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VA Loan Buyer’s Guide: Eligibility, Benefits and How to Apply

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A VA loan allows active-duty service members, veterans and eligible surviving spouses to finance a home with no down payment, no mortgage insurance and lenient credit requirements. Understanding how a VA loan works will help you determine if it’s the right mortgage for your purchase or refinance plans.

What is a VA loan?

A VA home loan is a special type of mortgage guaranteed by the U.S. Department of Veterans Affairs (VA), and is available only to qualified borrowers as a part of their military benefits. Created to help veterans access credit and compete in the housing market, VA loans have more lenient credit, down payment and debt-to-income requirements than conventional loans. They also typically offer lower interest rates and have lower closing costs. This makes them a great option for any veteran, but especially for first-time home buyers who may need extra help entering today’s competitive housing market.

VA home loans are guaranteed by a government agency, so lenders know that even if a military borrower defaults, they won’t lose all of the money they lent. The VA promises to pay a specific dollar amount to the lender on behalf of each veteran if they default on a loan, and this is the reassurance lenders need to offer military borrowers credit under the relatively relaxed requirements of a VA loan.

How does a VA loan work?

On the surface, a VA loan works like any other home loan program. You fill out a loan application with any bank, lender or credit union of your choice that offers VA loans. You’ll provide proof of your income and credit history and verify that you have enough money saved up to cover closing costs.

However, there are some big differences between VA loans and the loans available to the average civilian, like conventional loans and loans backed by the Federal Housing Administration (FHA). Loan-related costs and fees are charged and paid differently when you’re using a VA loan.

Unique VA loan requirements include:

Military service history

The VA home loan benefit is only for military borrowers that have served enough time to meet eligibility requirements.

VA funding fee

One of the downsides to a VA loan is having to pay the VA funding fee cost of 0.5% to 3.6%. The funding fee is charged to offset the cost of the VA loan program to taxpayers and is typically rolled on top of the loan amount, even if you make no down payment. Disabled veterans are exempt from having to pay the funding fee.

Unique VA loan benefits include:

No down payment

The vast majority of VA borrowers won’t have to make a down payment if they don’t want to, but in some cases it makes good financial sense to put money down if you can afford to.

No mortgage insurance

Most low- or no-down-payment loan programs available to civilians require mortgage insurance, which covers lenders in case you default on your payments and they have to foreclose. The VA doesn’t require mortgage insurance on any of its loan types.

Capped closing costs

VA lenders are limited to charging 1% of your loan to cover their fee. That saves you money at closing and makes VA closing costs more affordable than other government-backed loan programs.

No loan limits

There are currently no VA loan limits for veterans with full entitlement, although some lenders may set their own maximums.

VA loan eligibility

Not everyone who served in the military automatically qualifies for a VA loan. Here’s what you’ll need in order to verify that you’re eligible:

Minimum service requirement

According to the VA, you meet the minimum service requirement if:

  • For active-duty service members: you’ve served at least 90 continuous days of active duty
  • For veterans, National Guard members or Reserve members: you meet the active-duty requirements for your dates of service
  • For surviving spouses: Your spouse is a service member who is missing in action or who died while in service or from a service-related disability.

Your military service records will reflect the number of years you served in the military.

Certificate of eligibility (COE)

A certificate of eligibility (COE) is a document that shows the mortgage lender that your VA benefits qualify you for a VA loan. Every service member earns what is called VA entitlement as a benefit of their service, which is a dollar amount that the VA promises to pay a lender if they default on a loan.

But how much entitlement you have at any given time is affected by how much you’ve used in the past. Calculating VA entitlement can get a little bit complicated, but your COE will list the dollar amount currently available to you as a guaranty on a VA loan, as well as when and how you’ve used your entitlement in the past.

  Tip. If your COE says that you have “$0” of basic entitlement left, don’t panic. You may still be able to get another VA loan using your “bonus” entitlement. If you need help determining where your VA benefits stand, ask your lender or contact your local VA regional loan center.

You can ask your lender to obtain a COE on your behalf, or request one yourself on the VA’s eBenefits site or through the mail using VA Form 26-1880.

VA loan requirements

Once you prove that you’re eligible, there are additional requirements you’ll need to meet to get a VA loan.

Employment history

Lenders prefer a steady, two-year job history, but may make exceptions at their discretion.

Credit score

Although the VA guidelines don’t require a minimum credit score, many lenders set their minimum at 620. However, you should be able to find lenders who will accept scores between 500 and 619 without too much trouble.

