We shouldn’t need a war to break out to appreciate the service of military members and the challenges they and their families face, not only during their tours of duty but after those tours are completed.
One example of that appreciation is the long history of the VA home loan, created in 1944 by the U.S. government to help returning service men and women purchase a home with no down payment and without perfect, spit-polished credit.
Qualifying guidelines and credit requirements for VA home loans increased after the 2008 subprime mortgage crisis, but VA home loans remain one of the most reliable and utilized zero-down-payment home loan programs in the country. The VA guarantees a portion of the loan, allowing lenders to offer more favorable terms.
Lenders can be banks, credit unions or mortgage companies. One company, USAA, caters specifically to eligible military members.
“On average, USAA books over 36,000 VA home loans a year,” said USAA spokesman Bradley Russell. “[And] for the most part, VA home loans are zero down payment required, depending on the borrowers’ entitlement availability.”
As with any home loan, excellent credit is the key in securing a VA loan, but lenders offering the program typically allow some leeway in FICO credit scores.
While the VA doesn’t set a minimum credit score, most lenders will typically want to see 620 or higher. The USAA minimum is 640, according to Russell.
A lower score doesn’t eliminate you from the game, but your finances will face further scrutiny and, in all probability, you’ll get offered a higher interest rate.
The VA loan program has helped millions of service members, veterans and their families buy, build, improve and refinance their homes since its inception – often by offering better terms than are available through traditional loans from banks, mortgage companies and credit unions.
Types of VA Loans Available
The VA loan program is as versatile as it is impactful. For instance, there is a VA direct loan, and multiple VA-backed loans streamlined to meet various needs – from purchasing a home to reducing an interest rate or refinancing an existing VA loan.
Another benefit to the VA loan program, in addition to zero down payments, is that the program doesn’t require monthly mortgage insurance as is the case with many traditional loans.
Too good to be true? Well, VA loans have their limits. You can only borrow up to the VA loan limit in your county unless you have full entitlement, and to lower the cost of the loan for U.S. taxpayers, you will likely pay a VA funding fee.
The funding fee is a one-time payment made to the Department of Veterans Affairs in support of the VA loan program. A higher down payment typically lowers the cost of the funding fee.
Other types of loans available to veterans include an SBA Veteran Loan for those that own a business and a Military Debt Consolidation Loan (MDCL) for those with credit card debt.
There are good reasons why a VA Purchase Loan is an attractive option for service members and veterans trying to crack today’s ultra-competitive housing market.
The VA Purchase Loan can be a powerful tool – especially if it would be difficult to impossible for you to make a down payment on a house.
How does it work? The VA guarantees part of the loan, allowing the lender to offer better terms. That includes the option not to make a down payment.
Here’s what a VA-backed Purchase Loan offers:
- No down payment as long as the sales price isn’t higher than the home’s appraised value (the value set for the home after an expert inspects the property.)
- Better terms and interest rates than other loans from private banks, mortgage companies or credit unions.
- The ability to borrow up to the Fannie Mae/Freddie Mac-conforming loan limit on a no-down-payment loan in most areas — and more in some high-cost counties. (You can borrow more than this amount if you want to make a down payment.)
- No need for private mortgage insurance (PMI) or mortgage insurance premiums (MIP). PMI is protection for the lender in the event you can’t pay your mortgage and is often required on conventional loans with less than a 20 percent down payment. MIP is what the Federal Housing Administration requires to self-insure a loan against future loss. Not requiring these is a significant savings for the borrower.
- Fewer closing costs, which may be paid by the seller. If not paid by the seller, average closing costs are 3% to 5% of the home’s sales price.
- No financial penalty if you pay the loan off early.
- You can combine VA financing to buy land and build your home into one mortgage.
Cash-Out Refinance Loan
The Cash-Out Refinance Loan – probably the VA’s most versatile loan — allows borrowers to replace the current loan with a new one under different terms, whether the original is a VA loan or not.
If you want to take cash out of your home equity, or if market forces make refinancing a non-VA loan into a VA-backed loan a smart call, this could be just what you need.
