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By Gabriella Cruz-Martínez
February 2, 2021

A VA loan is a mortgage issued by private lenders and backed by the U.S. Department of Veterans Affairs (VA).

VA loans help U.S. veterans, active duty service members, and widowed military spouses purchase homes. Some types of VA loans can also be used to refinance an existing mortgage.

What You Should Know:

  • You can buy a home with no down payment under the VA home loan program.
  • There’s no limit to the amount you can borrow.
  • With a VA loan, you don’t have to pay Private Mortgage Insurance (PMI).
  • There are no minimum credit score requirements, but mortgage lenders still look for healthy credit history.
  • You don’t need to be a first-time homeowner to get a VA loan.
  • VA home loans don’t have prepayment penalties.
  • The VA also offers refinance loans to cash out your home equity or reduce your interest rate.

The VA home loan program was created in the U.S. in 1944 to help qualified veterans and surviving spouses become homeowners.

VA home loans are issued by private lenders and backed by the U.S. Department of Veterans Affairs (VA), which provides several housing-related programs and exclusive benefits to help military service members and their families finance, build, rebuild, or improve their homes.

There are some unique VA loan benefits, such as the VA guarantee. With this benefit, the government guarantees a portion of the loan to help get qualified borrowers started.

The VA also limits how much the lender can charge in closing costs, making it more affordable to service members and their families.

Since the government backs VA loans, they feature competitive mortgage rates, which can save borrowers a considerable amount of money over the life of their loan.

Additionally, VA loans tend to have more flexible credit requirements and lower interest rates than conventional loans.

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VA Loans vs. Conventional Mortgages

VA home loans and conventional loans are similar because they are issued by banks and other private lenders. However, they have significant differences.

A flagship benefit that makes the VA home loan program stand out is that borrowers aren’t required to make a down payment.

In addition to this, VA borrowers don’t have to pay private mortgage insurance (PMI), which lenders require from borrowers who put less than a 20% down on a conventional mortgage.

VA loans are federally-insured, so they represent a lower risk to lenders. This, in turn, encourages lenders to be more forgiving when it comes to credit score requirements.

In contrast, you must adhere to Freddie Mac and Fannie Mae’s credit, debt-to-income, and down payment requirements to qualify for a conventional loan.

VA Home Loan Conventional Loan
Available to qualifying members of the U.S military, veterans, and surviving spouses. Available to civilians.
For primary residences only. For primary, secondary, and investment properties.
No down payment is required. Minimum 3% required.
Private Mortgage Insurance is not required. Requires Private Mortgage Insurance if the down payment is less than 20%.
No minimum credit score is required, but the credit score does affect the interest rate. A credit score of 620 or above is preferable.
One-time, upfront fee included in the loan amount. Closing fee costs may vary by lender.

Types of VA Loans

Purchase Loan

A VA-backed purchase loan can help you build, purchase, or improve a home with better terms and a lower interest rate than a conventional loan.

With a VA-backed purchase loan, you’re not required to pay for PMI or provide a down payment to secure a loan.

Borrowers that have full entitlement don’t have a borrowing limit on VA-backed loans. However, those that don’t receive full entitlement may have to stick to Freddie Mac/Fannie Mae conforming loan limits to avoid having to provide a down payment in some areas.

Interest Rate Reduction Refinance Loan (IRRRL)

Often referred to as “streamline refinance,” an interest rate reduction refinance loan (IRRRL) can help you refinance an existing VA-backed loan with a new one.

Borrowers often refinance with the aim of lowering their interest rate and monthly payment or changing from a variable to a fixed rate.

A streamlined refinance often requires less paperwork, and some homeowners can secure a new loan without an appraisal.

Cash-out Refinance Loan

A VA-backed cash-out refinance allows borrowers to replace an existing loan with a new loan under different terms. This type of mortgage is worth considering if you want to refinance a non-VA loan into a VA-backed loan or take cash out of your home equity to pay off school, debts, or renovations.

Native American Direct Loan (NADL)

If you’re a Native American Veteran or are a non-Native American Veteran married to one, you may be eligible for a veteran home loan under the Native American Direct Loan program.

A NADL will help you build, improve, or purchase a home on federal trust land. You can also refinance an existing NADL to reduce your interest rate.

VA Loan Eligibility Requirements

The first step to participate in the VA home loan program is establishing the borrower’s eligibility.

To determine if they qualify, applicants will need to apply for a Certificate of Eligibility (COE) with the U.S. Department of Veterans Affairs. Applicants can request a COE online or by mail, or through their VA mortgage lender.

