What Is a VA Purchase Loan?
VA purchase loans are mortgages issued by private lenders and backed by the U.S. Department of Veterans Affairs (VA).
With a VA home purchase loan, eligible U.S. veterans, active-duty service members and surviving spouses can buy a home for their personal occupancy.
Like other types of VA loans, VA purchase loans feature exclusive advantages for qualifying homebuyers, including competitive interest rates and more flexible credit score and down payment requirements than conventional mortgages.
What can you do with a VA purchase loan?
VA purchase loans are an excellent option for qualifying VA borrowers in the market for a primary residence, whether they be first-time or seasoned homeowners.
You can use a VA mortgage to finance a house that's move-in-ready, build one or even make improvements to an existing home, provided they enhance the property's livability as opposed to its aesthetic appeal.
What can you buy with a VA loan?
The Department of Veterans Affairs has specific guidelines regarding what types of properties you can buy with a VA purchase loan.
First, the property must be the borrower's primary residence or that of their immediate family (spouse or children). This means investment properties are not eligible unless the borrower also lives in the home.
Second, VA purchase loans may only be used for approved property types. Acceptable properties that are approved for VA purchase loans include:
- Single-family home, up to 4 units
- Manufactured home or lot
- Condo within a VA-approved project
- New home construction
Finally, for a property to be approved by the VA, it must meet the agency’s Minimum Property Requirements (MPRs) to make sure it’s move-in ready and a safe investment. MPRs are generally evaluated during the VA appraisal process.
Some of the minimum property requirements for VA loans include:
- Sufficient living space
- Have safe and adequate pedestrian or vehicular access
- Safe and functional drainage systems
- Safe topographic conditions (to prevent mudslides, flooding or sinkholes)
- Free of pests, rot or fungus
- Have a functional heating supply
VA loan benefits
VA home mortgages provide different benefits than conventional mortgage loans.
While the Department of Veterans Affairs doesn't originate loans, it does provide a VA guarantee. The VA guarantee is the dollar amount that the VA will provide your lender in the event you default on the loan. Generally, the VA pledges up to 25% of the loan amount.
In turn, the VA guarantee gives private lenders the confidence to offer qualifying VA borrowers exclusive benefits including no down payment and competitive interest rates and terms.
Some of the benefits of VA purchase loans are:
No loan limits
Eligible VA borrowers with full entitlement don’t have loan limits. VA entitlement refers to the dollar amount the Department of Veterans Affairs guarantees on your VA loan. If you default on your loan the VA will pay your lender the dollar amount you are entitled to.
If you receive less than full entitlement, you can borrow up to the conforming loan limit for your county without a down payment. Conforming loan limits are set annually by the Federal Housing Finance Agency (FHFA), and include general and high-cost area loan limits in the U.S.
If you do put money down, you can borrow more than the conforming loan amount for your county. Loan limits can change every year, so make sure to verify them with the FHFA.
No down payment
As long as the purchase price doesn’t exceed the appraised value of the home, you can avoid the expense of a down payment. However, offering a down payment on a VA loan could reduce your interest rate and the overall cost of the loan.
Competitive interest rates
Because the U.S. Department of Veterans Affairs guarantees a portion of your loan to private lenders, you’ll carry less risk as a potential borrower. As a result, VA loans often feature lower mortgage rates than conventional loans.
No mortgage insurance
VA purchase loans don’t require private mortgage insurance (PMI) or mortgage insurance premium (MIP). Instead, you’ll have to provide a VA funding fee, a one-time payment made to the Department of Veterans Affairs.
The VA funding fee can range between 1.4% and 3.6% of the purchase price. The funding fee can be paid upfront or rolled into your monthly mortgage payments. Under certain circumstances, like permanent disability, the VA funding fee can be waived entirely.
Lower closing costs
Closing costs for VA loans generally range from 3% to 5% of the loan’s overall cost. With a VA purchase loan, you’ll have the advantage of not being required to offer a down payment or pay mortgage insurance.