Income

Your debt-to-income (DTI) ratio measures your total monthly debt (including your new mortgage payment) divided by your gross (before-tax) income. The VA recommends a maximum 41% DTI ratio, but exceptions are possible if you have enough residual income.

VA loan limits

There are no loan limits for borrowers with full entitlement, but if you’ve used your VA loan benefits before you may be working with partial entitlement. For those with partial entitlement, the VA loan limit is the current conforming loan limit.

Residual income

Residual income is the amount of cash you have each month after you’ve covered your basic living expenses. The VA sets a minimum requirement that depends on your home and family size, as well as the location of your home.

Reserve funds

In some circumstances, you may have to show that you have a certain amount of cash or other liquid assets on hand in order to qualify for a VA loan. While most single-family homebuyers won’t have to show reserve funds over and above the amount needed to cover their closing costs, some common situations that do require reserve funds include:

  • You’re going to separate from active duty in the next 12 months and haven’t lined up a civilian job yet
  • You’re buying a multifamily property
  • You own a rental property and are using that income to qualify for the loan

Occupancy

The VA requires you to live in the home you intend to finance, which in lender terms is known as a “primary residence.” You can’t use a VA loan to buy a second home if you don’t plan to live in that home and just want it as an investment or vacation property.

Federal debt

If you’ve defaulted on federal debt in the past, your lender will find out when they run a Credit Alert Interactive Reporting System (CAIVRS) check. Borrowers in default on past VA loans or student loans, for example, may not be able to qualify for a VA loan.

Home Appraisal

Only VA-approved appraisers can complete a VA appraisal, and they typically cost from $500 to $1,200 — much more than the $300 to $400 usually spent on a conventional appraisal.

Property Requirements

The VA requires that any home financed with a VA loan be “safe, sound and sanitary.”

VA minimum property requirements include the ability to show that:

  • Each unit has enough space for living, cooking, sleeping and sanitary facilities
  • All local building codes are met
  • There is private road access if the home is located in a rural area
  • The drainage directs water away from the home
  • Clean water is available for drinking and bathing
  • Sewage systems are in place to properly dispose of human waste

Types of VA loans

VA loan typeDescription
Purchase loans
  • No down payment
  • No credit minimum
  • No income limit
  • No loan limits (as long as the borrower has full entitlement)
  • May be able to buy more than one home with no down payment
Jumbo loans
Refinances
  • Borrow up to 100% of your home’s value
Cash-out refinances
  • Tap home equity up to 90% of your home’s value
VA Interest rate reduction refinance loans (IRRRLs)
  • Homeowners with a current VA loan can lower their interest rate and roll the VA closing costs into their loan
  • No home appraisal required
  • No income verification required
Renovation loans
  • Purchase or refinance a fixer-upper home and roll remodeling and repair costs into the loan
  • Finance up to 100% of the home’s value
Energy-efficient loans (EEMs)
  • Finance up to $6,000 worth of energy-efficient home improvements
Manufactured home loans
  • Finance just a manufactured home and place it on land you already own
  • Finance a manufactured home and land at the same time
  • Refinance a manufactured home you already own and purchase a plot of land to place it on
  • Finance the improvements necessary to meet VA manufactured home foundation requirements
Land loans
  • Buy land, then build a home on it, all with one mortgage
  • Refinance land you’ve already purchased and a home you’ve already built
  • Buy farmland, as long as it also has a house on it
Construction loans
  • Build a house with no down payment
  • Choose from one-time or two-time close options
Supplemental home improvement loans
  • Finance smaller home maintenance projects and add the loan amount to your current loan or take it out as a separate loan

Things you should know

If you’re refinancing a VA loan you took out less than a year ago, you’ll need to prove you’ve made at least seven payments to refinance to a new VA loan. This rule was put in place in 2019 to prevent the practice of “churning,” in which lenders refinance your loan multiple times with little benefit to you.

