What Is A VA Loan?

What is a VA loan?

A VA loan is a mortgage guaranteed by the U.S. Department of Veterans Affairs (VA), specifically for eligible active-duty military, veterans and surviving spouses. If you qualify, you can use the VA loan program to buy a home, build or renovate a home, or refinance an existing loan.

How does a VA loan work?

The VA doesn’t provide VA loans to borrowers directly. Instead, you’ll get your loan through a VA-approved mortgage lender. Many national banks offer VA loans, and there are lenders that specialize in them, too.

Like conventional loans, VA loans can have different term lengths — typically 10 to 30 years — and a fixed or adjustable rate.

In most cases, you won’t need to make a down payment to get a VA loan, and you won’t pay for mortgage insurance, either — a key difference between VA loans and conventional and FHA loans. However, you will be responsible for some upfront costs.

VA loan fees

VA loans do have closing costs, like other types of mortgages. In addition to the origination fee, the appraisal fee and others, they also charge the VA funding fee, which offsets lenders’ risk when providing no-down-payment mortgages.

The funding fee ranges from 0.5 percent to 3.3 percent of the loan amount, and it applies whether you’re buying or refinancing. For purchase loans, it costs:

There are certain circumstances in which borrowers don’t have to pay the funding fee, primarily if they receive or are eligible to receive compensation for a disability caused by an injury suffered during service.

If you prefer not to pay the funding fee at closing, you can add it to your loan and pay it over time with your mortgage. That increases the total amount you’re borrowing and the total interest paid.

Current VA loan rates

VA loan rates are typically competitive with conventional loan rates, but they may be slightly higher or lower. For example, the national average rate for a 30-year VA loan is currently 7.08 percent, while the national average rate for a 30-year conventional loan is 6.88 percent.

VA loan eligibility and requirements

To be eligible for a VA loan, you need to meet minimum service requirements. These vary based on your status as active-duty or a veteran. There are also specific requirements for National Guard or Reserve members. If your spouse served, you might be eligible as well.

Before applying for a VA loan, you’ll need a certificate of eligibility, or COE, that proves you’ve satisfied the service requirements to qualify for the loan.

Other VA loan requirements

Like other mortgages, VA loans have financial requirements — but they’re often more flexible than those of conventional loans.

• Minimum credit score: The VA doesn’t set a minimum credit score for its borrowers, but many lenders require a score of at least 620.
• Maximum debt-to-income (DTI) ratio: Borrowers must generally have a DTI ratio of 41 percent or less to qualify for a VA loan, but you may be approved with more debt if you have a lot of savings, a low tax burden or meet other special circumstances.

Lastly, you can only use a VA loan with a primary residence; investment properties and vacation homes aren’t allowed. The property also needs to meet certain safety and structural standards.

VA loan limits

If you have full entitlement, there’s no limit on the size of your VA loan. However, your lender still assesses what you qualify for based on your finances, including income and other debt. Your entitlement is pegged to conforming loan limits, as well.

You won’t have full entitlement if one or more of the following applies:

• You have an active VA loan that you’re still paying back.
• You paid a previous VA loan in full and still own the home.
• You refinanced your VA loan into a non-VA loan and still own the home.
• You experienced a short sale, deed-in-lieu of foreclosure or foreclosure on a previous VA loan and didn’t fully repay it.

In these cases, you’re restricted to borrowing only as much as the loan limit for your county.

Types of VA home loans

Whether purchasing or building a home or refinancing a mortgage, there are a variety of VA loan options:

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

• No down payment: VA loans allow you to purchase a home with zero down payment. In contrast, you’d need at least 3 percent down for a conventional mortgage and at least 3.5 percent down for an FHA loan.
• No mortgage insurance: Unlike conventional and FHA loans, VA loans don’t require you to pay mortgage insurance, even if you aren’t making a down payment.
• Capped lender fees: The VA limits certain lender fees. This might mean lower closing costs compared to other loan types.

Cons of a VA loan

• Funding fee: VA loans charge a funding fee that varies depending on whether you’re buying a home or refinancing, whether you’re making a down payment — and how much — and whether you’ve previously used a VA loan.
• Limited to primary residences: You can only use VA loans to purchase a primary residence, not a rental or a vacation home. However, you can buy up to a four-unit property with a VA loan as long as one unit is your primary residence.

Is a VA loan right for you?

Even if your service qualifies you for a VA loan, you might decide to go with another loan type. For example, if you can afford to put 20 percent down on a conventional loan, you’ll likely pay fewer fees than if you chose a VA loan.

But a VA loan is likely the best option for you if:

• You’d struggle to qualify for a conventional loan. VA loans have more lenient qualifications than conventional loans.
• You live in a high-cost area. You can use a VA loan to buy a property that’s more expensive than conforming loan limits, potentially without a down payment.
• You plan to live in your home long term. Because of the upfront costs, it may not be worth buying a home with a VA loan if you plan to live there for only a few years.

How to apply for a VA loan

The process of applying for a VA loan is similar to that of applying for other types of mortgages. It involves comparing offers from lenders, providing proof of employment and income and promptly responding to underwriting requests. Here are the basic steps for a VA purchase mortgage:

1. Obtain your COE.
2. Organize a file of information about your finances, including recent pay stubs, bank and brokerage statements and tax returns.
3. Compare rate offers from at least three VA lenders.
4. Request a preapproval and begin looking for homes.
5. Complete the mortgage application once you have an accepted offer.
6. Be ready to provide additional credit or financial information as needed during underwriting.

FAQ

• What are VA entitlements?
  

  Entitlement is the amount of the VA loan the VA will guarantee to the lender if you default. There are two types: basic entitlement, which is up to $36,000 for loans worth less than $144,000 or 25 percent for loans of that amount or more; and bonus entitlement, which is up to 25 percent of the conforming loan limit, minus the basic entitlement. If you’re getting a loan that costs more than $144,000, the bonus entitlement can be used.

• What if I can’t afford my VA loan?
  

  If you’re struggling to pay your VA loan, the VA can help you find relief options with your mortgage lender or servicer. Call 877-827-3702 as soon as possible for assistance.