According to the VA, sellers can contribute up to 4% of your loan’s closing costs. Seller concessions on VA loans may include payments toward the VA funding fee, credit balances, prepaying taxes and insurance on the property or mortgage points.
No penalties for early repayment
Unlike conventional mortgages, government-backed VA, USDA and FHA loans do not carry prepayment penalties. Prepayment penalties are fees some lenders charge for paying off your mortgage — or a portion of it — early.
Easier to refinance
Refinancing a VA loan with an Interest Rate Reduction Loan (IRRRL) is easier than refinancing a conventional mortgage. IRRRL loans, often called VA “streamline refinance” loans, have a simplified underwriting process that’s designed to minimize fees and time.
Generally, VA refinance loans don’t require a VA appraisal or much paperwork to be approved. The VA will simply use the documentation available on file to speed up the underwriting process.
Qualified borrowers can also request a VA cash-out refinance loan. With a VA cash-out refinance, you can refinance an existing loan — whether it's VA, conventional or FHA — as long as you meet the military service requirements.
Unlike an IRRRL, you must have your home appraised and meet both lender and VA eligibility requirements to qualify for a VA cash-out refinance.
If you're interested in refinancing your VA loan, read Money's How to Refinance a VA Loan for more details.
The VA guarantee is a lifetime benefit that you can use multiple times, as long as you meet the eligibility requirements set by the VA.
VA purchase loans requirements
You must meet certain service requirements to qualify for a VA loan.
These depend on whether you're a veteran or active-duty service member or national guard or reserve member.
Military service members
To qualify for a VA purchase loan, you must have served after September 1940, and been in active duty for 90 days during wartime or 181 consecutive days during peacetime.
If you served less than the minimum active-duty service requirement, you must have been discharged for a service-related disability.
National Guard and military reserve members
According to the VA, to qualify for a VA purchase loan, National Guard and Reserve members must have 90 days of active duty service and:
- Have an honorable discharge or
- Have been placed on the "retired" list or
- Have been transferred to the Standby Reserve or another element of the Ready Reserve beside the Selected Reserve after honorable service or
- Still serve in the Selected Reserve
If you meet the basic service requirements for a VA purchase loan, your Certificate of Eligibility (COE) will include details about eligibility and entitlement.
Finally, eligible candidates must meet their lender's unique income and credit requirements to qualify for a VA purchase loan.
Direct Home Loans for Native Americans
The U.S. The Department of Veterans Affairs designed the Native American Direct Home Loan (NADL) Program for Native American veterans or veterans with Native American spouses to build, purchase or improve a home on federal trust land.
To qualify for the NADL program, the home must be your primary residence. Your tribal government must also hold a Memorandum of Understanding (MOU) with the VA, and provide documentation on how the program will work on its federal trust lands.
Like other VA loans, borrowers are required to have a valid VA certificate of eligibility, be able to cover mortgage payments and meet VA credit requirements to qualify for the NADL program. NADLs have many benefits including no down payment, no PMI, low interest rates and limited closing fees.
NADL loans are a lifetime benefit, meaning they are reusable. You can also refinance a NADL loan under the VA home loan program.
Other VA mortgage options
If you already own a home, there are several refinance options backed by the U.S. Department of Veterans Affairs:
- Cash-out refinance loans: Allow you to take cash out of your home equity.
- Interest Rate Reduction Refinance Loans (IRRRL): Also known as a streamline refinance, this type of mortgage allows you to refinance your mortgage to get a lower interest rate and lower or more stable monthly payments.
Summary of Money's guide to VA purchase loans
VA purchase loans are federally-backed mortgages available to qualified members of the military, veterans and military spouses looking for no-down-payment loans with competitive interest rates and terms.
While VA purchase loans offer different benefits than conventional loans, they are still issued by private lenders. That means veterans and service members must meet the eligibility requirements set by the VA lender to qualify.
Before taking any other step, shop around and compare mortgage lenders to get the best VA loan rates.