How do VA loans work?

In a nutshell

VA loans help veterans, active duty military members and eligible surviving spouses become homeowners through various means, including buying an existing home or building a new one.

• While VA loans are partially guaranteed by the Department of Veterans Affairs, these home loans are offered through private lenders.
• The fact VA loans are backed by a government agency means buyers get access to favorable loan terms.
• Notable benefits of VA loans include zero down payment, competitive interest rates and limited closing costs.
• VA loans are also available without private mortgage insurance, although an upfront VA funding fee is required.

What is a VA loan?

A VA loan is a type of mortgage guaranteed by the Department of Veterans Affairs for eligible military borrowers. For example, these loans are for veterans and active duty service members first and foremost, although some eligible surviving spouses can also use VA loan benefits.

While VA loans are commonly used to purchase an existing home, borrowers can also use VA loan benefits to buy a new property or improve a home. VA loans can also be used to refinance an existing mortgage, either to access home equity through cash-out refinancing or to secure a new home loan with a lower interest rate.

How does a VA loan work?

VA borrowers must show proof of their service history with a Certificate of Eligibility (COE), which borrowers can request from the VA. Borrowers can request a COE online, via mail or through their lender, and it is used to prove eligibility for a VA loan.

Because VA loans come with the backing of a U.S. government agency, the government can repay part of the loan if the borrower defaults. This gives the lender more reassurance on their end, which allows them to offer competitive loan terms.

VA loans have many benefits, including low closing costs, competitive interest rates and no need for private mortgage insurance (PMI). According to the VA, about 90% of VA loans are used to purchase a home with no money down.

Instead of PMI, VA loans charge an upfront funding fee. The amount of the VA funding fee varies based on how many times a VA loan benefit has been used and the down payment amount. However, this fee typically works out to 0.5% to 3.3% of the loan amount. Some borrowers with a service-connected disability or other special situations do not have to pay the funding fee.

Types of VA home loans

Several types of VA loans can help eligible veterans, active duty service members and eligible surviving spouses buy, improve, build or refinance a property.

• Purchase loan: VA purchase loans let eligible borrowers purchase an existing home, build a home or improve a home with no money down and other favorable terms.
• Native American Direct Loan (NADL) program: You may be eligible to use VA loan benefits when purchasing a home if you're a Native American veteran or a veteran married to a Native American.
• Interest Rate Reduction Refinance Loan (IRRRL): Also called a "streamline refinance," these loans let borrowers who already have a VA loan replace their current loan for a new one with better terms. To qualify, you must also prove that you currently live or used to live in the home being refinanced.
• Cash-out refinance loan: This type of loan lets VA borrowers refinance an existing VA loan or a non-VA loan and withdraw some of their home’s value in cash at closing.

Eligibility for a VA loan

You may be eligible for a VA loan if:

• You have served for at least 90 continuous days (all at once, without a break in service) as an active duty U.S. military member.
• You meet service requirements for veterans that vary based on the era served, length of time in service and other factors.
• You served for at least six years or for 90 days (at least 30 must be consecutive) in active duty in the National Guard or Reserve under Title 21 orders.
• You qualify as an eligible surviving spouse. This means you have not remarried or your veteran spouse died in the line of duty or due to a service-connected disability.
• You are a surviving spouse of a military member who went missing in action or is held as a prisoner of war (POW).
• You can meet lender requirements for credit and income, which can vary from lender to lender. Note that the VA does not set a minimum credit score for VA loans, but lenders typically do.
• You are buying a residential property that meets safety standards and building codes and can pass a VA home appraisal.
• You plan to move into the home within 60 days of closing (which may be extended up to 12 months in certain situations) and live in it as a primary residence.

How to apply for a VA loan

Applying for a VA loan requires many of the same steps as other mortgage types. However, there are a few additional hoops to jump through to qualify.

