VA loans: What are they, and how do you get one?
For active and retired military service members, a VA loan could be the ticket to securing an affordable mortgage loan with low rates and no down payment. (iStock)
If you’re a current service member, veteran or an eligible family member looking to buy a home or refinance your current mortgage, a VA loan could be the ticket to saving a considerable amount of money.
A VA loan is a type of mortgage loan backed by the U.S. Department of Veterans Affairs that comes with several benefits to borrowers.
VA loan vs. conventional mortgage
VA loans are considerably different from conventional home loans. Typically, VA loans offer lower interest rates, don’t require private mortgage insurance (PMI) and come with no down payment requirements. These two mortgage types differ in other ways, too.
VA loans
- Down payment: You usually aren’t required to make a down payment on VA loans unless the lender specifically requires one or the home sale price exceeds its appraised value. You may be required to pay an up-front VA funding fee, typically between 1.4% and 3.6%.
- PMI: VA loans don’t require private mortgage insurance.
- Interest rates: VA loans are still subject to a credit check but often offer lower interest rates than conventional home loans.
- Lending policy: VA loans are reserved for eligible military service members, veterans and service member spouses. You’ll also need a VA-backed home loan Certificate of Eligibility (COE) and must meet lender credit, income and other requirements.
Conventional home mortgage loans
- Down payment: Lenders typically want homebuyers to make a down payment of at least 20% of the loan total.
- PMI: Lenders require private mortgage insurance on conventional home loans with a down payment of less than 20% of the loan amount.
- Interest rates: Your credit score and history, loan length and other factors affect the interest rate on a conventional loan.
- Lending policy: Qualifying for a conventional home loan depends primarily on meeting a lender’s underwriting requirements, including credit score and history, debt-to-income ratio and other factors.
Credible allows potential homebuyers to compare mortgage rates easily.
Qualifications you’ll need for a VA loan
To qualify for a VA loan, you’ll need to obtain a Certificate of Eligibility (COE) from your military branch and provide it to your lender. This is the first (and most important) step in getting a VA loan. You must meet qualifications set by the VA to acquire a COE. You typically must meet one of the following requirements to be eligible for a VA loan:
- If you’re currently on active duty, you must have served 90 consecutive days of active service.
- If you’re a veteran, you must have served at least 90 days of active service, depending on when you served.
- If you are or were in the Reserves or National Guard, you must have served at least six years and meet other requirements.
- You are the spouse of a service member that has died in the line of duty or because of a service-related injury.
Types of VA loans
The VA offers several home loan programs to help borrowers buy a home, fix up an existing home or refinance a current mortgage loan. Below are the options currently available through the VA.
VA purchase loan
A VA purchase loan is a VA-backed loan that offers competitive interest rates compared to other mortgage loan types. You can use a VA purchase loan to purchase an existing home or approved condo, build a new home, purchase a home and improve it or purchase a manufactured home or lot. You can also use a VA purchase loan to update your current home to make it more energy-efficient. These loans are sometimes subject to a VA funding fee, interest and closing fees.
VA interest rate reduction refinance loan (IRRRL)
A VA interest rate reduction refinance loan, or IRRRL, is a refinance VA loan available to qualified borrowers. You must have an existing VA-backed home loan to qualify. This loan type allows you to refinance your existing home loan to a lower interest rate or switch from a variable rate to a fixed rate. With an IRRRL, your old loan is paid off and replaced by a new loan with a new interest rate and new loan term. IRRRLs are subject to closing costs and VA funding fees, as well as interest on the loan.
VA cash-out refinance
Another way to refinance your existing VA loan is a VA cash-out refinance. This type of home loan allows you to take cash out of your home equity to use for various needs, such as paying off debt or making home improvements. You can also use a VA cash-out refinance to refinance a non-VA loan into a VA loan. Along with a COE, your lender may require income and other financial information and a home appraisal of your current property.
