Buyer's Guide: What Is a VA Loan?

Purchasing a house requires a significant amount of cash. Fortunately, veterans and military service personnel who wish to purchase a house are awarded a unique opportunity by the government: the Veteran Affairs Loan (VA loan). This is the only mortgage option that doesn’t require a down payment and is available to borrowers with low credit scores. Annually, a multitude of veterans leverage the VA loan to acquire a cherished abode they can call their own.

In this article we explain what a VA loan is, the types of VA mortgages out there, the eligibility requirements, and how to apply for a Veteran Affairs loan.

What Is a VA Loan?

A VA loan is a special mortgage that the U.S. Department of Veterans Affairs offers to qualified military personnel as an entitlement. The issuance of the mortgage rests in the hands of private entities: banks, credit unions, and mortgage companies. The money doesn't come from the government. The overarching objective of this loan is to facilitate the homeownership aspirations of veterans.

To secure the VA loan, one must diligently complete a mortgage application with one's preferred lender, accompanied by credit history documentation and verifiable proof of income. The VA sets the standards and terms of the mortgage but does not finance the loan.

Types of VA Loans

Now that you know what a VA loan is, let’s discuss the various types. Refer to the table below to learn about the 12 subtypes of Veterans Affairs loans.

VA Loan Eligibility

A lesser-known VA loan fact is that not all military personnel are eligible. To obtain the VA loan, you must meet the following requirements. Requirements vary by period of service, so for full details, drill down into the categories on the eligibility page at VA.gov.

Duty requirements:

• Active-duty service personnel must have served 90 consecutive days.
• A spouse of a veteran who died or suffered a service-related disability is eligible.
• All reserve members and National Guard members must have served six years.

Certificate of Eligibility (COE):

The COE is a document that proves to lenders that you are eligible for the VA loan benefit. You can apply via the eBenefits portal or ask the lender to do it.

Active-duty members should submit a signed statement of service that includes:

• Name
• Date of birth
• Social Security Number
• Lost time
• Date of the first day of duty
• Name of the command

Note: COE documentation can vary depending on your position.

VA Loan Requirements

The requirements for a VA loan are as follows.

• Steady work history: At least two years' employment.
• Most lenders want a credit score of 500 or higher, though Veterans Affairs sets no minimum score.
• Your debt-to-income ratio should not exceed 41%.
• Acceptable residual income, as set by the VA. This is the monthly amount you save after paying for basic living expenses.
• Proof of reserve funds, but only if you are purchasing a multifamily house, plan to leave active duty in 12 months and don’t have a job lined up, or own a rental property.
• You must use the house as your primary residence.

Property requirements for a VA loan:

• Enough space for sleeping, cooking, and living
• Meets the local building codes
• Clean water for bathing and drinking
• Well-functioning drainage and sewage system

Steps to Apply for a VA Loan

Once you have confirmed your eligibility and know what a VA loan is, follow these steps to apply for a VA home purchase loan.

Step 1: Remember that not all loan providers offer a VA home mortgage and are familiar with the process. Therefore, work with a real estate agent and a lender who understands VA loans.

Tip: The standard VA lender fee is capped at 1% of the mortgage amount. Thus, don’t sign the offer if the lender wants to charge more than that.

Step 2: Gather the following documents.

• Certificate of Eligibility (COE)
• Child care statement
• Record or discharge of separation paperwork (DD214)
• 60 days of bank statements
• Two years of W-2 forms
• Statement from nearest residing relative
• Earning or leave statement
• Letters explaining credit issues, gaps in employment, and large deposits in the asset account.

Step 3: Search for a house and make an offer. If the seller agrees, sign the property purchase contract and patiently wait for the VA home appraisal and inspection results. These will take up to three business days.

Step 4: Submit additional documents if required. Review the final document and double-check all the amounts.

Step 5: Attend the closing at the escrow office, attorney’s office, or title company. Wait for the lender to review the closing package and send the loan funds. Once done, the property title will be recorded in your name and you will be the official homeowner.

To get your best VA loan terms, don’t forget to compare offers from several lenders and opt for the one with not only a low interest rate but also low closing costs.

What Is a VA Loan: The Pros and Cons

VA loan pros:

• No down payment required
• Lender fee is capped at 1% of the mortgage amount
• No mortgage insurance
• No income restrictions
• No loan limit as of 2020
• Easy to refinance

VA loan cons:

• Not everyone is eligible
• VA funding fee (different from lender fee) can be as high as 3.6%
• Challenging home appraisal
• Not all houses are eligible
• Cannot finance a second home or an income property unless you live there too

What Is a VA Loan: Frequently Asked Questions (FAQs)

Q: What should I know about the VA loan limit?

For active-duty service personnel and veterans eligible for their full VA loan entitlement, loan limits were removed in 2020. It used to be that you had to stay below the limit or else face a down-payment requirement. Borrowers who already had a VA mortgage or who had defaulted on a VA loan were not bound to the old limits.

Prior to January 1, 2020, a VA loan to buy a single-family house was limited to $726,200. For houses in upscale counties, the VA loan limit was as high as $1,089,300. Today, there are no VA loan limits.

Q: How many times can I take out a VA loan?

A VA loan is not a one-time opportunity. Once you have attained a VA loan for a property purchase, you can get another one in the following circumstances:

• You're selling this home and want a new VA loan for the next home.
• You have repaid the mortgage and will use that house for rental income, vacations, and so on while you take out a new VA loan to buy your next primary residence.
• You sell to an eligible veteran. His or her entitlement replaces yours in the home, freeing up yours to use again.  

Q: Can I refinance a VA loan?

Yes, refinancing a VA home loan to reduce the interest rate is possible. It's called an Interest Rate Reduction Refinance Loan (IRRRL). The idea behind the refi is to lower your interest rate by changing the loan from a fixed rate to a slightly lower adjustable rate, or by taking advantage of a time of low rates.

Whether a homeowner would like to access their equity or convert a conventional mortgage into a VA loan, they can do this by utilizing the VA cash-out refinance opportunity. Like all cash-out refinances, the idea is basic:

• Take out a larger mortgage
• Pay off the original loan
• Pocket the difference

You can use the saved equity to finance asset-building expenses like property repairs or renovations.

Q: What credit score is required for a VA loan?

The Department of Veterans Affairs sets no minimum credit score to obtain a VA loan, although different lenders may want a minimum between 500 and 619. Applicants with a credit score of 620 or higher won’t face any challenges in getting their mortgage approved.

Q: Is there any interest rate flexibility with VA loans?

Yes, VA loan interest rates can be adjustable or fixed. Within an adjustable-rate mortgage, the interest rate is a bit lower than fixed rates at the same point in time, but, after an initial period, adjustable rates will fluctuate in response to the market. This can make financial planning difficult because one day your payment could jump hundreds of dollars. On the other hand, if you choose a fixed-rate loan, the rate will remain the same throughout the loan term.

Note: While VA mortgage interest rates are generally lower than those of conventional mortgages, the associated fees may differ among lenders.

Final Thoughts: What Is a VA Loan

The Veterans Affairs loan is undoubtedly one of the best mortgages on the market. If you belong to a military background and have spent part of your life working to protect U.S. interests, the VA loan is a well-deserved benefit from the government to you. Coming as it does with several advantages—including no mortgage insurance, zero down payment, lower interest rates, and more flexible credit guidelines—the VA loan makes it easier for current and former veterans to build the house of their dreams.

Still not sure if a VA loan is the right option for you? Consult with a mortgage officer and research the market for the best prices, ensuring that you can pay the monthly income easily.