Step 1: Get a Certificate of Eligibility (COE)

Eligible borrowers need a COE to show lenders they meet the service requirements to use a VA loan. Borrowers can request the COE online, by mail or through some VA lenders. Start an online request for your COE through the VA.

Step 2: Determine if you're ready

Once your COE is on the way, the VA recommends taking stock of your financial situation to see if you're ready to buy a home. Evaluate your income, expenses, monthly budget and credit score and figure out how much you can afford to pay toward a mortgage each month.

Step 3: Look for a VA lender

Not all mortgage companies offer VA loans, so you'll need to shop around. It’s best to compare offers from at least three different lenders to ensure you’re getting the best deal. Once you narrow down lenders, apply for a mortgage preapproval with each one to compare rates and terms. This is where lenders will check your credit, income, debts and assets to determine your ability to repay your new mortgage. Having a preapproval letter in hand also helps your offer stand out to sellers.

Step 4: Shop for a home

If you're planning to use a VA loan for a home purchase, you can begin shopping for a home once you have a COE and a lender lined up. You can start looking with the help of a real estate agent or on your own. Once you find a home you love that's within your price range, you’ll make an offer and negotiate terms with the seller.

Step 5: Close on your home purchase

Once your offer is accepted, your loan will go through further processing to ensure you and the property meet VA guidelines. The lender will schedule a VA home appraisal to confirm the home’s value and that it meets basic property requirements. Once your loan is approved, you’ll receive a Closing Disclosure three business days before your closing date detailing key loan information and costs. You’ll also do a final walk-through before closing to ensure the property is move-in ready. On your closing date, you’ll bring your ID, down payment and closing costs and sign final loan paperwork and other documents transferring ownership to you to seal the deal.

What are the requirements for VA loans?

Some of the requirements for a VA loan vary by lender, whereas others are set in stone. Here's what you'll need to qualify:

• Service requirements: You'll have to meet military service requirements and receive a Certificate of Eligibility (COE) from the Department of Veterans Affairs.
• Credit requirements: While the VA doesn't set minimum credit score requirements for VA loans, many VA lenders require a minimum credit score between 580 and 620. However, this will vary by lender.
• Income requirements: VA lenders will verify a borrower's ability to repay the loan and cover their other monthly bills and expenses.
• Property requirements: Homes purchased with VA financing must meet the VA’s requirements for safety, structural soundness and sanitation. This is determined by a mandatory VA home appraisal, which is required for all VA loans. As a result, some fixer-uppers may not qualify.

The AP Buyline roundup

Access to VA loans is a hard-earned benefit afforded to active duty service members, veterans and certain eligible spouses, so these loans won't work for everyone. Those who do qualify for VA loans can benefit greatly from them since they often come with no down payment requirement, no private mortgage insurance (PMI), competitive interest rates and low closing costs.

Since not all lenders offer VA loans, however, shop around to find one that meets your needs before you look at homes. Getting preapproved for a mortgage ahead of time might boost your chances of getting an offer accepted.

Frequently Asked Questions (FAQs)

How many times can you use a VA home loan?

There’s no limit on how many times VA loan benefits can be used by an eligible borrower as long as they have full VA entitlement.

Are VA loans harder to get?

VA loans are harder to get because you need to prove a record of military service to qualify. Fewer lenders offer VA loans overall, so it might take longer to find the right one.

How much money can you get with a VA loan?

VA loan limits ended in 2020 for current military members and veterans with full VA loan entitlement. VA loan limits still apply for borrowers who have remaining entitlement, that is, an active VA loan they’re still repaying or a loan they defaulted on in the past. It’s worth noting that the VA “loan limit” refers to the maximum amount the VA will pay to your lender if you default on your mortgage; it doesn’t limit the total amount you can borrow from a VA lender.

What are the benefits of a VA loan?

VA loans typically require no down payment and no mortgage insurance. VA loans also have competitive interest rates and low closing costs compared to other loan types. VA borrowers can roll their closing costs (including the funding fee) into their loan amount, usually in exchange for a higher interest rate.