VA Native American Direct Loan (NADL)
A VA Native American Direct Loan is specifically designed for Native American veterans or non–Native American veterans married to a Native American. Along with meeting other general VA loan requirements, your tribal government must have an agreement with the VA to qualify for this loan type. A NADL is a 30-year mortgage featuring a low fixed interest rate with limited closing costs.
How VA loans work
The process to get a VA loan isn’t that much different than other types of mortgage loans, with the exception of providing a COE to the lender. Once you have a COE, you can find a lender and prequalify for a loan. Then, start searching for a home and make an offer. A home appraisal by a VA-approved appraiser is required for all VA loan financing. If there are no issues, you’ll finish the process by closing on the home.
VA loans typically take up to 55 days to process, similar to other types of mortgages. The specific time may depend on your lender and its loan volume.
Looking for a home loan? Credible can help you compare mortgage rates.
VA loan limits
There are no longer VA loan limits for eligible service members, veterans and survivors with full entitlement. This means that if you default on your loan, the VA agrees to pay your lender up to 25% of the loan amount on loans over $144,000. It also means there’s no down payment required.
To qualify for full entitlement, you must meet one of the following requirements:
- Never used your home loan benefit
- Paid a previous VA loan in full and sold the property
- Used your home loan benefit but had a short sale and repaid the loan in full
If you don’t have full entitlement, you likely have remaining entitlement. With remaining entitlement, the VA loan limit is based on the county loan limit where you reside. If you default on your loan with remaining entitlement, the VA will pay your lender up to 25% of the county loan limit minus any entitlement already used.
Keep in mind that VA loan limits don’t restrict how much you can borrow, only how much of the loan is guaranteed by the federal government. Private lenders set loan limits based on your credit history, income, assets and other factors.
VA loan funding fee
When you take out a VA loan, you must pay an additional VA loan funding fee.
Lenders charge this one-time fee to help lower the cost of the loan for U.S. taxpayers. VA loan borrowers that meet specific program requirements aren’t required to pay a funding fee. As of Jan. 1, 2020, funding fees for each VA loan type are:
- VA-backed purchase and construction loans: 1.4% to 3.6%
- VA-backed cash-out refinancing loans: 2.3% to 3.6%
- Native American Direct Loan (NADL): 0.5% to 1.25%
- Other VA loans: 0.5% to 2.25%
The cost of the funding fee depends on factors such as the loan type, amount borrowed, down payment amount and whether it's your first time using a VA loan.
Qualifying as a surviving spouse
If you’re the surviving spouse of a veteran, you may be eligible for a VA loan. To qualify, your veteran spouse must meet one of the following requirements:
- Be missing in action
- Be a prisoner of war
- Died during service or from a service-connected disability and you didn’t remarry
- Died during service or from a service-connected disability and you didn’t remarry before you were 57 or before December 16, 2003
- Had been totally disabled and then died (in some cases, the disability doesn’t need to be the cause of death)
If qualified, you can apply for a COE and proceed through the loan approval and home buying process through a private lender.
VA property requirements
On top of borrower requirements to qualify for a VA loan, the property itself must also meet VA loan program requirements. The VA created standards, known as minimum property requirements (MPRs), to provide safe and sanitary housing for veterans. With proper housing, veterans can avoid costly repairs in the future. MPRs cover almost every aspect of a property, including:
- Appropriate electric, heating and cooling systems
- Adequate roofing
- Sufficient size
- Proper water supply
- Sanitary conditions
- No lead-based paint
- No wood-destroying insects
- No fungus or dry rot
- Adequate sewage disposal
- Reasonable accessibility
- Appropriate ventilation in the attic and crawl space
A VA-approved home appraiser will appraise the home during the homebuying process to ensure it meets all of the program MPRs. The appraisal process isn’t the same as a home inspection. VA-approved borrowers should also consider doing an independent home inspection when buying a home.
VA loans are a great option for active service members, veterans and their spouses, and can make buying a home a much more viable option.
When you’re ready to buy a home, compare mortgage rates from various lenders all in one place with Credible.