VA home loans help veterans, servicemembers and eligible surviving spouses not only buy a home but also build, repair, refinance and adapt homes for a disability.
The loans are from private lenders, but the U.S. Department of Veterans Affairs guarantees a portion of them, which allows lenders to provide loans at more favorable terms than conventional mortgages.
You must serve in the military, or have served, or be the surviving spouse of someone who did, to be eligible for VA home loan benefits. VA loans are exclusively for military borrowers in recognition of the fact that they served their country when they could have been building wealth in the private sector.
In 2021 alone, lenders across the U.S. approved more than 1.4 million VA home loans at an average of $310,174 per loan. Since the program began, more than 25 million VA loans have ensured a roof over the head of countless veterans, servicemembers and their families.
How Do VA Loans Work?
VA loans work the same way a traditional mortgage does as far as applying and closing go. But there are big differences as far as qualifying, costs and saving money.
VA loans are a lifetime benefit for military members and veterans. Though you can have only one VA loan at a time, you can take out as many as you need to over a lifetime.
VA loans differ from a conventional mortgage, including:
- No down payment is required by the VA in most cases (some lenders may require one)
- There is no minimum credit score (some lenders may require one)
- Interest rates are lower
- Closing costs are limited
- There is no private mortgage insurance (PMI) requirement
VA Loans vs. Conventional Loans
There is a military service requirement to be eligible for a VA loan, while conventional loans are open to anyone who qualifies financially. There are also differences in financial requirements, what loans can be used for and more.
Here’s a comparison of VA loans and conventional mortgages:
- Eligibility Requirements: VA: military service history; Conventional: None
- Credit Score: VA: Officially none, but lenders usually require 580-620; Conventional: 620
- Down Payment: VA: None (some lenders may require one); Conventional: 3% minimum, but 20% is the accepted norm
- Maximum Loan Amount: VA: None; Conventional: County limit set by Freddie Mac, varies by region
- Eligible Properties: VA: Primary residence; Conventional: Primary residences, second homes, investment properties
- Private mortgage insurance (PMI): VA: Not required; Conventional required with less than 20% down payment
- Fees at Closing: VA: 0.5-2.3-3.6% VA funding fee, lender origination fee, others; Conventional: Lender origination fee, others
- Closing Costs: VA: Average 2-5%; Conventional: Average 2-5%
- Number of loans a one time: VA: One, Conventional: No limit
VA Loan Advantages
The benefits of a VA home loan are many, particularly for veterans and military families who may not have money saved for a down payment and can’t afford a lot of upfront costs.
Many who take advantage of their VA loan benefit say the thing that attracted them to it in the first place was that it didn’t require a down payment. More flexible requirements, lower closing costs, the fact that PMI is not required, and more, are all benefits of a VA loan.
The biggest advantages of a VA home loan are:
No Down Payment Necessary
The VA does not require a down payment on a VA loan, which means the borrower can get the loan for 100% of the cost. Exceptions are that some lenders may require a down payment, and the VA also requires one if the home’s purchase price is more than the reasonable value.
No Private Mortgage Insurance (PMI)
Conventional loans require PMI if the down payment is less than 20%. The borrower must continue to pay it until they have 20% equity. PMI can add a substantial amount to a monthly payment. VA loans don’t have this requirement.
Competitive Interest Rates
VA loans are not funded by the government but by private lenders. The VA guarantee means lenders offer more favorable rates than for conventional loans. Lender offers vary, so shop around – a seemingly small 0.5% difference in interest can make a big difference in monthly payment and overall loan cost.
Loosened Credit Requirements
Your credit must be in decent shape to get a VA loan, with no defaults on federal VA or student loans. The VA has no minimum required credit score, but most lenders require 620. Some allow a lower score, but may charge higher interest or other fees to offset it.
Lenient Debt-to-Income Ratio
The VA suggests a 41% debt-to-income ratio – the amount of monthly debt you have vs. the amount of money you bring in. Some lenders, though, allow a DTI as high as 55% on a VA loan if other credit benchmarks, like credit score, are good.
The reason lending requirements are more favorable for VA loans is because the VA guarantees a portion of the loan will be paid if you can’t pay it. Interest rates and other fees are based on the risk the lender is taking in loaning the money – if part of it is guaranteed, that lowers the risk.
No Prepayment Penalty
There’s no fee if you pay off your VA loan early. VA loan borrowers can sell the property at any time. You may also refinance your VA loan – the VA’s streamlined and cash-out refinance programs both offer favorable rates and benefits to VA loan borrowers.
VA loans can be fixed or adjustable rate (ARM). Types of VA loans include:
- Purchase Loans
- Cash-Out Refinancing – Provides cash from home equity
- Interest Rate Reduction Refinance Loan (IRRRL) — Reduces interest rate, converts ARM to fixed-rate, or extends/shortens term
- Native American Direct Loan (NADL) – Native American veterans can buy, build, renovate or refinance home on federal trust land
- Adapted Housing Grants – Veterans with a service-connected disability can buy, build or adapt a home for their disability with money that doesn’t have to be paid back.