You can use the cash to pay off debt, pay for school, make home improvements, pay for vacation, and more.
The Cash-Out Refinance Loan also allows you to borrow up to the Fannie-Mae/Freddie Mac-conforming loan limit on a no-down-payment loan in most areas — even more in designated high-cost counties. You can borrow more than this amount if you choose (or your circumstances allow) to make a down payment.
Native American Direct (NADL) Loan
Standard requirements are in effect for a NADL loan, but one other requirement is the reason for the name: you can be eligible for this loan if you or your spouse is Native American and the house you want to buy, build or improve occupies federal trust land.
The tribal government or other Native American group must have a working relationship with the VA. What constitutes a working relationship? The tribal organization must have a signed Memorandum of Understanding with the Secretary of Veterans Affairs spelling out the conditions under which the program operates on its trust lands.
If that’s the case, you’re well on your way to enjoying some attractive benefits:
- As with the VA Purchase Loan, no down payment is required as long as the sales price isn’t higher than the home’s appraised value (see above).
- The ability to borrow up to the Fannie Mae/Freddie Mac-conforming loan limit on a no-down-payment loan in most areas—and more in some high-cost counties. And, again, if you can make a down payment, you can borrow even more on this amount.
- No need for private mortgage insurance (PMI) or mortgage insurance premiums (MIP) (see earlier explanation).
- Fewer closing costs, some of which may be paid by the seller.
- A low-interest, 30-year fixed mortgage (a fixed mortgage means your interest rate will stay the same over the full life of the loan). The current VA interest rate for NADLs starts at 3.25%. You can contact your state’s VA regional loan center to find out what your interest rate will be and to get help starting your loan application.
- A reusable benefit, which means you can get more than one NADL to buy, build, or improve another residence in the future.
- The ability to refinance a current NADL for a lower interest rate.
Interest Rate Reduction Refinance Loan (IRRRL)
If you have a VA-backed loan, you may want to improve the terms to lower your monthly payment or make your payments more stable – typically by trading in an adjustable-rate mortgage (which is vulnerable to market fluctuation) for a fixed rate.
Your best option might be to refinance a VA loan in that it allows you to replace your existing loan with a new one under friendlier terms.
You need to have a VA loan to pursue a VA IRRRL. The VA doesn’t actually issue refinancing loans. You can shop for refinancing at a bank, mortgage company or credit union. It’s a good idea to contact several lenders.
The terms may vary, the benefits are uniform:
- Lowers your monthly mortgage payment by getting you a lower interest rate.
- Makes your monthly payments more stable by moving from a loan with an adjustable or variable interest rate (an interest rate that changes over time) to one that’s fixed (the same interest rate over the life of the loan).
- Offers the ability to borrow up to the Fannie Mae/Freddie Mac conforming loan limit on a no-down-payment loan in most areas—and more in some high-cost counties. If you want to make a down payment, you can borrow more on this amount.
Another bit of friendly advice is to understand the closing costs involved in refinancing. They’re not insignificant. If you’re paying $3,000 in closing costs on a new loan, make sure the monthly savings makes getting the new loan worth it for you.
Eligibility Requirements for VA Home Loan Programs
You know those USAA commercials football star Rob Gronkowski calling to ask for VA benefits even though he isn’t a veteran?
In the case of VA loans, flashing a Super Bowl ring won’t help you. What you’ll need is a Certificate of Eligibility (COE) to show your lender that you qualify based on your service history and duty status.
Easy enough? Yes, but you’ll also need to meet other VA loan requirements to receive financing such as credit and income requirements. As always, a good credit score is the perfect launching point to secure VA-backed loans and refinancing loans.
Length of service requirements for veterans and service members on active duty vary:
- Between September 16, 1940, and July 25, 1947 (WWII): 90 total days, or less than 90 days if you were discharged for a service-connected disability.
- Between July 26, 1947, and June 26, 1950 (post-WWII period): 181 continuous days, or less than 181 days if you were discharged for a service-connected disability.
