VA loans are mortgages designed to make home buying affordable and accessible for veterans. These mortgages have the same financing options as traditional home loans but are insured by the government. Benefits of VA loans include low interest rates, no mandatory mortgage insurance, and the option to make no down payment.
- What is a VA Loan?
- Who's Eligible for a VA Loan?
- What Are the Requirements on a VA Loan?
- How Do You Apply for a VA Loan?
VA Loans Explained
Loans backed by the Department of Veterans Affairs, or VA loans, are mortgages that the government subsidizes for veterans and their families. Private lenders provide the funds for the loans, and the government insures them in the case of default. This means that if a borrower stops making their mortgage payments, the government will pay the lender. However, unlike with traditional mortgages, borrowers of VA loans are not required to pay mortgage insurance—which keeps monthly payments relatively low.
|VA Loan||FHA Loan||Conventional Mortgage|
|Mortgage Insurance||None||Upfront and annual premium for the life of the loan||Paid until 20% equity is reached|
|Minimum Down Payment||None required||3.5% of home value required||3% of home value for most qualified borrowers|
|Credit Score Minimum||Varies by applicant|
Most importantly, VA loans provide benefits which make homeownership more affordable for veterans. For example, no down payment is required and there are limits on the closing costs that borrowers have to pay. This can decrease the initial costs of taking out a mortgage by thousands of dollars—though it's important to note that making no down payment rather than putting 5% or 10% down will also substantially increase monthly costs. However, the Department of Veteran Affairs has staff which can help veterans choose the right mortgage depending on their individual financial situation.
As with traditional mortgages, VA loans can be used for a variety of purposes. In addition to purchasing a primary residence, VA mortgages can be applied towards making a home more energy efficient, building a new house, or purchasing a house for remodeling. For veterans looking to change their existing payment plan, VA loans can also be used to refinance a previous mortgage.
- Insured by the government
- Option to make no down payment
- Can be used for refinancing
- Exclusively for servicemembers
- No mortgage insurance fees
- Lower interest rates
Eligibility Requirements for VA Loans
The primary requirement for a VA loan is, of course, to be a veteran of the US armed forces. A minimum of 90 days on active duty or 24 months on active duty is the minimum eligibility requirement in most cases. A full list of requirements can be found here on the Department of Veteran's Affairs website. Certain people who aren't veterans may also be eligible for VA loans, including:
- Servicemembers on active duty
- National Guard and Reserve members
- Spouses of fallen soldiers
Lenders have more relaxed approval standards for VA loans, specifically when assessing credit score and debt-to-income ratio. Legally, there are no strict financial criteria or credit score "floors" for VA loans like for conventional loans and FHA mortgages. Instead, lenders are required to view each applicant's financial situation as a whole and determine their eligibility by considering factors other than just a credit profile and savings account balance.
There are also limits on how much the VA will guaranty in the case of default. These limits don't set a hard cap on how much a borrower can take out; instead, they describe the maximum amount that the government will pay a lender if a borrower becomes insolvent. For loans over $144,000, the VA sets the guaranty amount at 25% of the FHA loan limit, which varies by county. The FHA's borrowing limit is set at $424,100 for most of the country but are higher for high cost county. You can find your county's exact maximum loan amount using the FHA's mortgage limit tool.
What Are the Requirements on a VA Loan?
While there are no limits on how many times you can apply for a VA loan or how much you can request in your loan, the Veterans Administration follows several guidelines you should be aware of. These requirements include a funding fee as part of your upfront costs and a minimum property requirement that determines the type of property you can purchase.
VA Loan Funding Fee
Although the VA loan is one of the few zero-down payment options for a mortgage, it does require that you pay a funding fee to help the Veterans Administration cover its losses from loans that default. This funding fee is between 1.25% and 3.30% of your total loan amount, depending on your down payment size, service branch and how many times you've used the VA loan.
|Down Payment||Fee on 1st VA Loan||Fee on Additional VA Loans|
|5% or more||1.50%||1.50%|
|10% or more||1.25%||1.25%|
|5% or more||1.75%||1.75%|
|10% or more||1.50%||1.50%|
For example, if you're a veteran of the regular military purchasing your first home at $200,000 with zero down, your VA loan funding fee would be 2.15% or $4,300. This would be added to your other closing costs, such as property taxes and insurance. While the funding fee may seem expensive, it's still a very affordable alternative when you consider that a typical 10% down payment on that same house would cost you $20,000 instead.
The funding fee is higher when you apply for a cash-out refinance, ranging between 2.15% and 3.30% for that riskier type of loan. However, the fee also decreases to 1% if you're using the VA loan to purchase a manufactured home. In addition, your funding fee won't increase on your second VA loan if you used your first loan to buy a manufactured home.
Minimum Property Requirement (MPR)
The government has established certain minimum property requirements, or MPRs, to ensure that every veteran uses their VA mortgage on a safe, structurally sound, and sanitary home. Most broadly, these MPRs mandate that each home meets local building code laws, federal laws and the Department of Housing and Urban Development's regulations. As such, an eligible home is one free from health hazards, defective construction and other dangerous conditions.
However, VA regulations also allow for exemptions for houses that are being purchased with plans for construction, or in other special circumstances. Exemptions must be approved by VA local field offices and are dependent on the specific scope of each project and financial situation of each applicant. A full list of VA regulations and MPRs can be found on the VA website.
Applying for a VA Loan
To service veterans at the beginning of the application process, the Department of Veterans Affairs has Regional Loan Centers, or RLCs, stationed around the country. RLCs evaluate applicants' eligibility criteria and provide them with a Certificate of Eligibility, or COE. This proves to the private lenders who make VA loans that a prospective homebuyer has been approved and is a legitimate candidate for a mortgage.
Because VA loans are provided through the private market, a prospective borrower is entitled and encouraged to shop around for the best deal. Not all VA loans come with the same terms, so a little comparison work can go a long way in securing the most affordable deal. While closing costs for VA loans are lower than for traditional mortgages, there is also a small funding fee charged which goes to the VA. This fee is around 2% of the loan amount for first time home buyers, and the proceeds go towards keeping the VA loan program up and running.