VA Loans are Assumable
An assumable mortgage is one that can be transferred to a new buyer, with the same terms. VA loans can be transferred as long as the person assuming the loan is also VA-eligible. This can increase the value of the home, particularly if interest rates are high when you’re selling.
VA Loans After Foreclosure and Bankruptcy
Veterans who have filed for bankruptcy or have been foreclosed on are eligible for a VA loan in two years. Those who have filed Chapter 13 bankruptcy are eligible after one year. This includes foreclosures on a VA loan or those who had one when they filed bankruptcy.
VA Loan Disadvantages
While the advantages of a VA loan for veterans and servicemembers are many, there are also some disadvantages when compared to conventional mortgages.
Less Home Equity
Since no down payment is required, the borrower will have less home equity than if they had made a down payment, and it will take longer to build equity. The VA home loan borrower may even have negative equity if the loan amount increased because closing costs were rolled in.
Unlike conventional mortgages, VA loans can’t be used for second homes, vacation homes, investment property or any residential property that isn’t the borrower’s primary residence. VA loans can be used for multifamily homes up to four units, but the borrower must live in one of the units.
Some sellers may be wary of a buyer using VA loan financing, because:
- Appraisal may have stricter requirements
- Misconceptions such as lengthier closing periods, or the seller must cover closing costs
- Belief that no down payment means buyer isn’t serious
Enlist a buyer’s agent who can advocate for you and set straight any misconceptions or fears about the VA loan process.
Higher Funding Fee for Subsequent Use
The funding fee for a first-time VA loan is 2.3% of the total and 3.6% of any subsequent loan. For instance, if you get buy a home with a VA loan, then get a VA Cash-Out Refinance loan, the funding fee will be 2.3% for the initial loan, but 3.6% for the refinance. The fee is waived for eligible veterans with certain disabilities or their surviving spouses.
Not All Lenders Offer VA Loans
Shop around to find a lender experienced with VA loans and the process. Ask people who have VA loans about their lender and get referrals. The VA doesn’t list lenders on its website, but it does provide quarterly reports showing who is lending the money, so it’s a good place to find VA-experienced lenders.
Who is Eligible for VA Loans?
Military service is required to get a VA loan, but that’s not the end of it. There are strict requirements for length of service. VA loans cannot be transferred to spouses or dependents.
Those eligible for VA loans include veterans; active-duty members from all branches of the military; surviving spouses of some veterans or active-duty members; National Guard and reserve members, depending on length of service; U.S. Military, Air Force and Coast Guard academy cadets and U.S. Naval Academy midshipmen; officers at the National Oceanic and Atmospheric Administration.
Minimum Service Requirements
Veterans must not have received a dishonorable discharge to be eligible for a VA loan. Service requirements, in general, are:
- 181 days of active duty during peacetime
- 90 days of active duty during wartime
- Six years in Reserves or National Guard
- Your spouse died while in service or was a veteran with a service-connected disability and you didn’t remarry before age 57.
VA Loans for Disabled Veterans
The funding fee is waived for veterans with service-connected disabilities. Service members disabled while on active duty before they met minimum service requirements are also eligible. Veterans with permanent and total service-connected disabilities are also eligible for Adapted Housing Grants, used to buy, build or renovate a home adapted to their disability.
VA Loans for Surviving Spouses
Surviving spouses are eligible for VA loans if their spouse:
- Died in action, is a prisoner of war or missing in action
- Died while in service
- Was a veteran who died from a service-connected disability
Spouses must have not remarried at all, or not until age 57 or older.
Surviving spouses are also eligible for the VA Streamlined Refinance (IRRRL), which lowers interest, extends the term, or otherwise makes payments more affordable.
About The Author
Maureen Milliken has been writing about finance, banking, investment, entrepreneurship, real estate and other related topics for more than 30 years. She started as the “Business Beat” columnist for the now-defunct Haverhill (Mass.) Gazette and currently is one of the hosts of the Mainebiz business-focused podcast, “The Day that Changed Everything” in addition to her daily writing. She also is is the author of three mystery novels and two nonfiction books.
- N.A. (ND) VA Buyer’s Guide. Retrieved from https://www.benefits.va.gov/HOMELOANS/documents/docs/VA_Buyers_Guide.pdf
- N.A. (ND) VA Home Loans. Retrieved from https://www.benefits.va.gov/homeloans/
- N.A. (ND) VA Home Loans Eligibility. Retrieved from https://www.va.gov/housing-assistance/home-loans/eligibility/
- N.A. (2022, March 9) VA Home Loan Programs for Surviving Spouses. Retrieved from https://www.va.gov/housing-assistance/home-loans/surviving-spouse/
- N.A. (2022, April 19) VA Home Loans Lender Statistics. Retrieved from https://www.benefits.va.gov/HOMELOANS/Lender_Statistics.asp