehab and refinance
|Can be used by service members to finance the cost of improvements made to the home.
|VA jumbo loan
|Allows service members to finance a home with a sales price exceeding the conforming loan limits.
|Native American loan
|Available to Native American veterans to help them purchase, build, improve or refinance a home located on federal trust land.
Who qualifies for a VA loan?
The VA sets service requirements for active-duty military personnel and veterans to qualify for a VA loan. You can check the full eligibility requirements on the VA’s website, but the basics are:
- You’re currently on active military duty, or you’re a veteran who was honorably discharged and met the minimum service requirements.
- You served at least 90 consecutive active days during wartime or at least 181 consecutive days of active service during peacetime.
- Or, you served for more than six years in the National Guard or Selective Reserve.
- If your spouse died in the line of duty, you may qualify for a VA loan.
The first step in applying for a VA loan is getting a VA Certificate of Eligibility (COE). This certificate shows the lender that you meet the VA loan requirements for eligibility.
How to apply for a VA loan Certificate of Eligibility (COE)
You can get a VA loan Certificate of Eligibility by applying through your eBenefits portal online or applying through your lender.
To apply, you need to provide some data based on your current status. Veterans need to provide a DD Form 214, and active-duty service members need a signed statement of service. A statement of service should include:
- Full name
- Date of birth
- Social Security number
- The date you started duty
- Any lost time
- Name of the command providing the information
Different requirements may apply for National Guard or Reserve members, as well as surviving spouses. You can find more information through the VA’s benefits website, or by speaking to a qualified lender.
Other VA loan requirements
You should also keep these VA loan requirements and rules in mind:
- VA loan limit: As of 2020, if you have full entitlement, there is no limit on the size of your loan. However, your lender may impose its own terms, and your entitlement will still be pegged to conforming mortgage limits.
- You do have a home loan limit if you have remaining entitlement: You have an active VA loan you’re still paying back; or you paid a previous VA loan in full and still own the home; or you refinanced your VA loan into a non-VA loan and still own the home; or you had a compromise claim (or short sale) on a previous VA loan and didn’t repay it in full; or you had a deed in lieu of foreclosure on a previous VA loan; or you had a foreclosure on a previous VA loan and didn’t repay it in full.
- If you have remaining entitlement, your VA home loan limit is based on the county loan limit where you live. This means that if you default on your loan, the VA will pay your lender up to 25 percent of the county loan limit minus the amount of your entitlement you’ve already used. Check your county loan limit here.
- Property type: Investment properties and vacation homes cannot be purchased using VA loan proceeds. Furthermore, you must occupy the home and use it as your primary residence.
- Credit score: The VA does not specify a minimum credit score requirement. However, borrowers might have a hard time getting approved by a lender if they don’t have at least a 620 FICO Score.
- Income: Borrowers need to show they have the income to make the mortgage payments. It’s equally important to not have a huge debt load since the lender will assess your debt-to-income ratio (DTI), or the percentage of your monthly income that’s spent on debt payments.
- Assets and down payment: There is no down payment requirement for VA loans, but the lender may have overlays (or specific criteria) that mandate a down payment in place for borrowers with lower credit scores.
- Reserve funds: Many lenders require borrowers to have an adequate amount of reserves — generally two to three months of mortgage payments — before clearing you to close on your loan.
It’s also possible to use home loan benefits after bankruptcy, as long as sufficient time has passed, typically two years after filing for Chapter 7 bankruptcy or 12 months after Chapter 13 bankruptcy.
VA home loan pros and cons
For those who are eligible, VA loans have many benefits, but they also have drawbacks to consider.
Pros of a VA loan
Some of the key advantages of VA loans include:
- Lower borrowing costs: VA loans can be cheaper than their conventional mortgage counterparts.
- No down payment: VA loans allow you to purchase a home with zero down payment, making homeownership more accessible for those who may struggle to save a large lump sum. You need at least 3 percent down for a conventional mortgage.
- No mortgage insurance: Unlike many other types of mortgages, VA loans do not require you to pay private mortgage insurance (PMI), potentially saving you hundreds of dollars per month.
- Competitive interest rates: Because the government guarantees these loans, lenders are able to offer lower interest rates than you’d typically find with conventional loans.
- Capped lender fees: The VA limits lender fees (like loan origination fees) to 1 percent of the loan amount. This can result in lower closing costs than other loan types.
Cons of a VA loan
Despite the many benefits, VA loans also have a few downsides to consider:
- VA funding fee: VA loans come with a funding fee that can vary depending on your military category, down payment amount and whether you’ve previously used a VA loan. You can finance this fee into the loan amount, adding to the total cost of the loan, or you can pay it upfront at closing.
- Limited to primary residences: You can only use VA loans to purchase a primary residence, not vacation homes or investment properties. However, you can buy up to a four-unit property with a VA loan as long as one unit is your primary residence.
- Not all properties qualify: Not every property will meet the VA’s minimum property requirements (MPRs), which can limit your potential housing options.
- Longer closing process: The VA loan process can take slightly longer than other loan types due to extra steps such as the VA appraisal.
How to apply for a VA loan
After you’ve obtained your COE and are ready to apply, there are a few steps you need to take:
- Gather your financial paperwork.
- Look for lenders that offer VA loans.
- Get approved for a VA loan through at least three lenders.
- Compare each lender’s offer and choose the best option.
- Shop for a home and submit an offer.
- Have a seller accept your offer and get a signed purchase agreement with the seller.
- Get a VA home appraisal and inspection.
- Work with the lender through the underwriting process, promptly responding to questions and requests for documentation.
If you’re struggling with your VA loan, there’s extra help available. The VA can help you negotiate with your lender if you can’t make payments. With the help of the VA, it’s possible to avoid foreclosure through loan modification or other repayment plans. Call 877-827-3702 if you need help.
VA loan FAQ
VA loans can have term lengths of 10 to 30 years. In addition, they can be fixed-rate or adjustable-rate mortgages (ARMs). The interest rates for VA loans are typically lower than those for conventional loans, mainly because the VA guarantees a portion of the loan, which reduces the risk for the lender. These rates change frequently, so check Bankrate’s VA home loan rates to compare offers from different lenders.
A key feature of VA loans is the entitlement. This is the amount of the loan that the VA will guarantee to the lender if you default. There are two types of entitlement:
- Basic entitlement: Up to $36,000 for loans worth less than $144,000, or 25 percent for loans of that amount or more.
- Bonus entitlement: Up to 25 percent of the Federal Housing Finance Agency (FHFA) loan limit, minus the basic entitlement.
If you’re purchasing a loan that costs more than $144,000, the bonus entitlement can be used.
No, VA loans don’t require PMI or any other mortgage insurance. That’s because the VA loan entitlement usually amounts to more than 20 percent of the home’s value. However, while you won’t need to pay for mortgage insurance, you will have to pay a funding fee.
As with any mortgage, different lenders have various closing costs. You might need to pay for discount points, a credit check, VA appraisal fees, title insurance and other costs, including local and state taxes. While you don’t have to worry about PMI, you do have to pay a VA funding fee. Your VA funding fee depends on the size of your VA loan down payment, and whether it’s your first-time use of the benefit.
Down payment First-time use Subsequent use 0%-5% 2.15% 3.30% 5%-9.99% 1.50% 1.50% 10% or more 1.25% 1.25%
So, while a VA loan down payment isn’t required, it can save you money to make a down payment.
Quick note: Disabled veterans who receive disability benefits are exempt from the VA funding fee.
Also, it’s possible to wrap your VA closing costs into the loan amount. However, that increases how much you need to borrow and can cost you more.