The Different Types of VA Loans
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If you’re a veteran or on active duty in the military, you may be eligible for a Veteran’s Administration home loan. Unlike other loan programs, a VA loan doesn’t require a down payment or mortgage insurance — and it’s easier to qualify for than other home loan programs.
VA loans can also be extremely flexible. You can use a VA loan to buy more than one house, cash out all of the equity in your home, or even finance renovations. Understanding all of the types of VA loans available to you can help you accomplish a number of different financial goals.
Comparing VA loans to other loan programs
The easiest way to see the benefit of the VA loan program is to compare its basic features against other common loan types: conventional, FHA and USDA loans.
The table below compares the down payment requirement, minimum credit score, maximum debt ratio and monthly mortgage insurance payment of all four programs
|How VA Loans Stack Up|
|Loan type||Down payment||Mortgage insurance required||Minimum credit score||Debt-to-income maximum|
|VA||0%||No||No minimum||41%, but exceptions are possible|
|FHA||3.5%||Yes||580||43%, though exceptions are possible.|
|Conventional||3%||Yes||620||45%, though exceptions possible up to 50%|
|USDA||0%||No||640||41%, though exceptions made up to to 44%|
As you can see, VA loans have the lowest down payment requirement, do not require mortgage insurance, and do not have a minimum credit score requirement. The program also uses a different calculation for the maximum debt-to-income ratio that can make it more lenient.
Debt-to-income is a ratio that looks at your total debt — including your future house payment — divided by your gross income. Most loan programs look at the raw numbers here. However, the VA loan program also looks at residual income, or what a veteran’s monthly income looks like after taxes and living expenses.
As long as the veteran has enough money left over every month to make the mortgage payment, he or she can qualify for a loan even if the debt ratio is higher than the standard guidelines allow. That gives VA-eligible buyers a lot more qualifying power compared to other loan programs.
Types of VA loans
Veterans are often surprised to learn how many types of VA loans there are. There are a number of things you can do with your VA home loan eligibility.
VA purchase loan
The VA’s standard new purchase loan allows veterans and military members to buy a home without a down payment. This is probably one of the biggest benefits of the VA loan program.
VA cash out refinance loans
These loans allow you to access up to 100% of your home’s equity. Maybe you’d like to pay off credit card debt, do some home improvements, or simply replenish your savings account for an upcoming purchase. The VA cash out refinance gives you more borrowing power than FHA, conventional or USDA loans. You can get up to 100% of the equity in your house using VA financing, while the FHA only gives you access to 85% of the value of your home and 80% is the limit for conventional loans.
IRRRL stands for “interest rate reduction refinance loan,” and it’s more commonly known as a “VA streamline” refinance. You don’t need to provide income documentation, nor do you need to get an appraisal.
VA renovation and home improvement loans
In April 2018, the VA updated its repair purchase and refinance loan program to allow you to update a house that you own or are buying that needs repairs. One of the biggest benefits is being able to borrow up to 100% of the “after-improved” value of your home versus needing at least 5% equity.
Special features and benefits unique to VA loans
- You can buy a home after foreclosure or bankruptcy in a shorter time: Most loan programs require at least a three to four year waiting period for you to get another loan after you’ve had a major credit event like a bankruptcy or foreclosure. The VA only requires two years.
- You pay a funding fee instead of mortgage insurance: Conventional and FHA loan programs require that you pay monthly for mortgage insurance to protect them if you default on your loan. The VA instead charges a flat fee that starts at 2.15% if you don’t make a down payment. The cost is added into your loan amount.
- You can buy a second home with zero down payment: It’s not uncommon for members of the military to be relocated on a moment’s notice. There may not be enough time to sell your home before you need to buy a new one. Or home values in your area may have dropped to the point where it makes more sense to keep the house and rent it, rather than sell it at a loss. In these cases, a veteran has something called “second tier eligibility” which allows for 0% down financing for another home, without having to pay off the VA loan on your other property.
- You can renovate your home even if you have no equity: If you bought your home with zero down, you may not have enough equity to take any cash out if there are home improvements you need to make. Or you might be purchasing a home that needs some fixing up so that it meets the VA’s guidelines. A VA renovation loan will allow you borrow up to 100% of the “after-improved” value of the home, which means you might be able to get the work done without having to take out a personal loan or use a credit card.
- You may be eligible to have your funding fee waived if you have a disability: The VA recognizes that many veterans have disabilities related to their service in the military that may affect their quality of life and ability to be in the civilian workforce. To alleviate some of the financial pressures that may cause, the VA may waive the funding fee on your mortgage with proof of your disability rating.
- Your loan may be assumable by someone else: If you got a very low interest rate on your mortgage, you may be able to entice a new buyer to purchase your home by offering to let them assume your mortgage. Be careful with this, though: Your eligibility to take out another VA loan won’t be restored unless the buyer is an eligible veteran too.
Additional documentation needed to qualify for a VA loan
There are some unique documents you’ll need to get approved for a VA loan. Having them ready will make the process much faster.
- DD214: If you are veteran, you should have received a DD Form 214, which is issued by the United States Department of Defense when you retire, separate or are discharged from the armed forces. The information on this form will be used to issue a certificate of eligibility confirming your VA home loan benefits.
- Statement of service letter: If you are still on active duty with the military, you’ll need to get a statement of service letter from a commanding officer outlining your service to determine your eligibility.
- NGB 22, retirement points summary: Retired military reservists or National Guard veterans will need a form NGB 22, or a retirement points summary to determine if you eligible. You will not receive a form DD214 since that form is only issued for regular military service.
- Certificate of eligibility: This form will provide the information about how much your home loan benefit is, and should also indicate if you are eligible for a funding fee waiver. You may be able to obtain your COE electronically through the VA. If that doesn’t work, you’ll need to fill out a specific form and email or fax it to your regional VA office to have it completed.
- Proof of pension: You should receive some paperwork from the VA when you retire in the form of a VA retirement award letter. This will outline your monthly benefit, and confirm that it is a lifetime benefit.
- Proof of service related disability: Lenders will require you to complete a VA form 26-8937 to confirm the amount of any benefits you receive related to a disability.
- Paystubs/W2s: Like any other loan, if you are working you’ll need to provide a full month of pay stubs and two year’s of W-2s or tax returns if you are self-employed.
- Proof of current housing allowance/quarters (if active duty): Most likely, this will be on your paystub, but since some of these allowances can be used as income on a VA loan, you’ll want to make sure you provide any information about your quarters benefits.
- Proof of how much longer your active duty will continue: This should be part of your statement of service, but it’s important for the lender to know how much longer you’ll be on active duty to confirm how much longer your income will continue.
With all of the benefits that a VA loan provides, there usually isn’t a reason for a veteran to apply for any other type of loan. You’ll want to make sure you work with a lender and loan officer that is familiar with VA loans.
The loans do require more paperwork, but an efficient VA lender can complete a VA loan in about the same amount of time as it takes to finish any other type of loan.
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