What is a VA Loan? Pros, cons and how to apply
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Published 11:00 a.m. UTC Feb. 12, 2024
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Mortgages backed by the Department of Veterans Affairs (VA) can be easier to qualify for compared to conventional loans. They also tend to come with lower interest rates, and they don’t require a down payment.
Here’s what you need to know about VA loans to see if they’re the right fit for you.
What is a VA loan?
A VA loan is a mortgage backed by the U.S. Department of Veterans Affairs. This type of home loan is available to eligible military service members, veterans and surviving spouses. Standard VA loans are offered by private VA lenders. However, the loans are regulated and insured by the VA. There are also VA direct loans where the VA serves as your mortgage lender.
Note that while VA loans don’t require a down payment or mortgage insurance, they do come with a funding fee that you’ll pay at closing. This ranges from 1.25% to 3.3% of your loan amount, depending on if you’ve previously taken out a VA loan and your down payment (if you opt to make one).
Veterans United Home Loans
Types of VA loans
There are a few different types of VA-backed loans, including:
- Purchase loan: This is a traditional VA loan and the most common type used to purchase a home.
- Cash-out refinance: This type of refinance replaces your current VA loan with a new one, with different terms. You can use this loan to cash out on the equity you have in your home and then use those funds how you wish, such as for home improvements or debt consolidation. You can also use this option to refinance a non-VA loan into a VA-backed loan if you qualify.
- IRRRL: An Interest Rate Reduction Refinance Loan (IRRRL) is a refinancing option designed to help reduce your interest rate and possibly your monthly payments.
- NADL: The Native American Direct Loan (NADL) program is available to Native American veterans as well as veterans who are married to Native Americans. These loans can be used to buy, build or improve a home on federal trust land.
VA loan eligibility requirements
While VA loans are designed for those who serve in the military and their families, not everyone will qualify. Here’s a look at some of the main requirements:
Service-related requirements
For current or previous members of the military, service-related requirements work as follows:
- Active-duty service members: You must serve at least 90 continuous days to qualify for a Certificate of Eligibility (COE). This is a document that tells lenders you’re eligible for a VA loan.
- Veterans: If you’re a veteran, you’ll have different requirements based on when you served. For instance, if you served anytime between Aug. 2, 1990, and the present, you must have served for either 24 continuous months or 90 continuous days in active duty. You can also qualify if you were discharged for a hardship or a reduction in force and you also served at least 90 days. If you were discharged for a service-connected disability, you’re eligible if you served fewer than 90 days.
- Discharged service members: To qualify for a VA loan, you must have received a discharge under conditions outside of dishonorable, such as general, honorable or under honorable conditions. If you received a dishonorable discharge, you won’t be eligible for a VA loan.
- Surviving spouses: While spouses are eligible for a VA loan, they also need to meet certain requirements. For instance, you’re eligible if you’re the spouse of a veteran who’s a prisoner of war (POW) or missing in action. You’re also eligible if you’re the surviving spouse of a veteran and you haven’t remarried.
- Previous borrowers: If you’ve taken out a VA loan before, you might be eligible for another one if you meet certain conditions. For example, you could qualify if you’ve sold the home you bought with the prior loan or if you’ve repaid the loan in full and haven’t sold that home yet.
Tip: You can contact the VA if you have more questions about your specific eligibility and whether you meet the service requirements
Financial requirements
While you aren’t required to have a minimum down payment with a VA loan, your lender might have specific financial requirements you’ll need to meet. For example, the VA doesn’t specify a minimum credit score, but lenders often require a score of at least 620 — similar to conventional loan criteria.
Your home’s location can also factor into qualification requirements. This is because the lender might compare your income to the area median, according to Rebecca Richardson, the founder of The Mortgage Mentor.
“For the majority of people, there’s a calculation based [on] a minimum that must be met based [on] where you live in the country (as well as family size),” Richardson says. “That amount is calculated based [on] your gross income minus the mortgage payment minus any other debts.”
Tip: Not all lenders offer VA loans, and each lender has different requirements you’ll need to meet. It’s important to compare multiple loan options from as many mortgage lenders as possible to see where you may qualify and what type of loan will give you the best terms.
How to get a VA loan
If you’re ready to apply for a VA loan, follow these steps:
- Get your COE and check your finances. Before talking to a lender, request your Certificate of Eligibility from the VA. This document tells lenders that you’re eligible for a VA loan.
- Check your finances. Take a look at your income and credit history as well as the state of your expenses and budget to figure out how much you can comfortably afford to pay each month on a mortgage. Also keep in mind that while a down payment isn’t required for a VA loan, it can help reduce your monthly payments. You can use our home affordability calculator to see what will suit your budget based on your income as well as different mortgage rates and terms.
- Compare lenders and get preapproved. Be sure to shop around and compare your options with multiple lenders to find a loan that works for you. Many lenders let you pre-qualify with only a soft credit check to see what rates and terms you might get approved for. You can also take it a step further by getting preapproved with the lenders you like most. This will give you a more accurate estimate of what you could get approved for. Note that preapproval generally requires a hard credit check.
- Hire an agent. After you have a preapproval letter in hand, hire a real estate agent to help you find the right home. Your agent should be familiar with the neighborhoods you’re looking to buy in, which can make the process much easier. Make sure to review any fees and commissions the agent will receive before you sign any paperwork.
- Find a home and make an offer. With the help of your real estate agent, you can start making appointments to view homes and visit open houses. Your agent should be able to find homes that are in line with your needs and meet your financial requirements. When you’ve found a home you like, you can make an offer. The seller might accept or decline the offer, or they might negotiate the terms.
- Submit an application. Once you find a seller who accepts your offer, you’ll be ready to submit a formal application for the VA loan and go through an underwriting review. Be prepared to provide additional documentation, such as tax returns, bank statements and more.
- Close on the loan. If you’re approved for the loan, you’ll set a closing day and finalize the paperwork to buy your home. You’ll also pay closing costs, which include the VA funding fee.
VA loan pros and cons
Pros
- Can finance your entire home’s value.
- Can have lower interest rates and fewer fees than conventional loans.
- No minimum down payment required.
- No private mortgage insurance (PMI).
Cons
- Not all lenders offer VA loans.
- Not all veterans or service members are eligible.
- Comes with an upfront funding fee (and the fee goes up if you’ve previously taken out a VA loan).
- Can only be used for primary residences.
Frequently asked questions (FAQs)
The amount you can borrow partly depends on entitlement, which is the amount that the VA will guarantee on your mortgage. If you have full entitlement, there’s no limit to how much you can borrow. You might have full entitlement in the following situations:
- You’ve never used a VA home loan benefit.
- You bought a home with a VA home loan, then paid off the mortgage and sold the home.
- You used the VA loan benefit and then went through a foreclosure or compromise claim that you paid in full.
If you have any remaining entitlement, you’ll have a home loan limit. That limit is how much the VA is willing to guarantee in case you default on your loan.
For those who are eligible, VA loans could be a better option than conventional loans as they can offer more favorable rates and fewer fees than conventional loans. You also don’t have to worry about PMI.
However, if you’ve bought a home with a VA loan before, keep in mind that the VA funding fee can be as high as 3.3% of the loan amount if you put less than 5% down on the loan.
The VA doesn’t have a minimum credit score requirement. However, individual private lenders can set their own requirements — in many cases, you’ll need a credit score of at least 620 to get approved for a VA loan.
Keep in mind that your circumstances might also allow you to have a lower credit score when taking out a VA loan.
There’s no limit to how many times you can use a VA loan. While you can typically only have one VA loan at a time, depending on your eligibility, you can take out a VA loan more than once.
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