The U.S. Department of Veterans Affairs – familiarly known as the VA – provides numerous loan options for active duty service members and some qualifying spouses, as well as qualified veterans. Those with VA loan eligibility can use these loans to buy a home, build a home, or even refinance an existing mortgage.
Various VA loan benefits have been available since 1944. They were initially launched to help returning service members settle back in at home without having to worry about their credit scores or saving up a down payment for a new residence. The VA has guaranteed more than 25 million loans since then, according to Veterans United.
How Does a VA Home Loan Work?
VA home loans are issued by banks and lending institutions; the money doesn't come from the VA itself. The Department backs these loans to effectively guaranty that VA lenders will be paid at least a portion of the outstanding loan amount if the borrower defaults. The VA will usually pay the mortgage company up to about 25 percent.
This tends to make lenders more generous about things like credit scores, interest rates, closing costs, private mortgage insurance and down payments. They tend to follow VA guidelines regarding these issues, but they’re free to impose their own requirements, and these might be a bit stricter.
There are limits as to the type of property you can buy, but they’re generous. VA home loans cover everything from building a new home to purchasing a single-family dwelling, including condos and manufactured homes. It backs purchases of multi-family properties of up to four units – although you have to live in one of those units. The property does have to be your primary residence, but this simply means that you live there at least six months and one day out of the year.
Types of VA Home Loans
We’re not just talking first-time mortgages here, either. The VA guarantees refinance loans as well as purchase loans. The cash-out refinance program lets you refinance your existing mortgage loan and take cash for the difference between your existing mortgage balance and the amount of your new loan, usually up to 90 percent of your home’s value. You don’t have to take cash out, however, and your existing loan – the one you're refinancing – doesn’t have to be a VA loan.
One part of the VA home loan program is the Streamline refinance loan, an interest rate reduction program that often doesn’t require an appraisal, a credit check or income verification. Homeowners can replace their initial mortgage with a new one with a more favorable interest rate to lower their monthly payments. This loan is sometimes referred to as the IRRRL or Interest Rate Reduction Refinance Loan. This option is limited to homes with existing VA mortgages. You can’t refinance any other type of loan.
Read More: Is It Worth Refinancing for 1 Percent?
The Native American Direct Loan Program (NADL) backs mortgages and construction or improvement loans for properties located on Federal Trust Land. This program refinances other VA loans for a more affordable interest rate. As the name implies, it’s restricted to Native American Veterans.
Not all private lenders offer all of these options.
Are You Eligible for a VA Home Loan?
VA loans are an entitlement restricted to veterans, active duty service members, and some spouses. They’re available to reservists, members of the National Guard, surviving spouses of veterans who were killed in the line of duty, cadets, midshipmen and officers at the National Oceanic and Atmospheric Administration. Veterans must have been honorably discharged to receive these home loan benefits.
Some eligibility requirements apply. Service requirements, according to the VA, are “Your length of military service or service commitment, duty status and character of service” are all taken into consideration. This means 181 days of active duty during peacetime, 90 days of active duty during wartime, or six years in the Reserves or National Guard. Dependents can qualify as well if the service member is on active duty. Surviving spouses cannot have remarried, unless they’re over age 57 and they remarried on or after Dec. 16, 2003.
You can’t have rock-bottom credit, and you need sufficient income to handle the anticipated mortgage payments. You can’t ever have defaulted on a financial obligation to the U.S. government. Most important, you must have a Certificate of Eligibility (COE) issued by the VA. This is all a one-time challenge, however. Once you qualify and get your COE, you’re qualified for life. It won't expire.
The NADL program also requires that your tribe must participate in this VA direct loan program.
Purchase Loan Requirements and Terms
Purchase loans – mortgages that are taken out to buy a home – typically don’t require a down payment, or private mortgage insurance (PMI). The no-down-payment rule makes this type of loan virtually unique in this day and age. PMI isn’t required even if you don’t put money down, because the VA already has the lender's back in the event that you default. PMI is generally required to protect your lender by paying off your loan if you stop making payments.
Read More: What Is PMI?
Likewise, having a bankruptcy or foreclosure on your credit report won’t automatically disqualify you for a VA home loan, although two years must have passed since the event. This drops to a year of timely payments if you’re currently involved in a Chapter 13 bankruptcy proceeding.
Interest rates are generally much more favorable as well, averaging about 0.25 percent less than other loan types, and these mortgages are available as either fixed-rate or adjustable-rate mortgages. A rule for loan limits – caps on the amount you can borrow – was repealed under the Blue Water Navy Vietnam Veterans Act of 2019.
Unfortunately, you have to pay a VA funding fee. This money goes to the VA, not to your lender. It’s intended to keep the program up and running for future generations. The fee is usually about 2.3 percent of the purchase price, so it can be a little steep, but you can roll it into your loan. That’s a good deal because it can increase to much as 3.6 percent if you’ve ever taken out a VA home loan before, with the exception of a Streamline refinance loan. The fee is only 0.5 percent in this case, and the VA does provide a few exceptions to this rule, such as for veterans with service-related disabilities.
How to Apply for a VA Home Loan
For home buyers, applying for a VA mortgage isn’t all that different from applying for any other type of home loan, other than that COE requirement, and that doesn’t have to be prohibitive. Your loan officer can get it for you under most circumstances because the VA provides an automated system. You can also reach out to the VA yourself, either by mail, by phone, or on their Housing Assistance website. Your COE is good for applying for subsequent VA loans, so you probably already have one if you’ve already borrowed on a VA-guaranteed loan. Check your paperwork.
Credit score limits can apply, even if the VA itself doesn’t impose any rules for minimum scores. You might need one in the area of at least 620 for approval, but this can vary by lender. You must also be current on all your other debts for the last 12 months.
Read More: Credit Score for Mortgage Rates – How It Works
- U.S. Department of Veterans Affairs: VA Home Loans
- U.S. Department of Veterans Affairs: VA Home Loan Types
- Veterans United: Your Complete Guide to the VA Home Loan
- Veterans United Home Loans: How VA Loans Work – What Most Borrowers Don’t Know About VA Loans
- Military.com: VA Loans
- The Mortgage Reports: The VA Home Loan – Benefits, Requirements, and Rates for 2021
Beverly Bird has been writing professionally for over 30 years. She is also a paralegal, specializing in areas of personal finance, bankruptcy and estate law. She writes as the tax expert for The Balance.