VA loans vs. conventional loans

Borrowers with good credit and at least a 20% down payment often choose conventional loans to buy or refinance homes. However, there are conventional loan programs that require down payments as low as 3%, if you can’t or simply don’t want to use your VA loan eligibility. Here’s how these two loan types stack up side by side:

Loan featureVA loanConventional loan
Down payment0%3%
PMINot requiredRequired with less than a 20% down payment
Credit score minimumNo guideline minimum620
Funding fee0.5% to 3.6% of loan amountNot applicable
OccupancyPrimary residence onlyPrimary, second or investment home permitted

VA loan benefits and drawbacks

Pros

  No down payment required

  No loan limits

  No income restrictions

  No mortgage insurance required

  Lender fees capped at 1% of loan amount

  Options for no income verification/no appraisal refinance

Cons

  Must be eligible based on military service

  VA funding fees up to 3.6% of the loan amount

  Tougher appraisal requirements

  Higher appraisal costs than conventional or FHA loans

  Can’t finance a second home or investment property

Special VA loan benefits for disabled vets

Veterans with qualifying disabilities get some additional perks when they use their VA loan benefit:

Funding fee exemption
Property tax exemptions (check with your county tax assessor for more information about the exemptions in your area)
Eligibility for various disability housing grant programs, including:

  • Specially Adapted Housing (SAH) or Special Home Adaptation (SHA) grants, which offer up to $101,754 and $22,036, respectively, to help disabled veterans buy or improve a house they already own to make it more accessible.
  • Temporary Residence Assistance (TRA) grants, which provides up to $40,983 to veterans to make accessibility alterations to a home owned by a family member.
  • Home Improvements and Structural Alterations (HISA) grants, which provide up to $2,000 for veterans with non-service-connected disabilities and up to $6,800 for veterans with service-connected disabilities.

Current VA mortgage rates

VA loan rates are generally lower than the rates offered on conventional loans or FHA mortgage rates. However, since VA loans require a funding fee that conventional and FHA loans don’t, it’s a good idea when deciding between these loan types to compare APRs, not just interest rates.

How to apply for a VA loan

Once you’ve confirmed you’re eligible for a VA loan, you’ll normally follow these five steps to apply for a VA home loan:

Step 1: Shop for a VA-approved lender

Not all lenders offer VA loans, and not all loan officers are familiar with how to process them. Don’t forget: The VA caps lender fees at 1% of your loan amount, so skip any lender that quotes costs any higher than that.

Step 2: Gather your financial documents

You’ll need to provide a little extra paperwork if you’re buying a home with a VA loan.

VA loan documents checklist
  • Certificate of eligibility
  • DD214 (discharge or record of separation paperwork)
  • Leave and earning statement (if you’re on active duty)
  • Child care statement
  • Nearest living relative statement
  • Two years of W-2s
  • 60 days of bank statements
  • Letters of explanation for:
    • Credit issues
    • Gaps in employment
    • Large deposits in your asset accounts

Step 3: Find your home and order your appraisal

Your lender will need to order your appraisal from a VA-approved inspector. You’ll likely have to pay for your appraisal upfront, but in some cases the seller might pay some or all of the appraisal fees. One good thing about VA appraisals: The appraisers on the VA rotation must finish your appraisal within a set time, depending on your location. Check the appraisal for any repair requirements and be prepared to negotiate with the seller if anything needs to be fixed.

Step 4: Provide approval conditions and review your closing disclosure

The VA underwriter will review any final conditions and the lender will issue your closing disclosure at least three business days before your closing date. Double-check all the figures and, in particular, make sure you aren’t being charged for a funding fee if you’re eligible for an exemption.

Step 5: Sign your closing documents and bring your cash to closing

You’ll typically need to attend closing in person at a title company, escrow office or attorney’s office. Once the lender reviews your closing package and loan funds are wired, the property title is recorded into your name and you’re officially a homeowner.

Frequently asked questions

You can use your VA loan benefit as often as you wish, as long as you have sufficient entitlement to buy a home and are purchasing a primary residence. Your VA loan entitlement is a lifetime benefit.

No, private mortgage insurance (PMI) is not required. Instead of the borrower paying for insurance to cover a lender’s potential losses, the VA offers a guaranty that covers the cost of lender losses equaling up to 25% of your loan amount if you default. The VA also charges you a funding fee of 0.5% to 3.6% to offset the program cost to taxpayers.

You’ll usually pay 2% to 6% in VA loan closing costs depending on your loan size. However, VA-approved lenders can’t charge more than 1% of your loan amount in lender fees.

Eligible veterans typically don’t need any down payment. However, you may need one if you have an outstanding VA loan on another home and don’t have enough entitlement to cover the guaranty on the new loan.

Yes. The VA IRRRL program makes it easy to refinance to a lower rate with no income verification or appraisal required.

Residual income is the amount of money you have left over each month after paying your basic expenses and ongoing debts. The VA sets minimum residual income requirements based on loan amount, location and family size to ensure that you can afford the loan you are taking out.

Yes, VA loans are assumable. Just make sure that you’ve done your due diligence and know the pros and cons of assuming a VA mortgage.

 

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