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By Gabriella Cruz-Martínez
June 25, 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.

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How VA loans work

Like other home loan programs, VA mortgage loans are issued by private lenders. However, the VA home loan program is backed by the U.S. Department of Veterans Affairs (VA).

The VA provides several housing-related programs and exclusive benefits to help military service members and their families finance, build or improve their homes.

One benefit unique to the VA loan program is the VA guarantee. This guarantee means the U.S. government will be responsible for a portion of the loan — typically 25% for eligible veterans — if the borrower fails to pay back what they borrowed.

VA loan limits and VA loan entitlement

VA mortgage loan limits are tied to the borrower's entitlement, which refers to the dollar amount for which the U.S. Department of Veterans Affairs will insure a home loan. If the loan is approved, the VA guarantee will protect the lender against loss if the borrower fails to repay it.

If you have full entitlement on your Certificate of Eligibility (COE), you can borrow as much as you can afford without having to provide a down payment.

If you have less than full entitlement, there will be a limit to how much you can borrow without a down payment.

VA mortgage loan limits will also depend on the conforming loan limit for your county, set by The Federal Housing Finance Agency (FHFA). As of 2021, the conforming loan limits vary from $548,250 to $822,375 for single-family homes.

If you don’t have full entitlement and want to purchase a property over the conforming loan limit for your county, you will have to provide a down payment to qualify.

Full VA loan entitlement

There are two levels or tiers of VA loan entitlement. The first one is valued at $36,000, while the other is tied to the loan limits of the borrower's county.

First-time homebuyers or those who have never defaulted on a VA loan before have full entitlement. That means there are no limits to how much they can borrow without providing a down payment.

Those who have used their entitlement before or defaulted on a VA loan in the past may still qualify for this benefit. In such cases, the lender will calculate the remaining entitlement based on the county's borrowing limits and the amount the borrower used or lost in the past.

Fees

VA funding fee

To close a VA-backed or VA direct home loan, borrowers must pay a one-time fee known as the VA funding fee.

The funding fee can be folded into your mortgage payments or paid in full upon closing, and the amount you'll be required to pay will depend on your loan type and the loan amount.

Your down payment and whether it’s your first or subsequent time using a VA home loan will also influence the funding fee.

VA funding fees generally range from 0.5% to 3.6% of the total loan amount.

Only a few borrowers are exempt from paying a VA funding fee, such as those with a service-related disability, surviving spouses from veterans who died in service, had a service-related disability or were Purple Heart recipients.

Closing costs

Like other types of home loan programs, VA borrowers are subject to closing costs determined by the lender.

Closing costs can be anywhere from 3% to 5% of your total loan amount and include:

  • Brokerage fees
  • Real estate commissions
  • VA appraisal fee
  • State and local taxes
  • Loan origination fees
  • Underwriting fees
  • Title insurance
  • Mortgage discount points

You can calculate your estimated mortgage costs using Money’s mortgage calculator.

VA loans vs. Conventional loans

VA home loans and conventional mortgages are similar in that they are issued by banks and other private lenders. However, there are significant differences between the two:

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.

VA loan eligibility requirements

Who is eligible

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

Candidates eligible for a VA loan include:

  • 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

Read our related article for more information on who qualifies for a VA loan.

Service requirements

To qualify for a VA loan, candidates must have served after September 15, 1940, and must meet any of the following service requirements:

  • Served 90 days during wartime or 181 consecutive days during peacetime.
  • Served a minimum of 6 years in the Reserves or National Guard.
  • Be the surviving spouse of a service member who passed away while serving or due to a service-related disability, became a prisoner of war or went MIA.

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, requesting their military records via a DD214 form can help them obtain a COE, says Beeston.

Credit score requirements

Lenders set credit score requirements for VA loans. This means that while credit score requirements for VA loans can generally be as low as 580, some lenders may require scores of 660 and upwards.