While a COE isn’t required to shop lenders, it is necessary to close a VA home loan.

To apply, prospective borrowers will need a few documents at hand, including their personal ID, Social Security number, branch of service, and supporting documents that validate their title and status.

Eligible candidates that can borrow from the VA include specific members of the Selected Reserve, active-duty service personnel, and certain categories of spouses.

Eligible candidates that can borrow from the VA include the following:

  • Active-duty service members
  • The National Guard
  • Reservists
  • Cadets at the U.S. Military
  • Air Force
  • Marine Corps or Coast Guard
  • Navy or Midshipmen at the U.S. Naval Academy
  • Officers at the National Oceanic and Atmospheric Administration
  • Surviving spouses

Additionally, candidates must have served after September 15, 1940, and must meet a minimum service requirement to be eligible for a VA mortgage.

Service requirements include having served 90 days during wartime or 181 consecutive days during peacetime.

Those in the Reserves or National Guard must have served a minimum of six years to qualify.

Surviving spouses can also get VA loans if their spouse passed away while serving or due to a service-related disability, became a prisoner of war, or went missing in action.

What if I Don’t Meet Minimum Service Requirements?

Prospective borrowers who were dishonorably discharged or did not serve long enough may not qualify for a VA loan or other VA benefits. However, there’s still a way for them to acquire a COE.

Under certain circumstances, applicants may be eligible to receive VA benefits if granted a discharge upgrade or correction.

To qualify for a discharge upgrade, applicants must have been discharged for one of these reasons:

  • Hardship
  • Early out (must have served at least 20 months of a 2-year enlistment)
  • Certain medical conditions
  • A service-related disability

If borrowers served a long time ago and can’t obtain their certificate on their own or via a lender, having their military records via DD214 form at hand may help them obtain their COE, says Jennifer Beeston, branch manager, and SVP at Guaranteed Rate in California.

What Is a Certificate of Eligibility?

The Certificate of Eligibility (COE) is a document that states service members have officially met the minimum service requirements to be eligible for a VA mortgage.

A COE will give lenders some important details at a glance:

  • The amount of your VA Home Loan Entitlement
  • Your Funding Fee Exemption Status
  • Additional conditions that the lender and veteran must comply with

What is a VA Home Loan Entitlement?

A VA home loan entitlement is the dollar amount for which the U.S. Department of Veterans Affairs will insure your home loan. If the loan is approved, the VA guaranty will protect the lender against loss if the borrower fails to repay it.

A guaranty is not free cash. Borrowers are still required to repay the loan amount they borrow. An entitlement allows the lender to offer the borrower favorable terms.

What is a VA funding fee?

The VA funding fee is a one-time loan fee paid to the Department of Veterans Affairs.

According to the VA, the funding fee may be as low as 0.5% or as high as 3.6%. The funding fee will depend on the loan type, loan amount, down payment, and whether it’s the applicant’s first time applying for a home loan.

The funding fee is used to fund veteran programs, including the VA home loan program. Since VA home loans don’t require a minimum down payment or private mortgage insurance, the fee helps lower the loan’s cost.

Funding Fee Rates for VA-Backed Loans
Down Payment Funding Fee
First Use Less than 5% 2.3%
5% or more 1.65%
10% or more 1.4%
After First Use Less than 5% 3.6%
5% or more 1.65%
10% or more 1.4%
Source: U.S. Department of Veterans Affairs, VA Funding Fee Charts

Some borrowers are exempt from paying the VA funding fee, including veterans with a disability rating higher than 10%, Purple Heart recipients, and surviving spouses of military personnel who died in the line of duty or went missing in action.

According to Veterans United, about one-third of VA loan borrowers are exempt, so it’s worth asking a VA loan lender if you qualify for an exemption.

Will a COE guarantee my VA loan approval?

A Certificate of Eligibility (COE) will not guarantee the VA home loan application will be approved.

In addition to meeting military service requirements, applicants will also have to meet their lender’s financial requirements.

While the VA doesn’t require a minimum credit score, lenders will. For this reason, experts recommend that prospective borrowers have a credit score of at least 620 before starting the mortgage application.

It’s worth noting that a bankruptcy discharged two or more years ago won’t disqualify applicants.

“VA is a forgiving loan program when it comes to credit scores,” said Beeston. “VA itself actually does not have a credit score requirement, but lenders do. Part of your upfront shopping should include asking what the lender’s minimum credit score is.”