- Between June 27, 1950, and January 31, 1955 (Korean War): 90 total days, or less than 90 days if you were discharged for a service-connected disability.
- Between February 1, 1955, and August 4, 1964 (post-Korean War period): 181 continuous days, or less than 181 days if you were discharged for a service-connected disability.
- Between August 5, 1964, and May 7, 1975 (Vietnam War), or February 28, 1961, to May 7, 1975, if you served in the Republic of Vietnam: 90 total days, or less than 90 days if you were discharged for a service-connected disability.
- Between May 8, 1975, and September 7, 1980 (post-Vietnam War period), or between May 8, 1975, and October 16, 1981, if you served as an officer 181 continuous days, or less than 181 days if you were discharged for a service-connected disability.
- Between September 8, 1980, and August 1, 1990, or Between October 17, 1981, and August 1, 1990, if you served as an officer 24 continuous months, or the full period (at least 181 days) for which you were called to active duty.
- Between August 2, 1990, and the present (Gulf War): 24 continuous months, or the full period (at least 90 days) for which you were called or ordered to active duty, or at least 90 days if you were discharged for a hardship, a reduction in force, or for convenience of the government, or less than 90 days if you were discharged for a service-connected disability.
- You separated from service after September 7, 1980, or After October 16, 1981, if you served as an officer 24 continuous months, or the full period (at least 181 days) for which you were called or ordered to active duty, or at least 181 days if you were discharged for a hardship, a reduction in force, or for convenience of the government, or less than 181 days if you were discharged for a service-connected disability.
- On Active Duty Currently: 90 continuous days
Length of service requirements are different for National Guard members:
- Between August 2, 1990, and the present (Gulf War): 90 days of active-duty service.
- Any time period: at least 90 days of non-training active-duty service, or at least 90 days of active-duty service including at least 30 consecutive days (your DD214 must show 32 USC sections 316, 502, 503, 504, or 505 activation), or six creditable years in the National Guard and you were discharged honorably or placed on the retired list.
For Reserve members, the following length of service requirements are in effect:
- Between August 2, 1990, and the present (Gulf War): 90 days of active-duty service.
- Any time period: at least 90 days of non-training active-duty service, or six creditable years in the Selected Reserve and one of these descriptions is true for you:
- You were discharged honorably.
- You were placed on the retired list.
- You were transferred to the Standby Reserve or an element of the Ready Reserve other than the Selected Reserve after service characterized as honorable.
- You continue to serve in the Selected Reserve.
Securing a COE probably isn’t in the cards if you were dishonorably discharged or your personal file is rife with bad conduct citations. But you can still get one if you were discharged for one of the following reasons:
- The convenience of the government (you must have served at least 20 months of a two-year enlistment).
- Early out (you must have served 21 months of a two-year enlistment).
- Reduction in force.
- Certain medical conditions, or a disability, related to your military service.
Other Ways of Getting Your Certificate of Eligibility
It’s good to know there are alternate paths to securing a COE. (Again, sorry Rob, a Super Bowl ring and Lombardi Trophy aren’t among them.)
- Applying through a VA-approved lender.
- Applying online through the VA’s eBenefits portal.
- Applying by mail with VA Form 26-1880.
- You’re a U.S. citizen who served in the Armed Forces of a government allied with the United States in World War II.
- You served as a member in certain organizations, such as:
- A Public Health Service Officer.
- A cadet at the United States Military, Air Force or Coast Guard academies
- A midshipman at the United States Naval Academy.
- An Officer of the National Oceanic & Atmospheric Administration.
- A Merchant seaman during World War II.
Nearly all COE requests are received electronically.
How Spouses Can Verify Their VA Loan Eligibility
The same process of eligibility verification applies to the surviving spouse of a veteran or the spouse of a veteran missing in action or being held as a prisoner of war.
A COE is necessary for eligibility. As a surviving spouse, getting a COE is dependent on whether or not you’re receiving Dependency and Indemnity Compensation.