“VA is a forgiving loan program when it comes to credit scores,” said Jennifer Beeston, branch manager and SVP at Guaranteed Rate in California. “The VA itself does not have a credit score requirement, but lenders do. So part of your upfront shopping should include asking what the lender’s minimum credit score is.”

Document 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.

What is a Certificate of Eligibility (COE)?

A 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 borrower must comply with

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

It’s important to note that a COE alone doesn’t guarantee that a lender will approve your VA loan. Approval will depend on several other factors, including your credit, finances and DTI ratio.

Will a COE guarantee my VA loan approval?

A COE will not guarantee that your VA home loan application will be approved. Instead, a COE states whether or not you qualify for a VA-backed loan based on your service history and how much you are entitled to if you qualify.

To be approved for a loan, applicants have to meet their lender’s financial requirements. That’s because private lenders issue VA loans, not the VA.

Documents required for a VA Certificate of Eligibility

To apply for a VA Certificate of Eligibility, prospective borrowers will need:

  • A personal ID
  • Their Social Security number
  • Their branch of service
  • Supporting documents to validate their title and status

If you’re a surviving spouse who qualifies for a VA home loan, you’ll need the Veteran’s discharge documents - if available.

And if you’re receiving Dependency & Indemnity Compensation (DIC), you will be required to fill out a Request for Determination of Loan Guaranty Eligibility for unmarried surviving spouses.

Surviving spouses that aren’t receiving DIC benefits must send a copy of their marriage license, the service member's death certificate and a completed Application for DIC, Death Pension or Accrued Benefits.

A detailed list of the required documents to apply for a COE is available from the US. Department of Veterans Affairs.

Other requirements

In addition to the above, most lenders will also take a holistic look at your finances to determine whether or not you qualify for a loan, including your debt-to-income ratio and monthly expenses.

This is not particular to VA loans, but a general mortgage requirement.

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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

Types of VA loans

Purchase loan

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

Unlike conventional mortgages, VA-backed purchase loans do not require a down payment or private mortgage insurance (PMI).

Additionally, qualified veterans with full entitlement don’t have a borrowing limit on VA-backed loans.

Depending on the county, those who 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.

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.

Borrowers often refinance to lower their interest rate and monthly payment or change from a variable to a fixed rate.

IRRRL loans often require less paperwork, and some homeowners can secure a new loan without an appraisal.

Cash-out refinance loan

A VA-backed cash-out refinance loan allows borrowers to replace an existing mortgage 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 debt or renovate your home.

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-approved properties

The VA home loan program is designed for primary-residence properties in move-in-ready conditions.

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

Here are some examples of properties you can and can't purchase with a VA loan:

Approved Properties 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) Restaurants or farms

Tips to get a VA home loan

Before you make any moves toward homeownership, take the time to shop lenders, says Jennifer Beeston, branch manager and SVP at Guaranteed Rate in California.

Here are some tips she shared with Money:

Tip 1: Do your homework

“Shop for rates and fees on VA loans. People assume all lenders offer the same terms because it's a VA loan, but they don't. I see huge differences in VA rates and fees based on the lender. Doing your homework could save you thousands of dollars.”

Tip 2: Find an experienced VA lender

“Work with a lender or mortgage company that issues VA loans regularly. A team that works with VA loans every day has seen it all and knows the process inside and out.”

Tip 3: Choose a lender you’re comfortable with

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

To learn more about the best mortgage lenders, follow Money for the latest information. You can also view Money’s selection of the best VA mortgage lenders or read our VA loan tips for veterans, service members and military spouses.

Summary of Money's guide to VA loans:

Pros of VA loans Cons of VA loans
No borrowing limits or down payment requirements if you have full entitlement. Only available to veterans, qualified military service members and some spouses.
Backed by the U.S. government, which offers some protections. Borrowers are still responsible for paying back their loans.
Don't require private mortgage insurance. Require a one-time VA funding fee plus applicable closing costs.