According to Beeston, minimum credit score requirements vary from one lender to the next. While some lenders may require a minimum credit score of 600, others may require upwards of 660 for you to qualify.

Borrowing Limits for VA Loans

As of 2020, Congress removed borrowing limits for loans over $144,000 for eligible veterans, surviving spouses, and active-duty members who have full entitlement.

In other words, they don’t have to put money down and can borrow as much as the lender is offering.

Additionally, the VA will pay lenders up to 25% of the loan amount should borrowers default on loans over $144,000.

“You can literally do a $1,000,000 loan with 0% down. So many lenders are still telling people they need a down payment when they do not,” said Beeston.

Applicants who don’t have full entitlement — either because of other active VA loans or a previous default — will have a borrowing cap based on conforming loan limits, which vary by county.

If the property they wish to purchase exceeds conforming loan limits, they may be required to make a down payment on the property.

You have full entitlement if you meet any of the following requirements:

  1. You have never used your home loan benefit.
  2. You paid off a previous VA loan and sold the property (you’d have full entitlement restored).
  3. You’ve used your home loan benefit but had a foreclosure or short sale and repaid the VA in full.
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When Is a Down Payment Required for a VA Loan?

Whether or not borrowers should offer a down payment will depend on their financial situation, but there are a few reasons why veterans may choose to make one:

  • Exceeded the entitlement amount
  • Didn’t get full entitlement (can still pay 0% down, depending on the loan amount)
  • Want to lower their monthly payment
  • Want to reduce the VA funding fee

“Generally, VA is 0% down, but sometimes it can make sense to bring in money to reduce the VA funding fee. If you are a first-time homebuyer, the VA funding fee is 2.3%. However, if you put down 5%, the VA funding fee reduces to 1.65%,” said Beeston.

While there are some circumstances where a down payment may be advisable, this will vary on a case by case basis.

According to Beeston, working together with a knowledgeable lender can make all the difference when getting your dream home at an affordable price.

“The key is to work with a lender that will discuss this with you and who understands VA. Not all borrowers pay the funding fee, as some borrowers are exempt. In that case, putting money down could be advisable if you were looking for a lower monthly payment,” added Beeston.

Can I Buy Any Type of Home with a VA Loan?

The VA home loan program is designed for properties in move-in ready conditions, including single-family homes, condos, modular homes, and some multi-unit properties.

So if you’re planning to purchase a restaurant, farm, or vacation home you may find that these properties aren’t eligible under the VA home loan program.

That’s because VA loans are used to purchase primary residences, meaning they are meant to be lived in by the main borrower and their family members.

There are a few exceptions, though, where you can use the VA benefit to buy a duplex or multi-unit property, provided that you live in one of the units.

Note that lenders also have their own standards that might affect occupancy requirements.

Here are a few examples of properties you can purchase with a VA loan:

Approved Properties Not Approved
Single-family Homes Vacant land
New construction or fixer-uppers Vacation homes you don’t intend to live in
Prefabricated, manufactured, or mobile homes. Cooperative Housing Projects or Co-ops
Condominiums or townhomes (subject to the entire complex getting VA approval) Businesses (must apply for a loan through the SBA instead)
Multi-family units ( but the borrower must live in one of the units)

Steps to Getting a VA Home Loan

Before you start searching for your dream home, you should take the time to shop lenders, says Beeston.

Here are some tips she shared with Money:

Step 1: Do Your Homework

“It’s critical to shop the rates and fees on VA loans. People assume it’s the same for all lenders because it is VA, but it’s not. I see huge differences in VA rates and fees based on the lender. Doing your homework could save you thousands of dollars.”

 

Step 2: Find an Experienced VA Lender

“Work with a lender that does VA loans regularly. A team that does VA loans every single day has seen it all and knows the process inside and out. Your lender should be ‘in your corner’ the entire time.”

 

Step 3: Choose a Lender You’re Comfortable With

“Don’t be abused. If a lender is rude to you, treats you poorly, bullies you, or tries to scare you into doing business with them, walk away. I hear horror stories of lenders telling people their credit is bad and charging them thousands of dollars extra, and it is 100% unnecessary.”

Resources Download Money’s 21 Smartest Money Moves for 2021

Fine tune your financial life this year with Money’s expert advice on investing, retirement, building credit, and more. It even comes with a handy checklist. Best of all? It costs you nothing.

Download Money’s 21 Smartest Money Moves for 2021

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