If you are, get ready to fill out a few forms. You’ll need VA Form 26-1817, which is Request for Determination of Loan Guaranty Eligibility – Unmarried Surviving Spouses.) You will also need to obtain a copy of the Veterans separation paperwork, such as DD Form 214.
And if you’re not receiving Dependency and Indemnity Compensation, you need to apply using VA Form 21P-534EZ and submit it to your state’s VA Pension Management Center.
Just make sure you can provide a copy of your marriage certificate, the Veterans death certificate (or DD Form 1300 – Report of Casualty), and the Veterans Separation paperwork.
Restoring An Entitlement
What if you used an entitlement in the past? You might be able to restore that entitlement you used to buy another home with a VA Direct or VA-backed loan under certain conditions governing a second VA loan. If:
- You’ve sold the home you bought using a VA loan and have paid off that loan in full.
- A qualified Veteran-transferee agrees to assume your loan and substitute their entitlement for the same amount of entitlement originally used.
- You’ve repaid your entire loan in full but haven’t sold the home you bought with that loan. (That’s a one-off that can’t be repeated.)
Investigate FHA loans if you are ineligible for a VA loan. » Learn More: FHA Loan vs. VA Loan
How to Apply for a VA Loan
What comes first, the application or the eligibility verification? Unlike the chicken vs. the egg, this question has an answer.
You don’t need to know if you’re eligible for a VA loan to start the process. You’ll get information on whether you’re eligible during loan pre-approval.
The VA loan process isn’t immediate but not a marathon, either. It typically takes 30 to 45 days once you’re have a contract on a home.
The definition of “typically” means there are exceptions to that depending on the borrowers’ circumstances.
Regardless of your situation, applying for a VA loan does not obligate you to use a particular lender or mandate that you move forward with the home- buying process.
The list of steps in applying for a VA loan include:
- Contact a lender to start your VA home application.
- Verify your eligibility by obtaining your COE either through your lender or on your own through the VA.
- Complete the application. You’ll need to provide all W-2s, tax returns, and all other pertinent financial information.
Next Steps After You Apply
Crack open a bottle of champagne? Not quite yet.
The steps you’ll need to take after completing the application process depend on the type of VA loan you applied for and the lender you’re using.
Most lenders will be private banks, credit unions or mortgage companies. But if you’re applying for the Native American Direct Loan (NADL), the VA is your lender.
A subsequent VA appraisal of the house will estimate the home’s market value at the time of inspection. Don’t confuse an appraisal with a home inspection or guarantee of value.
It’s another tool the lender uses – along with credit and income information – in determining whether to approve a particular loan application. When using a VA loan, the sale price cannot exceed the appraised value of the property, but you as the buyer are protected in this case by the VA amendatory clause. This allows you to get out of the contract without losing your earnest money deposit.
If the loan is accepted, the lender will help you find a title company (or other entity) to conduct the necessary transfer of ownership.
VA-backed home loans could be exactly what you need to crack the housing market or improve an existing home.
Questions and application processes arising around military housing can be many and somewhat complicated depending on your circumstances.
About The Author
Sarah Brady is a Personal Finance Writer and educator who's been helping people improve their financial wellness since 2013. Sarah writes for Experian, Investopedia and more, and she's been syndicated by Yahoo! News and MSN. She is a workshop facilitator and former consultant for the City of San Francisco's Affordable Home Buyer Programs, as well as a former Certified Housing & Credit Counselor (HUD, NFCC). Sarah can be contacted via sarahcbrady.com.
- Fontinelle, A. (2020, August 28) What Is A VA Loan? Retrieved from: https://www.forbes.com/advisor/mortgages/what-is-a-va-loan/
- Fontinelle, A. Cetera, M. (2020, October 1) When Should You Refinance a Loan? Retrieved from: https://www.forbes.com/advisor/mortgages/when-should-you-refinance-a-home/
- Campisi, N. (2022, February 17) Best VA Mortgage Lenders Of March 2022. Retrieved from: https://www.forbes.com/advisor/mortgages/best-va-mortgage-lenders/